It has been a mixed year for sustainable investment. On the one hand, the financial sector has signed up to net zero commitments en masse – not to mention the sector-wide efforts to prepare for and implement SFDR. On the other hand, scepticism has grown around how deep the implementation of ESG integration and sustainable investment practices really go.
Is industry practice on ESG integration shifting fundamentally or is it greenwashing at work? The reality is that it is likely to be some of each: below we offer five ways to help determine which is which.
More regulation and oversight
The rapid growth of sustainable investing has precipitated the need for an appropriate regulatory framework, by which the financial industry, and asset managers in particular can continue to evolve.
Led by Europe, regulators around the world are sharpening their pencils on how to define, measure, oversee and enforce standards and disclosure linked to sustainable investment. So while navigating regulations from SFDR to MiFID II, CSRD or EU taxonomy can be challenging, the good news is that they are moving in the right direction, towards more harmonisation of ESG integration, making data accessible and defining common measurement tools.
Other areas of sustainable investment that are the focus of a growing number of voluntary and formal industry and regulatory initiatives across regions include stewardship (voting and engagement), the implementation of exclusion policies, and thematic and impact investment.
As susainable investment continues to mature, so will the comfort and means by which investors can ensure that there is something behind the curtain and that they are not being sold empty promises.
Everyone is going net zero
According to McKinsey , the world will need to invest an additional USD 3.0-3.5 trillion annually between now and 2050 to address the challenges of the energy transition. While this is a big number (equivalent to half of global corporate profits), it also brings with it significant economic opportunity and is essential to mitigating the most catastrophic impacts of climate change.
Reflective of the scale of the capital reallocation required, Glasgow’s COP26 meeting helped to galvanise national and investor level commitments to achieve net zero carbon emissions by 2050. Today, some 450 financial institutions representing USD 130 trillion in assets under management and advice have committed to the Glasgow Financial Alliance for Net Zero (GFANZ) .
This will require fundamental changes to how the financial sector finances and invests in the real economy – and advocates for the required policy changes that will price emissions and pave the way to a more sustainable and inclusive economy.
More significant – stewardship
Stewardship activities including voting at annual shareholder meetings, dialogue with companies and public policy have become significantly more recognised over the past few years.
This has led to a greater scrutiny of how asset managers are implementing stewardship: Are they supporting climate-related shareholder proposals? Maybe even filing them? Do they respond to the numerous industry consultations on the introduction of mandatory climate disclosures by companies and if so, what do they advocate for and why?
The days of flying below the radar are gone: It matters how asset managers vote and engage, and their approach will increasingly influence when they are selected, or dismissed, by clients. Climate related topics are at the heart of many resolutions, but topics such as diversity and inclusion are also making their way up the agenda.
Measuring impact is the future
It’s human nature to want to have a positive impact. This is also the case with investors.
While we still see some debate about what impact investing can and should be (Is it only for private markets? Does it align perfectly with Article 9 funds?), there is clear demand for it.
We posit that we will see growing progress not only on how to measure impact at the company and investment portfolio level, but that asset managers should seek to measure – and manage – the impact we have across the trillions of assets that we manage in aggregate.
Examples of measuring impact include reporting done by signatories to the Operating Principles for Impact Management (available here) disclosure document. An example of the latter includes the publication of our first Biodiversity Footprint (available here) earlier this year.
More ESG – also in-house
As asset managers put more focus on asking companies to improve their performance on ESG factors such as achieving net zero, reducing their impact on nature and improving diversity, it’s only fair for these aims to be prioritised within their own organisations as well.
We believe asset managers must lead by example and ‘walk the talk’ through activities such as promoting diversity & inclusion, reducing the use of paper, banning single-use plastics and community outreach. This will help to provide them with the legitimacy needed to have an impact with investee companies. Demonstrating a culture of sustainability will become a prerequisite to meeting client expectations and attracting and retaining talent.
In summary, we believe the evolution of sustainable investment along these lines can help safeguard it. The financial sector has both an opportunity and an obligation to use its capital allocation and stewardship practices to promote a more sustainable, real economy.
With the growth of transparency across the industry – pushed by increasingly demanding regulators – it will become harder for any laggards to keep up.