In his monthly column Mike Scott analyses the latest developments in sustainable finance, from increasing pressure on pensions to align with 1.5C, to the growth in green bonds, and As You Sow's right-to-repair campaign at Microsoft

Much of the discussion on the benefits of considering ESG issues in investment is, unsurprisingly, confined to the offices of City of London and Wall St financiers. But new research from Make My Money Matter, the campaign group started by film director Richard Curtis, highlights why everyday savers and investors should think about them, too.

The group says that making your pension green is the single most effective thing that an individual can do to reduce his or her carbon footprint. It shows that a greener pension can save 19 tonnes of carbon per year – significantly more than the average UK carbon footprint of seven tonnes.

“Greening your pension is 21 times more powerful in the fight against climate change than going veggie, stopping flying, and switching to a renewable energy provider combined,” Curtis said.

“Our pensions are the most powerful weapon we have to help protect the planet,” the Four Weddings and a Funeral director said. “We need the entire UK pensions industry to go green – making their default funds more sustainable. As individuals, we have a critical role to play in driving this change.”

The group announced 11 new pension funds had signed up to the campaign, including Tesco and Travis Perkins, as the move to greener pensions gathers pace. Meanwhile, 14 pension scheme chairs – collectively responsible for £267.9bn of pension assets, including HSBC, Barclays, Unilever and Tesco – have committed to set net-zero targets to align their investment portfolios with a 1.5C pathway by signing up to the A4S Pension Fund Chair Net Zero Statement of Support.  And the £32bn Railpen railway pension scheme has also announced it plans to deliver a net-zero portfolio by 2050, or sooner.

Complementing these moves, the UK’s Pensions Regulator launched a consultation on draft guidance for climate reporting regulations. The regulator's executive director of regulatory policy, analysis and advice, David Fairs, said it wants to "see more than superficial tick-boxing” from pension scheme trustees when they report on climate risk and opportunity.

Outside of the pensions sector, Wellcome, the endowment foundation, also said that its £29bn portfolio of investments will become carbon net-zero before 2050, the largest such pledge by a UK charity.

More sustainable choice for all investors

Research group Planet Tracker analysed the first acquisition by passive investing giant Vanguard since its creation in 1975. The $8tn asset manager has bought Just Invest, which manages just $1bn but uses sophisticated portfolio management tools traditionally available only to institutional or ultra-high-net-worth investors.

This will enable advisors to personalise investment portfolios to reflect investors’ values and financial objectives. Vanguard’s purchase follows similar deals last year by Charles Schwab, Morgan Stanley and BlackRock, and is an indication that “the index production landscape is evolving to meet the demands of sustainability-based investment products”, Planet Tracker claims.

This is a sign, Planet Tracker says, that the major financial institutions are positioning themselves to offer customisation of investment portfolios to clients beyond the usual select institutions and high-net-worth individuals. “This will be a step-change for pension funds and retail investors, giving them the opportunity to align their investments much more closely with their values than is possible at present.”

(Credit: Jom Nicha/Shutterstock)

The decision comes with sustainable investment continuing to go from strength to strength. The Global Sustainable Investment Alliance (GSIA) says that sustainable investment reached $35.3tn in the five major markets in 2020, a 15% increase from 2018, to comprise 36% of total assets under management.

“This growth is being fuelled by rising consumer expectations, strong financial performance and the increasing materiality of social and environmental issues – from biodiversity to racial equity to climate change.”

Green bond growth

One area that is quietly becoming more and more mainstream is green bonds, as proof of their impact continues to emerge. The Climate Bonds Initiative reported that in the five years from 2016 to 2020, the North American green, social and sustainability debt market grew by an average of 76% year-on-year.

And Aviva Investors said that 81% of institutional investors are seeing increased demand from stakeholders that they invest in ESG-focused fixed income products, with a majority of advisers believing that the conventional "brown" bond market will be completely green by 2040.

CaixaBank says the €3.58bn it raised from its first four green bonds have cut CO2e emissions by almost 1.5m tons, as well as helping to meet two of the UN's Sustainable Development Goals (SDG): number 7 (affordable and clean energy) and number 9 (industry, innovation and infrastructure).

The market is being boosted by the publication of the EU Taxonomy, which is providing certainty about what bonds qualify as green, and the number of sovereign green bonds is increasing, too, with Canada, Spain and the EU all expected to issue instruments soon. The UK is set to announce plans for £15bn of green savings bonds, allowing retail investors to help fund renewable energy products.

A 100% fisheries green bond has been launched. (Credit: Watchares Hansawek/Shutterstock)

While renewable energy, green housing and clean transportation remain the most common categories, new issuers and sectors are emerging, says Douglas Farquhar, senior client portfolio manager at NN Investment Partners. These include University College London becoming the first educational institution in Europe to issue a sustainability bond, the first 100% fisheries green bond, and Turkish home appliances manufacturer Arçelik issuing a green bond for energy efficiency home appliances.

Green hydrogen has started to feature in many new green bonds, and Adidas has used sustainable debt to fund a circular economy product in textile manufacturing. Sweden’s Vattenfall has used proceeds to fund green steel production, while Apple has directed proceeds towards cleaner aluminium.

Engagement expands its reach

The focus of research and engagement by ESG-focused investors continues to expand, with As You Sow calling on Microsoft to make its devices easier to repair, in what is believed to be the first right-to-repair proposal at a U.S. company. The EU and the UK are introducing right-to-repair rules this summer in a bid to reduce electric and electronic waste, reduce energy and materials use and save consumers money. (See Europe’s ‘right to repair’ regulation should be a spur for firms to design out e-waste)

“Microsoft positions itself as a leader on climate and the environment, yet facilitates premature landfilling of its devices by restricting consumer access to device reparability,” says Kelly McBee, waste programme co-ordinator at As You Sow.

The resolution follows a recent U.S. Federal Trade Commission report on the right to repair that said “there is scant evidence to support manufacturers’ justifications for repair restrictions”, and that the agency “will consider reinvigorated regulatory and law enforcement options” for the right-to-repair issue.

Another emerging theme is the just transition, which focuses on ensuring that changes to tackle climate change do not leave workers and consumers disadvantaged. “It is now clear that the just transition is a critical enabling factor for net-zero success and that investors can play a pivotal supporting role,” says a new report from the London School of Economics and Political Science.

(Credit: Golubovy/Shutterstock)

Investors need to lay out their expectations for how businesses should achieve a just transition to a net-zero and climate-resilient economy, it adds, and call on companies to create a Just Transition plan in the context of delivering net-zero and resilience goals.

The report also urges companies to “support consumers (notably vulnerable groups) by ensuring affordable access to key goods and services in the transition and enabling consumers to participate actively in the transition”. 

Carbon pricing pressure grows

The Net-Zero Asset Owner Alliance has called for a radical overhaul of global carbon pricing. Investors including Allianz, Aviva and CalPERS say that “current instruments and regulations are not fit for purpose and that carbon prices need to almost treble by 2030 to achieve net zero”.

Governments should set clear, legally binding targets that are supported by achievable regulation to ensure they are met, the alliance said in advance of the Venice Climate Summit and G20 meetings. The investors also want to see explicit mechanisms to create a global carbon price floor and ceiling that rise over time to create “a binding price corridor harmonised across national borders”. Such a tool, drawing on both emissions trading schemes and carbon taxes, would give companies and investors greater certainty over future prices and reliable incentives to drive the development of zero-emission technology. (See G20 take note: the world needs a policy breakthrough on climate change)

A sister organisation, the Net-Zero Insurance Alliance (NZIA), has been set up by eight leading insurers and reinsurers, including AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich. The founder members have all committed to transition their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas (GHG) emissions by 2050.  “As risk managers, insurers and investors, the insurance industry has a key role in supporting the transition to a net-zero economy,” they say.

Climate transition tools

The availability of new sustainable investment tools and products continues to grow across different asset classes. Aviva Investors has launched the Aviva Investors Climate Transition Real Assets Fund to give investors access to climate-focused solutions across the European real assets universe – principally direct real estate, infrastructure and forestry assets.

AXA IM has expanded its offering by buying ClimateSeed, which acts as a marketplace for carbon reduction projects, selling and generating carbon credits, with Marco Morelli, executive chairman, commenting: “As corporates and governments globally embark on net-zero transition plans, the market for carbon credits is expected to significantly expand.”

Soldiers help to clean up following flooding in North Rhine-Westphalia state, Germany. (Credit: Thilo Schmuelgen/Reuters)

At the same time, Aviva has also issued a Building Future Communities report, setting out seven key steps to protect homes and business premises from flood and extreme weather events over the next 30 years. It calls for stricter planning and design regulations, rigorous testing, more research and innovative, nature-based measures.

As deadly floods swept Germany, the report revealed that in February 2020, Aviva received almost a year’s worth of storm claims in just one month, while more than 570,000 new homes have been built since 2016 that will not be resilient to future high temperatures.

At a smaller scale, start-up Single.Earth, a blockchain-based tokenisation platform that enables landowners to sell carbon and biodiversity credits from forests, wetlands, and other planetary resources, raised almost $8m from EQT Ventures. The company will use “satellite imagery, big data analysis, and machine-learning to build global carbon models” and “tokenize” the planet’s resources, including forests and swamps,  “to unlock ecological value without destruction”.

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Main picture credit: Pcruciatti/Shutterstock



Make My Money Matter  greening pensions  Planet Tracker  Ethical investment  GSIA  green bonds  ESG investors  right to repair  Microsoft  As You Sow  Net-Zero Asset Owner Alliance  net-zeero insurance alliance  aviva  Single.Earth 

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