In his monthly column, Mike Scott analyses the latest developments in sustainable finance, from the ‘not-so-green’ recovery to Aviva’s tough stance on decarbonisation plans

When the CEO of the world’s largest asset manager speaks, investors and the corporate world pay attention. BlackRock CEO Larry Fink’s annual letter to clients, and its counterpart to companies, have focused on sustainability and climate change for the past few years, but this year he stepped up a notch.

Fink called on companies to “have a well-articulated long-term strategy to address the energy transition”, including a net-zero compatible business plan, and in a separate letter to its clients, he said BlackRock would set an interim 2030 net-zero target later this year, and would sell out of companies that pose significant climate risk.

The world’s biggest asset manager has been accused of not walking its talk on sustainability, with NGOs highlighting BlackRock’s investments in companies using coal and contributing to deforestation. Civil society will be watching to see if the firm follows through.

But Fink’s consistent ratcheting up of pressure on companies to integrate environmental, social and governance (ESG) issues into their investment strategies is pushing on a door that is rapidly opening.

A survey from Navex Global says that 88% of public companies have ESG initiatives in place, as do 79% of venture capital and private equity-backed businesses and 67% of privately owned corporations. Almost two thirds of respondents (64%) increased their focus on ESG in 2020.

The green recovery

This comes amid growing evidence that ESG analysis can improve financial performance. Research by New York University’s Stern Center for Sustainable Business and Rockefeller Asset Management, which looked at more than 1,000 research papers over the last five years, found that ESG funds offer better downside protection, especially during a social or economic crisis, and improved financial performance, which becomes more noticeable over time. But it adds that simply disclosing ESG issues without an accompanying ESG strategy does not improve performance.

Bloomberg reports that a record $490bn of green, social and sustainability bonds were issued last year, with another $347bn flowing into ESG-focused investment funds – also a record – while more than 700 new ESG-focused funds were launched to meet this demand. Ratings agency Moody’s expects 2021 to show even stronger growth, with sustainable debt markets set to reach $650bn and the influx of cash into ESG funds showing no signs of abating.

One reason is the trillions of dollars and euros in green stimulus packages being crafted by the major economies to create jobs and cut carbon emissions, Moody’s added.

A new Greenness of Stimulus Index (GSI) by Vivid Economics, which analyses the G20 economies and 10 others, tells a different story. It concludes that “most governments have thus far failed to harness the opportunity of combining economic recovery with sustainable growth by investing in climate and biodiversity.”

According to Vivid, $4.6tn of $14.9tn in stimulus funding announced to date has supported “environmentally relevant” sectors such as agriculture, industry, waste, energy and transport, but only $1.8tn, less than 40%, of that investment has been “green".

Nevertheless, recent improvements in Canada, China, India, the UK, and most importantly the U.S., where the election of Joe Biden has led to a sea-change in government attitudes to climate, “point to a fiscal and policy shift by a number of countries who are now beginning to rise to meet the climate and biodiversity challenge,” Vivid suggests.

Investors step up pressure

Investors are continuing to innovate in their engagement strategies and the products they offer. Perhaps the most eye-catching announcement was Aviva’s unveiling of its Climate Engagement Escalation Programme, focused on its investments in 30 “systemically important carbon emitters” in the oil and gas, metals and mining, and utilities sectors.

The investment firm will require these companies “to deliver net-zero scope 3 emissions by 2050, and establish robust transition roadmaps to demonstrate their commitment to immediate action on climate change as the world’s carbon budget diminishes,” it said.

Aviva expects companies to

• Adopt a net-zero goal by 2050 (1.5-degree alignment)
• Commit to the Science Based Targets Initiative framework
• Integrate climate goals into business strategy, including capex framework
• Set short- and medium-term climate targets and milestones
• Align management incentives to climate goals
• Report on progress using the TCFD framework
• Prohibit direct and indirect lobbying deemed contrary to the company’s public climate commitment

Mirza Baig, global head of ESG research and stewardship at Aviva Investors said the insurer’s ESG philosophy promotes engagement over divestment. “However, for our engagement approach to have impact, it must be accompanied by a robust escalation process, including the ultimate sanction of divestment.”

Meanwhile, the impacts of investor engagement with oil and gas companies continues to play out, with European companies such as BP, Shell and Equinor setting targets that include their scope 3 emissions – those from suppliers and the use of their products by customers – as a result of pressure from investor groups such as Climate Action 100+ and Follow This.

Mark van Baal, founder of Follow This, says an unprecedented number of shareholders voted for climate targets resolutions in 2020. This backing persuaded Climate Action 100+, a $50 trillion-plus global investors alliance, to endorse Paris-aligned targets. And the results can be seen in Royal Dutch Shell’s recent announcement that it would set concrete targets to cut the net carbon intensity of each unit of energy it produces by 100% by 2050, replacing its previous non-binding ambition of 65%.

Van Baal says Shell’s move adds to the pressure on U.S. oil and gas groups, which, with the exception of Occidental, still maintain that scope 3 is beyond their responsibility. “We have seen this attitude before in their European peers, and we know that with enough support from investors, this can change. We hope to bring about the same effect in the U.S.”

The time may be right, with S&P recently revising its industry risk assessment up from intermediate to moderately high risk. The ratings agency says that it “believes the energy transition, price volatility, and weaker profitability are increasing risks for oil and gas producers”.

At the same time, BloombergNEF reports that corporations purchased a record 23.7GW of clean energy in 2020, in sectors ranging from big tech to oil and gas.

And a new scheme, Climate Neutral Commodity, was launched to “measure and offset the carbon footprint of commodity transactions, and issue a new label through an independent third-party audited process”. The scheme comes as the commodity industry faces pressures from new environmental regulations and stakeholders to address its carbon impact and climate change.

All of these factors help to explain why, according to a recent DNV research report, a record two-thirds of the sector is actively adapting to a less carbon-intensive energy mix.

Financial sector decarbonisation

The number of funds committing to net-zero continues to grow, with Scottish Widows announcing its entire £170bn portfolio will be net-zero by 2050 and the emissions associated with them will halve by 2030, the first major UK provider to do so.

Workplace pension provider Smart Pensions signed up to the filmmaker Richard Curtis’s Make My Money Matter campaign, which commits it to becoming net-zero, meaning more than 13 million UK pensions have now committed to net-zero since Curtis’s campaign launched in 2020. However, a new analysis of UK pension investments says that 85% of pension assets have no meaningful commitments in place to reach net-zero, leaving a massive “green gap” of £2.17tn.

A report from French bank Société Générale on European insurers and reinsurers included, for the first time, a specific ESG weighting to its share valuations: it found that an insurer’s stance on underwriting coal investments can reduce its valuation by up to 3%, while those that avoid coal could see an increase in valuation of up to 9%.

ESG is driving growth in new products, too. Vector Innovation Fund launched a $300m “advanced technology-focused sub-fund for pandemic protection and wider global healthcare” while American Century Investments and Nomura Asset Management have launched an Advanced Medical Impact UCITS “focused on innovative healthcare companies creating positive social impact”.

Indices of change

There has also been a flurry of ESG product launches from index providers: S&P Dow Jones Indices debuted the S&P MidCap 400 ESG Index and the S&P SmallCap 600 ESG Index, which, combined with its existing S&P 500 ESG Index, form the S&P 1500 Composite covering 90% of U.S. market capitalisation.

The SIX Swiss Stock Exchange launched its first ESG indices for Switzerland’s bond and equity markets, and the Financial Times has returned to the index business, partnering with investment advisors Wilshire to develop ESG-focused indices.

Biodiversity continues to be an important theme for investors in 2021. The Dasgupta review on the Economics of Biodiversity, produced for the UK Treasury, highlights the damage that our economic system inflicts on the natural world and the ecosystem services that it provides, such as food, water, clean air and flood protection. (See ‘The UK’s Dasgupta Review shows how we can avoid financing our way to extinction’)

To safeguard them – and us – we need to radically change the way we produce, consume and finance goods and services, and we must fully account for the impacts of our interactions with the natural world, the review said.

And an UN-backed report, Rising Tide: Mapping Ocean Finance for a New Decade, outlines the transition required for financial institutions to create a sustainable blue economy, rebuild ocean prosperity and restore the ocean, which is facing “the triple crises of pollution, nature loss and climate change”. The report covers five ocean sectors – seafood, ports, shipping, coastal and marine tourism, and marine renewable energy, setting out how private finance can accelerate a more sustainable ocean economy.

BlackRock  Larry Fink  net-zero  green recover  ESG funds  scope 3 emissions  ethical investing