In his monthly column in the new Sustainable Business Review, Mike Scott analyses the latest news developments in sustainable finance, from the boom in ESG funds to biodiversity climbing up the investment agenda
ESG IS SET to remain a big theme in the investment world in 2021 in the build-up to COP26, as societal pressure to take action on climate change collides with the impacts of the Covid-19 pandemic. There were fears in 2020 that sustainability concerns would take a back seat in the face of the global economic crisis, as they did in the 2008 financial crisis, but the opposite has happened.
Bloomberg reported that both sustainable debt and investment in the energy transition hit new records in 2020, with clean-energy investment reaching half a trillion dollars for the first time. Morgan Stanley announced that flows into ESG funds more than doubled last year.
The pandemic has heightened the realisation that ESG risks can have a material impact on companies and investors in unexpected ways. Last year’s Global Risks report from the World Economic Forum had presciently warned that “no country is fully prepared to handle an epidemic or pandemic”. Unsurprisingly, the pandemic is front and centre in the latest report, with WEF observing: “In 2020, the world saw the catastrophic effects of ignoring long-term risks such as pandemics, now an immediate risk according to the Global Risks Report 2021.”
Those risks are not only financial, but environmental and social as well, with the pandemic causing everything from a plunge in oil prices to an increase in social inequality.
Larry Fink, CEO of BlackRock, the world's largest asset manager, describes the energy transition as “central ... to every company's growth prospects” in his latest annual letter to CEOs.
“We are asking companies to disclose a plan for how their business model will be compatible with a net-zero economy,” he writes. Other recent examples include Canadian investment managers representing $1.6tn in assets calling for stronger ESG information “to strengthen investment decision-making and better assess and manage their collective ESG risk exposures”.
Even the Pope is getting in on the act. The Council for Inclusive Capitalism with the Vatican launched in December with the backing of the pontiff.
The council, which aims “to reform capitalism into a powerful force for the good of humanity” is led by a core group of global leaders, known as Guardians for Inclusive Capitalism, who meet annually with Pope Francis. They include investors with more than $10.5tn in assets under management, companies with over $2.1tn of market capitalisation, and 200 million workers in more than 163 countries. (See also Lady de Rothschild’s road to the Vatican)
Finance firms join race to net zero
ANOTHER COALITION, with the even more unwieldy name of the COP26 Finance Coalition Coordination Mechanism, launched ahead of Christmas, pledging to bring its expertise in finance and climate change policies to support the UN Race to Zero campaign. Led by CDP and WWF, other members include the UN PRI, UK Sustainable Investment and Finance Association (UKSIF), the Institutional Investors Group on Climate Change (IIGCC) and Make My Money Matter.
Mark Carney, the UN’s Special Envoy for Climate Action and Finance, and COP president Alok Sharma, wrote jointly to global financial institutions last month urging them to join Race to Zero by signing up to net-zero initiatives with science-based targets, such as the Business for 1.5 pledge, the Net-Zero Asset Owners Alliance and the newly launched Net-Zero Asset Managers Initiative, whose 30 signatories manage $9tn in assets.
And in the UK, Bankers for NetZero (B4NZ), whose inaugural members were Barclays, Handelsbanken, Triodos, Ecology Building Society and Tide, co-ordinated a framework for UK banking commitments in the run-up to the COP26 UN climate meeting at the end of the year, urging banks to set a clear date for net-zero climate emissions, commit to divesting in fossil fuels, and “actively advocate for intervention to accelerate the transition to zero emissions”.
“The financial services industry has come a long way in responding to the climate change challenge since the Paris Agreement. But there is still a long way to go,” it adds.
Another member of the Race to Zero campaign, the Net-Zero Asset Owner Alliance, has shown the way forward, publishing a 2025 Target Setting Protocol under which 33 of the world’s largest investors have committed to setting and reporting on 2025 targets to support their 2050 targets.
Wolfgang Kuhn, director of financial sector strategies at ShareAction, emphasises the importance of near-term target-setting. “Five years ago, we would have been delighted by these [2050 net-zero] commitments. But you need to think about the short term as well.”
That is why ShareAction is leading a shareholder resolution by 15 investors representing $15tn in assets ahead of HSBC Holdings' annual meeting in April.
The resolution calls on the lender, which announced in October that it would become a “net-zero” carbon bank by 2050, to “set and publish a strategy and short-, medium- and long-term targets to reduce its exposure to fossil-fuel assets on a timeline aligned with the goals of the Paris agreement, and starting with coal”, and report progress against its targets and strategy in its annual report.
The resolution may be pushing on an open door, at least in regards to annual reporting, if the current leadership shares the view of its former CEO, John Flint, who told the Reuters Next virtual conference earlier this month that holding regular shareholder votes on climate change action helps to de-risk the issue for companies. “If you don’t do that, you are guessing,” he said.
Last year, shareholders filed a similar climate resolution at Barclays’ AGM, which received the support of a quarter of shareholders and led it to strengthen its net-zero emissions lending policy – though the bank remains one of the biggest funders of Europe’s top eight coal utilities, according to the shareholder group Europe Beyond Coal.
Meanwhile, the Investor Forum, whose members account for a third of the market capitalisation of the UK’s FTSE all-share index, has called on the UK government to make it mandatory for companies to allow shareholders to vote on their action to climate change on an annual basis.
Banks have also been targeted by NGO portfolio.earth for their financing of plastics, a by-product of the fossil fuel industry. “By indiscriminately funding actors in the plastics supply chain, banks have failed to acknowledge their role in enabling global plastic pollution,” the group says, adding that banks are not introducing any due diligence systems, contingent loan criteria, or financing exclusions when it comes to the plastics industry.
Ethical Consumer has weighed into the ESG debate, saying that the UK insurance industry is “in denial” about climate change, with every single home and motor insurer it assessed receiving its worst possible rating. Insurers lacked visible public policies reporting on emissions from investments, commitments to fossil-free investment and future targets in line with international agreements, the consumer-focused campaign organisation said.
Biodiversity rises up the investor agenda
WHILE CLIMATE CHANGE is expected to remain at the top of investors’ agenda, 2021 will also see a growing focus on biodiversity and nature.
In a recently released report, Incorporating Biodiversity into an Investment Framework, Morgan Stanley says: “With natural disasters on the rise, climate change is visibly affecting biodiversity, whilst over the past year, the Covid pandemic has laid bare the fragility of our ecosystems, increasing public awareness of the theme.”
The report says that biodiversity provides societal benefits worth $125tn-$140tn every year, 1.5 times the size of global GDP.
“We expect that biodiversity will climb up regulatory agendas and also anticipate that biodiversity reporting will increase on a voluntary basis,” the bank says. “Investors need to understand how biodiversity loss may affect companies' risk-reward profiles.”
Another new study, by Responsible Investor and Credit Suisse, Unearthing Investor Action on Biodiversity, shines a light on investors’ lack of preparedness to value natural capital.
A survey of 250 asset owners and managers from 35 countries found that 90% did not have measurable, biodiversity-linked targets, and 72% had not assessed their investments’ impact on biodiversity at all.
Nature-based solutions will also be important for the growing number of companies that have set net-zero commitments, says Alejandro Litovsky, CEO of Earth Security. However, there is a risk that companies that rely heavily on nature, such as input-heavy agribusinesses, will face the same stranded asset risks that are starting to hit the oil and gas sector.
He expects to see more companies adopt natural capital accounting, allowing them to see where they are most reliant on nature and what their biggest impacts are.
Progress is not fast enough, but there have been recent encouraging steps with the launch of the Taskforce on Nature-related Financial Disclosures and the Prince of Wales’ Terra Carta initiative, which was launched at the One Planet Summit in France earlier this month.
The summit also saw the launch of the Natural Capital Investor Alliance, which aims to mobilise $10bn investment in nature-based projects by 2022, while €14bn has been pledged for the Great Green Wall in Africa, the world’s largest reforestation project.
“The finance sector is now on biodiversity where climate was five years ago in the lead up to COP21 in Paris. The movement is there with lots of new initiatives. We're not there yet, but it's coming,” said Robert-Alexandre Poujade, ESG analyst at BNP Paribas Asset Management.
This article appears in the January 2021 issue of the Sustainable Business Review. See also:UN Race to Zero Natural Capital Investor Alliance UN PRI CDP Net Zero Asset Owners Alliance Net Zero Asset Managers Initiative Council for Inclusive Capitalism Morgan Stanley WEF Global Risks