We Need “Green Strings” Attached -ESG Trends & Impact Investing

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A major pinpoint of sustainable investments is, let’s face it, the financial returns. Naturally, it’s where investors focus their attention —because financial institutions investing other people’s money should ‘do well’ rather than just ‘do good’. The new investing climate that has emerged has managed to target both.

J.P. Morgan’s Research report in July 2020 (Report) illustrates investor appetite trending toward ESG. The Report polled investors from 50 global institutions that totaled $12.9 trillion in AUM, and found that almost 75% believe that Covid 19 has increased a need to focus on issues related to climate change and biodiversity losses. The report eloquently reflects that “pandemics and environmental risks are viewed as similar in terms of impact, representing an important wake-up call for decision-makers.”

In a recent article by the Nasdaq Susan Caminiti remarks:

“Covid-19 crisis has ushered in new financial, health, and operational headwinds never before experienced by companies. Yet, it’s also placed a renewed spotlight on the importance of sustainability and resiliency, and how companies can do well even while they do good. This same emphasis on sustainability is now being seen in investing, with many saying the pandemic could be a major turning point for environmental, social, and governance issues — in short, ESG investing.”

The pandemic has shown us, that ESG investing is entering more mainstream markets and the SDGs, in fact, will be a framework for benchmarking impact. The United Nation’s Sustainable Development Goals (SDGs) were adopted in 2015 and will go until 2030 (these followed the Millennium Development Goals (MDGs)) which are effectively the world’s score chart for delivering on global development. It’s a set of goals that doesn’t only excite the non-profit sector, but also corporates and those wishing to carve out sustainable business models that will have both a social and financial return.

While many may be quick to point out that its ‘too little, too late’ there is now a concerted effort to move the needle toward sustainable business practice across the corporate sector.

Climate Risk is an Investment Risk

It is becoming widely accepted that high-carbon activities present considerable threats to ESG and financial stability as we see key players in the field now widely leading the space like Blackrock’s CEO, Larry Fink:

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

Mr. Fink’s bold Jerry-Maguire-mission-statement in his annual letter to CEOs of the world’s most influential companies argued that “climate risk is investment risk”.

“As a fiduciary, our responsibility is to help clients navigate this transition. Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”

In his 2020 edition, he informed that BlackRock would begin to exit certain investments that “present a high sustainability-related risk,” to encourage reflection around carbon footprints.

SDG 13 — Encouraging Action to Combat Climate Change

The goal of SDG 13 is to encourage that urgent action be taken to tackle the impact of climate change since affordable, scalable solutions are now widely available to enable countries to leapfrog to cleaner, more robust economies.

Trucost’s Positive Impact Analytics illustrates that 14% of companies globally have business models supporting SDG 13, with over half (53%) focused on Target 13.1:

“By 2030, strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries.”

Another 48% are focused on Target 13.2:

“Integrate climate change measures into national policies, strategies, and planning.”

Over 50% of these companies (53%) are providing property insurance, another 34% energy transmission networks and infrastructure, and another 8% hydroelectric energy. A small percentage of companies are focused on other renewable energy sources — such as solar, wind, and geothermal heat — but additional action is needed to provide energy efficient products, services, and technology.

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SDGs — A Framework For Not Just Impact Investing But Mainstream Investing

Formally adopted by 193 countries, the 17 United Nations Sustainable Development Goals (SDGs) provide a universal lens to track progress throughout the financial system by harmonising the three mandates of sustainable development: social inclusion, environmental protection, and economic growth. The Business and Sustainable Development Commission found that placing the SDGs at the centre of global economic strategy could unlock US$12 trillion in opportunities and 380 million jobs a year by 2030.

The SDGs — provide a way to measure the real-world impact investors often leave behind. It is also a mode for socially conscious investors to illustrate how pressing issues like climate change can be baked into the investment thesis and map a theory of change.

According to the Financial Times Online (October 2020), ESG funds are now forecast to outnumber conventional funds by 2025.

“Environmental, social and governance investing, which aims to look beyond traditional financial metrics when picking stocks, previously represented a niche area of fund management. But according to research by PwC, in a best case scenario, ESG funds will experience a more than threefold jump in assets by 2025 increasing their share of the European fund sector from 15–57 percent.” (FT Online, October 17, 2020)

Catalysed by the onset of the EU regulation on Sustainability-Related Disclosures (Disclosure Regulation) in 2021. The legislation seeks to dig deeper into whether financial products are “sustainable investments” and includes proposed amendments to MIFID II, AIFMD, and UCITS that will require the financial services sector to integrate ESG considerations into their organisation and operational controls alongside risk management processes.

Basically, asset managers are getting a reality check as growing ESG significance is rising and becoming a key consideration in asset allocation.  Despite the United Kingdom’s(UK) withdrawal from the European Union (EU), both the Disclosure Regulation and Taxonomy Regulation made the list of EU legislation that will be “onshored” by the UK. This means that asset managers and investment advisers will be required to implement these in the UK across UK AIFMs, UCITS management companies and portfolio managers authorised under MiFID.

Regulating “greenwashing” has been high on the EU’s regulatory landscape and the Disclosure Regulation intends to provide harmonised guidelines for investment products that will fuel rapid growth and help deliver on the UN SDGs by 2030. The Disclosure Regulation aims to hold asset managers accountable to their ESG reporting by enforcing mandatory disclosure about the sustainability of their funds regardless of whether they are pure play ESG funds or ESG-integrated funds.

Generally, when there’s a shift in the market, there’s also some work to be done. The institutionalisation of ESG will also create large regulatory hurdles where companies will be forced to not only report on ESG, but also on how they treat their employees, governance practices and undertaking to have robust climate mitigation policies.

What Side Of The Table Do You Sit On?

Change will take time — energy transition may take decades despite advancements; we may need to wait for cost-effective replacements to our essential energy sources. Fink puts it well:

“ We need to be mindful of the economic, scientific, social and political realities of the energy transition. Governments and the private sector must work together to pursue a transition that is both fair and just — we cannot leave behind parts of society, or entire countries in developing markets, as we pursue the path to a low-carbon world.”

The pandemic has pushed investor appetite toward sustainable business practices, benchmarking investments against the SDGs, enabling for a theory of change in impact portfolios and robust ESG reporting.

The long-term implications the SDG’s nurture may relieve the stresses unsustainable business growth models have placed on society — paving the way for a clear and measurable global effort to not just maintain, but also progress on delivering the UN global development agenda.

Nisaa Jetha

Nisaa Jetha Global Strategist & Impact Professional