February 2023
Target practice
Asset managers calling for companies to set science-based targets are having their time in the sun
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New year, new approach, new opportunities
We start 2023 with a fresh approach to ESG Clarity’s digital magazine. Previously, we have focused each issue on a single theme, taking a deep dive into a particular trend and exploring the various takes inside and outside the investment industry. This year, the bi-monthly publication will focus on the most pressing affairs of the day, exploring asset manager practices in an industry that is adapting to new regulation, while adopting new pledges and targets. We will share expert commentary to provide insight on topics most relevant to ESG investors and lift the lid on the funds in the spotlight at the time. We will continue to bring you the Responsible Ratings Index, sector reviews, ESG Clarity Intelligence, and fund manager and fund selector views, but based on the information and resources our readers need in that moment. For this issue, we explore science-based targets, Lombard Odier’s method of unlocking ‘green alpha’, Pictet’s water strategy, emerging markets, the European corporate bond sector – and much more. We hope you enjoy our new approach and find it useful. Please send feedback to natalie.kenway@bonhillplc.com
Spotlight
COVER feature
Asset managers calling for companies to set science-based targets are having their time in the sun, writes Natasha Turner
Natalie Kenway speaks to senior management at Lombard Odier Investment Management about a shift in investor mindset, the importance of third-party research and changes in 2023
Unlocking green alpha
The rapid rise in science-based targets is leaving the animal agriculture sector behind on climate commitments, says Erika Susanto of the Fairr Initiative
Cold comfort farm
Also in this issue ...
Parmenion’s Mollie Thornton unpacks key topics in ESG to look out for this year
The world of ESG in 2023 explained
Calls for mobilising capital directed towards emerging economies are strong, but solutions have fallen flat
Upping ambition in emerging markets
Despite lacklustre performance in 2022, the market for sustainable euro corporate bonds is growing
Green bonds weather the storm
There’s a mass of regulation coming down the line this year and we have a collective interest in helping steer the investment industry to success
Shared effort
Pictet Asset Management’s Marc Olivier Buffle discusses the global water deficit and how climate change is adding to the pressure
Watershed moment
ESG Clarity’s Responsible Ratings Index has been rebalanced, revealing the new top funds as rated by our partners
New balance
Bonhill Group Plc is a leading global media company, delivering cutting-edge analysis, insight, networking and data for financial services and business solutions communities. We offer forward-thinking products and provide high-quality information that leads to better, and informed, decisions. ©2023 Bonhill Group Plc
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EDITORIAL
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ESG clarity intelligence
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sector review
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BNP Paribas discusses how biology can be used to address some of humanity’s biggest challenges
How bioscience can help protect biodiversity
Allianz Global Investors explains why water is an increasingly important investment theme
Liquid capital: risks and opportunities
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Natalie Kenway Global head of ESG insight, ESG Clarity
Comment
ESG Clarity Intelligence Is COP achieving its stated aim of uniting nations on action against climate change? Read >>
Comment Climate change can’t truly be tackled until soil health is part of the conversation Read >>
Q&A Sawan Kumar of Evenlode Investment discusses how companies can improve their disclosures Read >>
Comment WWF International’s Margaret Kuhlow on credible net-zero plans for financial institutions Read >>
Analysis Industry experts from around the world pass verdict on the Finance Day announcements at COP27 Read >>
Comment Mobilising private capital towards developing markets is crucial in supporting climate action Read >>
Sector review Why more and more investors are reaching for fixed income with an ESG focus Read >>
Sponsored content Allianz’s Matt Christensen on powering through energy transition challenges Read >>
Since it launched in 2015, the Science Based Targets initiative (SBTi) has been a guiding light for companies looking to reduce their emissions in a way that is aligned with climate science. The SBTi is a partnership between the Carbon Disclosure Project, the United Nations Global Compact, World Resources Institute and the World Wide Fund for Nature, which has brought together a team of experts to independently assess and validate emissions reductions and net-zero targets. Asset managers have been quick to call on companies to adopt these targets to help with their own analysis and investment decisions because, as Georgina Tayler, research analyst at MainStreet Partners, says: “If fund managers are better able to identify the companies with robust greenhouse gas reduction objectives, then their claims of green know-how will be more legitimate.” But now attention is turning to the asset managers themselves, meaning fund selectors may be able to apply the same scrutiny to firms’ climate goals as asset managers have to companies. This year, the SBTi tells ESG Clarity, the initiative will be updating the industry on the launch of a Net-Zero Standard for Financial Institutions , helping these firms and other financial institutions set their own science-based targets. This builds on the SBTi’s corporate standard, launched in November 2021, and its roadmaps for the shipping industry, and forest, land and agriculture companies (see more on this in the article from Fairr). If greater adoption of science-based net-zero targets is a positive, then progress from the finance industry is already encouraging. In November last year, the initiative validated seven targets from financial institutions (three of them asset managers), meaning more than 50 have now had their targets validated by the SBTi, with another 150+ committed to submitting their targets in the near future. “Financial institutions have ramped up the adoption and implementation of science-based targets,” Howard Shih, technical manager– financial institutions, SBTi comments.
‘Financial institutions have ramped up the adoption and implementation of science- based targets’
Howard Shih, technical manager – financial institutions, SBTi
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Aviva’s targets cover 50% of its assets under management and include continuing to finance only renewable electricity in its electricity generation project finance portfolio until 2030, while reducing its real-estate portfolio greenhouse gas emissions by 57% per square metre by 2030 compared with 2019 levels. They also include ensuring 70% of its suppliers and a third of its corporate instruments have science-based targets by 2025. “Supply chain emissions are one of the biggest sources of carbon emissions for many businesses,” Zelda Bentham, group head of sustainability at Aviva, tells ESG Clarity. “Our ambition is to have achieved net zero in our supply chain by 2030 and we will use our supply chain science-based target to help us deliver this.” In the short term, the firm will use its supplier engagement targets to drive the adoption of science-based targets among suppliers. In the longer term, it is looking to define absolute or intensity emission targets on suppliers’ attributable emissions. Aviva’s targets also include a 90% reduction in absolute Scope 1 and 2 greenhouse gas emissions by 2030 compared with their levels in 2019, but Bentham says Scope 3 has been a tougher nut to crack. “The data gathering process for Scope 3 investments was a challenge,” she says. “We needed to gather data across a vast range of assets while the methodology and data requirements continued to evolve. However, by collecting this data and setting targets for our investment portfolio we can be confident they are robust and represent a more holistic view of our impact. We will look to broaden this out to additional asset classes and aspects of Scope 3, such as underwriting emissions, as methodologies develop.” Shih agrees data is one of the biggest challenges for finance firms looking to set science-based targets, as well as their climate knowledge, “which is still in the early stages”. “There is also some confusion around the connection between near-term science-based targets and long-term net-zero commitments, specifically around the variety of different coverage levels, ambitions and target-setting methods for financial institutions,” he adds. One issue is that some firms just don’t meet the requirements to set science-based targets, for example by only addressing financed emissions in certain sectors. But Bentham says the best thing is for firms “simply to get started”. “If businesses wait for the data and methodologies to be perfect, it will be too late,” she warns. Shih suggests asset managers can start by using reasonable estimates followed by sincere investments in compiling new data and improving the quality of existing data. In fact, the portfolio coverage method for setting targets, which is the one preferred by asset managers, doesn’t require emissions data, and the temperate rating method also liked by investment firms can be used with data from third-party providers such as CDP and Bloomberg. Financial institutions with SBTs quadrupled in 2022
Overcoming criticism But even without the hurdles for asset managers, can an uptake be expected, and will it lead to meaningful change? Amid plans to mandate climate reporting tools such as the Taskforce on Climate-related Financial Disclosure (TCFD), science-based targets remain voluntary (although they can inform TCFD reporting) and in fact seeking validation from the SBTi incurs a cost to firms. “I haven’t seen any mention of mandating science-based targets, unless they will form part of the final reporting standards from the ISSB [International Sustainability Standards Board],” FE fundinfo regulatory manager and ESG Clarity EU Committee member Mikkel Bates says. Like the ISSB, which looks to gain mass appeal and thus develop baseline standards, the SBTi has been criticised for a lack of ambitions in target setting. Company targets themselves are also not visible on the website, potentially contributing to the phenomenon of ‘green hushing’, where companies stay quiet about their climate strategies. Last February, The New Climate Institute published a report, Corporate Climate Responsibility Monitor 2022, that appeared to find errors in the targets of 11 out of 18 corporates it analysed, although SBTi’s managing director Alberto Carrillo Pineda said at the time these had been corrected by an October 2021 change in methodology. The report also questioned whether the SBTi had sufficient resources to give full credibility to the validation process. In January this year, SBTi hired Maria Outters as the initiative’s first chief impact officer as part of CEO Luiz Amaral’s plans to expand the executive leadership team. Challenges such as these must continue to be addressed by the initiative this year, while investment firms looking to submit targets for validation this year will need to assess their impact amid growing concern around the effectiveness of a variety of net-zero investment initiatives as firms with commitments continue to fund new fossil fuel financing, for example. Despite this spotlight, the SBTi appears set to remain a guiding light for the finance industry, with validated targets still welcomed. As Aviva group CEO Amanda Blanc concludes: “Science Based Targets is a key initiative in the journey to net zero. Robust, scientifically based, verification brings much-needed accountability to our emissions targets. Receiving validation from the SBTi is an important milestone for Aviva as we transition to net zero.”
‘Our ambition is to have achieved net zero in our supply chain by 2030 and we will use our supply chain SBT to help us deliver this’
Zelda Bentham, group head of sustainability, Aviva
Financial institutions committed to submitting targets in the near future
150+
Finance firms have had their targets validated by the SBTi
50+
Challenges for investment firms The list of asset managers that had their targets validated last year can be seen in the table below, but one even more recent addition, at the group level, is Aviva, which had its targets validated at the very end of December 2022. List of validated asset manager science-based targets as of December 2022
There has been a change in investor mindset around sustainability, it’s happening faster than previously anticipated, and will lead to an economic transformation by as early as 2030. These are the bold statements made by the global head of equity, head of sustainability research and head of UK wholesale at Lombard Odier Investment Management (LOIM) who are preparing portfolios and the business for a “fundamentally different economy” within less than a decade. “We’re on the cusp of an understanding what we’re really seeing is an industrial revolution, a fundamental transformation of our economy as profound as past digital revolutions,” says Thomas Hohne-Sparborth, head of sustainability research at LOIM, joining our group call from the World Economic Forum in Davos. The team has placed this at the heart of investment convictions pointing to evidence of this rapid change all around them as we understand more about how our economy and environment intertwine. “What is quite exciting to see here [at Davos] is that there’s very little discussion left on the science behind this,” Hohne-Sparborth adds. “It’s now very widely understood by all the attendees here that this is a fundamental challenge we’re facing, where action is needed. The focus of discussions here is very much more on the action, and how to bridge the gap between past ambition and the current action that’s needed.” He points out that as the global economy is hitting some very real physical boundaries for the earth’s system, there are physical implications such as limits on the way we use land, shortages of water, degradation of agricultural productivity, for example. Watch the video interview with Didier Rabattu discussing flows, themes and new funds.
‘We’re on the cusp of a fundamental transformation of our economy as profound as past digital revolutions’
Thomas Hohne-Sparborth, head of sustainability research, LOIM
Click for Didier Rabattu, Thomas Hohne-Sparborth and Selina Tyler’s biographies
Didier Rabattu, Thomas Hohne-Sparborth and Selina Tyler’s biographies
Didier Rabattu is global head of equity at LOIM, as well as a limited partner of the Lombard Odier Group. Before joining the group in 2011, Rabattu was a partner at Amber Capital and portfolio manager of its ARC fund, focused on agriculture and the consumer and retail sectors. Previously, he was a partner at Talaris Capital and co-managed a global fund from 2007 to 2009. Before that, Rabattu worked at Deutsche Bank as global co-manager of the consumer/retail sectors in the investment bank from 1995 to 2006. Earlier in his career, he was head of these sectors in the financial analysis department. Rabattu began his career in 1987 as an analyst specialising in consumer and retail stocks throughout Europe at SG Warburg. He is a member of the French Society of Financial Analysts. Thomas Hohne-Sparborth assumed his current role as head of sustainability research in September 2021, having joined LOIM in August 2019. He served as a senior sustainability analyst in the interim period. Hohne-Sparborth is a planetary economist focusing on the transitions to a net zero, nature-positive, circular and inclusive economy. He is a specialist in the assessment of sustainability and alignment with planetary boundaries across companies, industries and supply chains, and its integration in investment decisions, policy and consumer choices. At LOIM, Hohne-Sparborth leads a research team of data scientists, geospatial specialists, economists and climate experts around the world. Prior to joining LOIM, Hohne-Sparborth worked at Roskill as director of economics and analytics, and before that, for Médecins du Monde in Sudan and Myanmar. Selina Tyler started as head of UK wholesale in June 2021. With more than 18 years of investment management experience, she joined the business from Mirabaud Asset Management. She has held other senior roles at Hermes Investment Management and Man Group. Tyler’s responsibilities at LOIM include driving the growth of LOIM’s UK wholesale franchise and strengthening the firm’s distribution proposition for intermediaries including private banks, financial advisers and wealth managers. She also seeks to promote LOIM’s thematic and sustainability propositions to clients across the UK wholesale network. Tyler is also a member of the advisory board for CityHive, an independent organisation that aims to foster diversity, inclusion and sustainability across the investment management landscape.
“It’s our growing understanding that our current economic model simply cannot physically be scaled up as markets continue, still today, are assuming it will be,” he adds. “We’ll see a very rapid acceleration in this realisation, and investors are adjusting to how quickly all this is unfolding. That’s really been one of my personal takeaways over the past six months, a lot of the changes we’ve been talking about are unfolding much faster than anybody in the market anticipated.” That seems a lot to take in, but this is not a lonely view in the investment industry – Aviva Investors’ CEO and chief responsibility officer both told ESG Clarity last year we need a “complete rethink of the international financial architecture” to avoid the end of civilisation by the end of the century. Roadmap research The level of resources dedicated to researching this at LOIM shows how seriously the impending rapid transformation is being taken. The group launched a research unit four years ago, developed a research partnership with Oxford University and with Swiss universities (the latter focused on the circular economy), and also acquired a stake in SYSTEMIQ in 2021 to work on sustainable investment methodologies and roadmaps. “The traditional approach to sustainability/ESG is to only use quantitative metrics, scoring to rank companies for things such as the quality of their disclosure, whether they’ve got the right policies and practices in place. That is a necessary thing to do, but it’s not sufficient. Our approach has evolved towards undertaking much more fundamental research as to where the direction of the economy will be,” explains Hohne-Sparborth. Global head of equity Didier Rabattu adds: “We are very privileged to be able to dedicate resources to this together with our partners, that hopefully provides us with some distinctive edge in this market.” This research, they say, helps build roadmaps for the economy as a whole and for individual industries to inform their investment decisions. “This is the head of research and the global head of equity working hand in hand – something you do not usually see - to create these industrial roadmaps together and translate them into money-making ideas,” Geneva-based Rabattu says. The roadmaps help the team to understand where companies’ profit pools will be, how industries will evolve, the corporates that will be benefit or be negatively impacted, and also where first changes of policy attention will be focused. “That’s actually nothing to do with ESG,” Rabattu says, but means they can directly integrate their insights on sustainability into their investments. “What we are trying to do at LOIM is marry sustainability and making money. One cannot go without the other one,” he says. “We’re not just approaching this because of new regulatory requirements or new disclosure requirements,” Hohne-Sparborth notes. “We’re approaching this with this degree of seriousness, because of the sense of our convictions that this transformation is happening.” “The science is telling us that this current economic model simply cannot be scaled up and therefore it inevitably has to change - that is at the root of the strength of some of our convictions.”
Making money They say it is working. It’s sometimes the case that asset managers trying to assert their ESG credentials can shy away from talking about outperformance or “making money”, but this isn’t true for LOIM. Rabattu points out that amid challenging performance its Climate Transition, winner of ESG Clarity EU Awards Climate Focused Fund category, and Natural Capital funds, fared well last year. Data from FE shows the Natural Capital Fund, launched in 2020, returned 4.7% over the past six months to 23 January, outperforming the peer group average – the IA Global sector returned 1.5%. Over a year, the fund returned a loss of 1.5%, while the sector average lost 1.8%. “When we talk about performance, we are not shy whatsoever. Our model is not to invest in companies that are not making any money, but in companies that are already right now producing returns and create a portfolio that investors can buy without too many biases. It’s very important,” Rabattu says. The trio all mention the hunt for “green alpha” as a key part of creating portfolios at LOIM. Head of UK wholesale Selina Tyler explains: “As an industry, we need to understand the importance, the complexities and the opportunities that come with the transition to a net zero and nature-positive economy and allow our clients to capture the green alpha that comes with that.” “We amalgamate high-conviction portfolios at LOIM, through the creation of green alpha that we can isolate, and that has worked pretty well,” Rabattu adds. There will, they add, be more opportunities to unlock green alpha amid the renewable energy transition, and they say the energy crisis has actually accelerated this. Hohne-Sparborth explains the higher costs to consumers has led to faster uptake of energy-efficient technologies in Europe including electric cars and heat pumps to electrify buildings. They also highlight falling costs of hydrogen and in solar and batteries, while industries considered harder to abate, such as steel, cement and chemicals, are also seeing faster uptake. “This has been the silver lining of the energy crisis,” he says. Rabattu adds: “The amount of physical capacity that is coming onto the market through renewable energy that gets transformed into electricity is just enormous.” For this reason, electrification is a key theme for the business [see video interview above] alongside natural capital and food. Direction of travel Taking a step back and looking at the wider industry, Hohne-Sparborth says collaborative engagement is a key trend to watch. “Engagement is always one of the key levers we as investors can use to drive for positive change. There’s limited impact you can achieve if you as a small individual manager engage with the company – you can achieve much greater influence by trying to agree on a common framework with other investors and engaging key companies in unison. That is very much been the direction of travel in this industry, which is very positive.” Collaborative engagement is very much part of their future alongside their aim to unlock further ‘green alpha’ amid the transformation to a new economic approach. Continued dedicated research is part and parcel of that, Tyler says, which will benefit all clients not just those seeking their sustainability-focused portfolios. “Our investment conviction is so strong that we will continue to strategically expand and leverage a distinctive research capability, leveraging our own resources and academic partnerships. The results will allow us to understand the trajectory of the new economic systems which are unfolding, and to seize the investment opportunities that come with that. “UK clients already understand the opportunity from investing in the transition is of strategic importance, but the investors who understand this affects all of their client portfolios, not just the sustainable portfolios, are set to capture this opportunity and green alpha on a much larger scale.” And for those really in the dark, this rapid transformation will catch them off guard, Hohne-Sparborth warns. “[We recognise] that this is no longer something that will be 10, 15 or 20 years away, it’s actually going to reshape financial markets much sooner – it’s something we will start to see happen very quickly in 2023.”
In line with NZAM requirements, LOIM published its 2030 objectives in terms of AUMs aligned with Paris Agreement targets: LOIM is aiming for 70% of its AUMs to be managed in line with net zero by 2030
Q4 2022 AUM in CHF
70%
32.4bn
>80%
More than 80% of LOIM’s fund AUMs are in strategies that integrate sustainability factors and metrics in their investments process (beyond exclusions)
LOIM is a member of the
Net Zero Asset Managers Alliance (NZAM)
The latest climate science is crystal clear. We have a rapidly closing window to slow global warming or face catastrophic consequences. Companies around the world, across many sectors, are responding to the challenge by setting science-based targets (SBTs) ie ambitious emission reduction objectives that align with what climate scientists say is required to reach the Paris Agreement goals. Yet in the animal agriculture sector, responsible for 14.5% of net global greenhouse gas emissions, SBTs remain the exception, not the rule. Of the 4,400 companies now committed to science-based targets, only 80 are in the food production sector. Findings from the latest Coller Fairr Protein Producer Index, which analyses the ESG performance of 60 of the largest meat, fish and dairy companies, finds that only 17% of these leading players in the industry have set SBTs. Although it is encouraging this number has risen from just 2% in 2019, it remains a source of concern to investors that 50 animal agriculture giants have still not set SBTs, leaving them vulnerable to looming transition risks. As climate-related regulatory pressure grows, companies in the sector are facing mounting financial and regulatory risks when it comes to emissions reductions – risks that investors are finding harder and harder to swallow. The urgency of the climate agenda also means laggards will find it challenging to catch up as more companies are providing rigorous SBTs at record pace. In October 2021, the Science Based Targets Initiative (SBTi) launched the net-zero standard, raising the bar on emissions best practice and increasing the demand on companies to align their operations with a 1.5C pathway. Currently, none of the protein producers assessed in Fairr’s Index have set SBTi-aligned net-zero targets, although seven companies have committed to setting one. This lack of commitment on climate is also becoming a problem for agricultural producers with their main customers. Fairr’s analysis on food retailers and manufacturers found that 26% of them have committed to net-zero SBTs. As pressures from their clients intensify, producers will need to step up to the plate when it comes to committing to such targets themselves.
‘The lack of commitment on climate is becoming a problem for agricultural producers with their main customers’
Erika Susanto Director of ESG research and data, Fairr Initiative
comment
Introducing Flag In 2022, the SBTi released its long-awaited guidance for the forest, land and agriculture (Flag) sectors, providing a sector-specific pathway for companies to align themselves with the latest climate goals. Sectors such as transport and energy had long since had this specific direction, and the arrival of Flag has ushered in a new era, where agriculture companies can find the specific guidance they need to make progress. The guidance tightens the requirements for companies on emissions from land-use change, as well as requiring a zero-deforestation target. Using the SBTi Flag sector-based approach, company targets should result in an annual decrease of 3.03% between 2020 and 2030 to align with a 1.5C warming trajectory. Thus far, just seven companies in the Coller Fairr Index have disclosed complete emissions inventories, including feed and animal farming, since 2020 – and only three, Leroy Seafood, Salmones Camanchaca and Grieg Seafood, have reduced emissions during that period. While the SBTi’s new Flag methodology is a welcome step, Fairr has been one of several groups to raise a concern on intensity-based targets (ie CO2 equivalent per tonne of fresh weight meat). The use of intensity-based target could lead to a rise in intensive animal production with serious unintended consequences such as the growth of antibiotic resistance or other zoonotic diseases. The ESG risks of intensive animal farming are real and rising, and investors and companies cannot afford to solve one problem by creating another. Although progress has been made, the pace has been slow. Many of the world’s leading protein producers are rapidly running out of time to meet the growing demands from investors, policymakers and consumers with regards to emissions reduction. While some gaps remain within the guidance for the sector, animal agriculture companies must urgently align their commitments with targets validated by science – or risk falling off the menu.
<2%
3
17%
Percentage of food production companies with SBTs
Number of Flag companies that have cut emissions since 2020
Share of meat, fish and dairy leaders with SBTs
Mollie Thornton, senior investment manager at Parmenion, unpacks key topics in ESG to look out for this year
Watch the video interview with Mollie Thornton to hear key topics in ESG for 2023 explained.
‘TCFD: in 2023, large asset managers and more listed companies fall into areas that need to “comply or explain”’
Proposed sustainable investment label descriptions and objectives
By Natalie Kenway
Roadmap towards mandatory TCFD-aligned disclosures
Timeline for TNFD
TCFD: The Taskforce for Climate-related Disclosure has created a framework for company disclosure to help investors understand their climate impact and risk. In 2022 in the UK, compliance with this was rolled out to large corporates and pension schemes, and in 2023 large asset managers and more listed companies fall into areas that need to “comply or explain”.
Below is a glossary of terms Thornton highlights: SDR: The UK Financial Conduct Authority’s Sustainability Disclosure Requirements consultation ended on 25 January, with the first proposed rules around fund disclosure expected to be rolled out mid-2023.
TNFD: The Taskforce for Nature-related Disclosures is not as advanced as TCFD, but following in those footsteps to help companies disclosure on their biodiversity impact and risk. It is not yet mandated, but testing is taking place and the launch is expected to be announced in the second half of 2023.
Inflation Reduction Act: This was written into US federal law on 16 August 2022, directing spending towards reducing carbon emissions, lowering healthcare costs, funding the Internal Revenue Service and improving taxpayer compliance.
Click here to read Thornton’s A-Z of ESG series
Calls for mobilising capital directed towards emerging economies are strong, but so far solutions have fallen flat
For one coffee company in Rwanda, the year is off to a potentially exciting start. The purchase of a coffee hulling chain machine means Green Mountain Arabica Coffee is able to process cherry coffee into parchment coffee and finally green coffee, ready for export. The company, which was founded by Jeanne Niyonsaba in 2012, has also just received funding for a dry milling plant, as well as a processing plant and storage warehouse. It’s all part of plans to expand its operations this year and reach more farmers in its 1,200-strong, predominately female, network. The funding – $260,000 (£211,491) for the plant and $250,000 for the factory and warehouse – has come from Bamboo Capital Partners’ Build Fund, a blended impact finance vehicle designed to support business opportunities that contribute to the UN’s Sustainable Development Goals in lower-income countries, with co-financing from Rabo Foundation, Rabobank’s impact fund. “This investment will mean decent, secure, well-paid jobs, which in turn supports worker communities and lifts people out of poverty,” says Jean-Philippe de Schrevel, managing partner of Bamboo Capital Partners.“Green Mountain Arabica Coffee showcases how innovative financing solutions can make a real difference to improve economic opportunities and simultaneously reduce environmental damage.” Lack of progress In the aftermath of COP27, where the need to mobilise private capital for emerging economies was widely discussed, “innovative financing solutions” like this seem encouraging. But so far, they appear to be proving the exception rather than the rule. For a start, the take-up of blended finance, which de-risks investments for private capital, has been low, remaining flat at around $20bn a year since 2014, and tailing off over the past two years, according to non-profit Convergence. “What is particularly disappointing is if you look at the data from 2022, it shows a decline in blended finance flows to emerging markets,” Nazmeera Moola, chief sustainability officer at NinetyOne, told ESG Clarity at COP27. “And that’s really worrying because that’s where a lot of the transition finance will come from.” Flows to emerging market funds in general saw a sharp drop last year, ending the year with a total inflow of just $33.7bn, compared with $379.6bn in 2021, according to the Institute of International Finance. Outside the realm of impact and blended finance, launches of sustainable or ESG emerging market funds have also remained flat. Morningstar data supplied to ESG Clarity shows 45 funds launched last year compared with 47 the year before. Of the funds launched last year, some 64% are predominantly invested in China, with Taiwan Semiconductor an almost unanimous top holding among the equity funds, showing concentration for region, sector and companies. Ninety One’s emerging market sustainable equity fund, which launched in October last year, has a top holding, 8.3%, in Taiwan Semiconductor. Perceived barriers Asset managers said there are a number of factors preventing them from directing capital towards a broader range of emerging market countries and assets that will help the industry keeps pledges such as the Glasgow Financial Alliance for Net Zero commitment to “increase the mobilisation of finance to accelerate the transition of key sectors and deployment of climate solutions in emerging markets”. For example, lack of investable solutions is often cited, but at COP27 the UN published a list of emerging market sustainability projects worth $120bn, including ones that could be invested in quickly and easily by private investors, such as the Seychelles Blue Bond, and the Oman Water and Wastewater Services Company. “We can now show a meaningful pipeline of investible opportunities does exist across the economies that need finance most,” Mahmoud Mohieldin, a UN Climate Change High-Level Champions, said at the time. ESG Clarity asked 11 of the 34 fund houses that launched sustainable emerging market funds last year whether they had invested in any of these projects. Not one was willing or able to say. For example, “Invesco’s due diligence and investment approach doesn’t necessarily follow UN projects and these specific recommendations. However, we do invest in opportunities that capture the objective and focus of the UN,” a spokesperson for the firm says. Invesco’s MSCI Emerging Markets Climate Paris Aligned Ucits ETF, which launched in June last year, is most exposed to China, at 31.7% of the portfolio, with a top holding, 6.93%, in Taiwan Semiconductor.
By Natasha Turner
‘Innovative financing solutions can make a real difference to improve economic opportunities and reduce environmental damage’
Jean-Philippe de Schrevel, managing partner, Bamboo Capital Partners
‘What is particularly disappointing is if you look at the data from 2022, it shows a decline in blended finance flows to emerging markets’
Nazmeera Moola, chief sustainability officer, NinetyOne
ANALYSIS
Another reason given for the shortfall in emerging market ESG sustainable investing is lack of, or unreliable, data, although this has been improving. “There has been an explosion in data since about 2018, but it’s still far from where we want it to be” says Simon Cooke, emerging markets portfolio manager at Insight Investment. “Back in 2017, coverage of the indices for basic ESG data was less than 50%. Now it’s close to 90% for emerging market corporate indices and 100% for sovereign indices. Information on physical and transition risk around climate change, which was non-existent five years ago and only at around 30% coverage even a year ago, is now at around 80%.“ However, there are still gaps in the debt world, especially when you get to the smaller issuers, which are often high yield and privately owned, and when you look for more granular data points.” Cooke leads the Responsible Horizons EM Debt Impact Fund, which ESG Clarity exclusively revealed was launched in January 2023, investing mainly in impact bonds. The road ahead As we move into a new year, with risk, data and investable opportunity issues improved, there may be some small signs of encouragement. Rob Brewis, investment manager at Aubrey Capital Management, says his team has broadened their portfolio to cover more of Indonesia, Mexico, Vietnam, Thailand, Poland and Brazil – a necessary step in avoiding a concentration of capital in China or in the same company. Insight’s Cooke adds the proportion of the firm’s assets allocated to sustainable emerging market funds has been “growing significantly”, although he was not able to provide a figure. Allianz Global Investors (AllianzGI) is launching a climate solutions blended debt strategy focused on emerging markets in partnership with Allianz Group and a regional development finance institution. This will be a $1bn risk-tiered structure that will invest in Paris Agreement-aligned projects across energy, resilient/transition infrastructure, financial institutions, agricultural business, manufacturing and services. “With this initiative, AllianzGI aims to create an attractive solution for investors to access emerging markets in a de-risked and scalable way, while mobilising significant capital towards climate solutions in the markets where funding is needed the most,” Leticia Ferreras, portfolio manager, development finance, tells ESG Clarity. In public markets too, AllianzGI is planning to launch more “vehicles geared towards supporting emerging economies to meet the COP27 goals,” adds Giulia Pellegrini, senior portfolio manager, emerging markets debt. Back in Rwanda and Green Mountain Arabica Coffee has secured contracts with international buyers in Singapore, Thailand, Japan and Kenya. It’s a step towards expanding the business that De Schrevel says he is “delighted” to provide the investment for. “This will help the company reach more farmers and have an even greater impact on life in rural Rwanda.”
Click here for the full list of sustainable emerging market funds launched last year
Upping
ambition in emerging markets
Despite lacklustre performance and lower issuance levels in 2022, the market for sustainable euro corporate bond funds continues to grow
Fixed-income markets last year presented a rough patch for investors, struggling to provide protection during one of the most severe market downturns in recent history. Bond issuance declined in this context as interest rates climbed steadily, increasing borrowing costs for companies. Following years of rapid expansion, this had a negative impact on the momentum of sustainable bonds in the European corporate bond market, which have experienced lower issuance levels compared with last year. However, data shows that throughout 2022, sustainable funds in the Morningstar Euro Corporate Bond category (including funds with shorter maturity) experienced a total net inflow of approximately €11.8bn (£10.4bn), indicating continued investor appetite. In fact, the cumulative amount of €4.7bn that was pulled from core funds within the category over the course of the year was more than offset by flows into sustainable options in the space. The category has evolved rapidly in recent years through new sustainable fund launches or strategies that started to incorporate ESG factors into their investment processes. According to Morningstar data, currently almost a third of the funds in the EU corporate bond category are deemed as having a sustainable focus and more than half of the funds launched in 2022 were explicitly targeting ESG objectives. Compared with other regions, Europe has a highly developed market for ESG-labelled bonds, which sustainable funds can invest in. Green bond funds are a fast-growing subset of the category. The number of options available for investors in this space has increased, with strong net inflows exceeding €1.5bn last year and total assets approaching €5bn. The Morningstar Euro Corporate Bond and EU Corporate Bond Short Term categories currently house 15 funds specifically focused on green bonds. However, due to the longer duration of the market, these funds have on average fallen behind peers performance-wise in 2022. Sustainability-linked bonds are also gaining popularity. These bonds, whose share of issuance has increased since the pandemic, link sustainability goals to financial incentives and impose penalties on issuers who don’t meet them. The market, however, does not yet appear mature enough for dedicated funds to be fully invested in these types of bonds. BlackRock Sustainable Euro Corporate Bond
‘The number of options available for investors in the green bond space has increased, with strong net inflows exceeding €1.5bn last year’
Giovanni Cafaro Manager research analyst, Morningstar
The BlackRock Sustainable Euro Corporate Fund benefits from the experience and depth of its management team, led by Tom Mondelaers, who has managed the fund since its inception in June 2019, as well as the more established core strategy since July 2009. He is supported by Georgie Merson, who was appointed co-manager in June 2021, providing expertise in non-financial sectors and sustainable investing. The duo is part of BlackRock’s established and well-resourced euro fixed income platform led by Michael Krautzberger. The fund’s investment process is underpinned by BlackRock’s typical relative value approach. ESG integration begins with an exclusionary framework, which reduces the investible universe by approximately 15%. In the past year, the fund has incorporated more elements, including a commitment to invest in green bonds, a targeted reduction in carbon emissions and the adoption of a proprietary framework that allows for a better assessment of externalities – in other words, the cost (or benefit) of the firms’ operations to society. Portfolio managers and research analysts integrate sustainability related insights and data into their investment process and can leverage on dedicated fixed-income ESG resources. Schroder ISF Sustainable Euro Credit
The Schroder ISF Sustainable Euro Credit Fund features the group’s trademark thematic approach to credit analysis combined with a thoughtful integration of sustainability considerations. Lead manager Saida Eggerstedt has been in charge of the fund since its inception in December 2019. She works closely with Patrick Vogel, the long-standing portfolio manager of the firm’s flagship European corporate bond strategy and can leverage on Schroders’ experienced European credit portfolio manager team, credit analyst desk and a growing ESG team. The fund primarily invests in euro-denominated corporate bonds and aims to maintain a higher overall sustainability score compared with the benchmark, as measured by Schroders’ proprietary rating system SustainEx, through a combination of sector exclusions and a focus on companies with strong or improving ESG characteristics. A thorough list of excluded sectors (including coal-burning utilities, alcohol and tobacco companies or gambling businesses) reduces the investible universe by approximately a fourth. Of the remaining issuers in her universe, the manager aims to emphasise those that feature high or improving sustainability ratings according to Schroders analysts (a ‘best-in-class’ approach). The fund also invests in green, social and sustainability bonds that meet certain eligibility criteria, but with an eye on relative valuations – these have reached approximately a third of its portfolio as of Q3 2022. iShares € Corporate Bond ESG ETF
This ETF is a reliable passive option in the space, which combines ESG with an attractive fee level. The ETF tracks the performance of the Bloomberg MSCI Euro Corporate Sustainable SRI Index, which differentiates from its parent benchmark from being subject to an ESG screening process. The index includes investment-grade EU-denominated corporate bonds issued by companies with an MSCI ESG rating of BBB or higher. The index is constructed through a three-stage screening process that excludes issuers involved in certain sectors and those flagged for significant controversies. The eligible securities are then market value-weighted and the index follows the same eligibility rules as its parent non-ESG benchmark. Overall, the portfolio shows good diversification across sectors and relevant metrics such as credit rating and maturity, and the ESG filters typically deliver a quality bias to the portfolio as measured in terms of credit rating distribution, while maintaining a similar risk/reward profile to its non-ESG version.
There’s a mass of regulation coming down the line this year and though it may be difficult to navigate, we have a collective interest in working together to help steer the investment industry to success
The new year is still in its nascent stage, but already firms have had a full agenda when it comes to regulation on sustainable investment. On 1 January, the EU’s Sustainable Finance Disclosure Regulation (SFDR) Level 2 rules went live, strengthening the reporting requirements for sustainable and ESG-labelled financial products. This has already resulted in a number of fund groups reclassifying their funds to avoid having the greenwashing finger pointed at them. Now, most industry participants will have been prepared for this, but in the wider context it comes off an extremely busy year of responsible and sustainable investment regulation. While much of this is necessary and should bring about greater clarity for end-investors, it is not for the faint-hearted and firms need to be prepared to roll up their sleeves. Word of caution Just looking at the regulatory environment today, in addition to SFDR, you have the Task Force on Climate-Related Disclosures upping its reporting requirements, the International Sustainability Standards Board looking to finalise rules for its disclosures, the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDR) consultation, Consumer Duty, and so on. Simply put, the regulatory burden is huge and growing. We have favoured the FCA’s trickle-down approach and its timeframes to help firms and advisers prepare for the various regulations, but we have to sound a word of caution. The trickle-down approach also means it is potentially more difficult for firms and advisers to plan as the detail of the regulations’ endgame is not known and therefore building systems and procedures to meet these requirements is more complex. For advisers this is going to be an incredibly tough environment to navigate. The FCA has said it will consult separately on its requirements around SDR and it is good that this will drill down into additional detail of what it expects across the whole value chain. Investing attitudes are changing today across all generations and interest in responsible and sustainable investment has not abated. It is highly likely the SDR regime will result in products being labelled in accordance with their sustainable attributes. The difficulty that may well arise is there being no mandatory suitability process to use as a tool to identify clients’ responsible and sustainable investment requirements. It is sensible, therefore, to start formalising your own process and many advisers have done this already, knowing it may have to be adapted once the FCA comes out with its own rules. This is potentially the best approach given the increasing demand for responsible and sustainable investing. However, it is also understandable if advisers don’t feel confident enough to do so and want to see how these trickle-down regulations mesh together. Raising all boats This is where fund and investment groups have a crucial role to play. They are naturally further along in the responsible and sustainable investing journey and have had more time, and arguably resource, to prepare for all this regulation. Sharing this knowledge down the value chain and identifying best practice will ensure we have alignment, not only with each other and the terms we use, but also with regulation. Most importantly, however, is the need to distil all this into simple and understandable language. To make any of this regulation a success, we have to do better at making responsible and sustainable investment comprehensible and engaging with clients and advisers in a way that makes them feel this is the right course of action – not just for the planet but for portfolios, too. Consumer Duty should go some way to help with this, given its emphasis on producing good customer outcomes in every product and service there is to offer. This means all communications need to be understood by the average client. So, while regulation may be piecemeal and difficult to navigate this year, we have a shared interest in making it a success and find a way to make it help the industry flourish, not hold it back.
‘Simply put, the regulatory burden is huge and growing’
Gemma Woodward Executive director and head of responsible investment, Quilter Cheviot
What was the rationale behind launching a fund investing specifically in water? We launched the water strategy in 2000 off the back of an increased understanding that water was getting scarce and polluted, and that climate change was going to add to that pressure. We decided investing in companies that propose solutions to water quality or quantity challenges would achieve a dual objective: it would help the world through the financing of such solutions and it would represent an attractive investment opportunity, as such solutions were sure to be in high demand. Some 23 years into running the strategy, that hypothesis remains fully valid. The global water crisis is as relevant today as it ever was. Summer 2022 was a case in point. The theme will remain relevant both from a positive impact and a financial perspective for decades to come. Pictet Water has a particular focus on investing in water supply, technology and environmental services. Why these areas? Our water strategy invests in the entire value chain, from water extraction all the way to wastewater treatment, including drinking water distribution, recycling, treatment, monitoring, leak detection and water irrigation. The investment universe is therefore very large and global, and though we segment it in the three above categories, we could have segmented it differently. What are some examples of the types of companies you invest in and why? We invest in companies across the entire water system. This includes firms which distribute drinking water to communities or/and collect and treat wastewater, and which develop water or/and wastewater treatment systems. We also invest in companies that develop technologies which measure leakage to prevent loss in water networks, and in those producing smart meters. We invest in firms that develop advanced irrigation systems and minimise water usage, and those developing filtration units or desalination systems to remove salt from water; likewise, companies that make home-filtration systems to improve residential water quality. From water analysis systems capable of measuring pesticides or antibiotics leftover in water, to disinfection systems to remove viruses and bacteria from drinking water. Also, we invest in smart pump manufacturers that decrease energy usage through efficient pumping mechanisms, and in waste management companies that collect, treat and recycle waste so as to protect ground water from becoming polluted. Finally, we invest in water consulting engineering firms that develop and improve water infrastructure. Biodiversity is in focus following COP15 in December 2022. How does water sustainability relate to biodiversity? It relates both in terms of quantity and quality. In many regions of the world overuse of water comes at the expense of natural ecosystems. The most famous example is that of the Colorado river, which is entirely consumed by upstream users. What is less well-known is that quality is also a huge topic. In most developed parts of the world, two-thirds of the surface water is contaminated with micropollutants. While the concentrations are low most of the time, they can affect aquatic ecosystems. Another example of quality issues is eutrophication, which comes from the overuse of fertilisers in agriculture. This can eventually lead to dead zones in receiving water bodies, ie areas where no life is possible due to lack of oxygen. The world faces a 40% global water deficit by 2030 under a business-as-usual scenario, the UN has said, what is the next big thing in water investing to combat this? The global water crisis is the sum of many small regional water crises. There is no silver bullet that will resolve all problems through a massive one-shot investment. The solutions come from all corners of the economy and all regions of the world. This is why we invest in the entire water value chain, not one specific area only.
‘The global water crisis is as relevant today as it ever was’
Marc-Olivier Buffle, client portfolio manager, thematic equities, Pictet Asset Management
Click to read Marc-Olivier Buffle’s biography
Marc-Olivier Buffle’s biography
Marc-Olivier Buffle joined Pictet Asset Management in 2014 as a senior product specialist in the thematic equities team and is a member of Pictet’s sustainability board. Before joining Pictet, he was at RobecoSAM, where he acted successively as senior analyst, head of industrials and head of SI research, responsible for the research methodology of the S&P Dow Jones Sustainability Index. Prior to that he was responsible for environmental business development at the Danaher Corporation. Buffle started his career at Trojan Technologies in Ontario, where he led an R&D team focusing on water treatment technologies.
By Laura Miller
The RRI was launched in 2020 to provide a one-stop shop for readers looking for the top-rated ESG funds. Using research from our in-house team at Bonhill Intelligence, ESG Clarity has collated the sustainable ratings from houses such as Morningstar, MSCI and Square Mile to find the best-rated funds. In this February issue we are taking a closer look at the top three funds in the RRI table. Royal London Sustainable World Trust Click here to see fund performance. This £2.7bn fund, managed by Mike Fox, Sebastien Beguelin and George Crowdy, was launched in 2012. It features in the IA Mixed Investment 40-85% Shares sector and aims to achieve capital growth over three to five years by investing in listed companies deemed to be making a positive contribution to society. Looking at its regional make-up, more than half is invested in the US, more than a quarter in the UK and the rest spread across Europe and Asia. From a sector perspective, the fund’s highest weightings are industrials (24.1%), technology (21%) and healthcare (20.5%). The top stocks are Visa, Thermo Fisher Scientific and Astrazeneca. Legg Mason ClearBridge US Equity Sustainable Leaders Fund Click here to see fund performance. Managed by Mary Jane McQuillen and Derek Deutsch in the New York office, this fund has £17.2bn in assets under management. It was launched in 2015 and aims for growth over the long term by investing in at least 85% US equities (it has 94.5% in US and some other holdings in Denmark, Netherlands and Canada) that fit the company’s ESG Sustainability Leader criteria. The fund’s top holdings are tech-heavy, with Microsoft and Apple taking up 6% and 4.7% of the portfolio, respectively. Morgan Stanley Investment Funds – Global Brands Click here to see fund performance. Another fund heavily weighted towards the US is this £2.7bn strategy run by a 10-strong team led by head of international equities William Lock. The managers look for ‘high-quality’ companies with dominant market positions, and they claim ESG analysis and engagement is fundamental to the investment process. It has 73.2% in US positions, followed by 10.4% in UK, and then allocations to France, Germany, Netherlands and Italy. Microsoft is also the number-one holding for this fund, at 8.85%, while Philip Morris, Via, Reckitt Benckiser and Danaher are also in the top 10.
‘The RRI was launched in 2020 to provide a one-stop shop for readers looking for the top-rated ESG funds’
RRI ratings providers and methodologies
• Responsible Ratings Index (RRI) combines the scores of ESG ratings agencies. ESG Clarity’s bespoke index provides a comprehensive analysis of the top ESG funds available to investors. • Square Mile’s Responsible ratings combine a fund’s positive impact on the investor’s financial wellbeing alongside the positive impact it has on the world around them. Three factors are considered before being awarded a rating: exclusion – excluding those that have a negative impact on society or the environment; sustainability – rewarding and encouraging positive change and leaders in sustainability; and impact: those that have positive impact on society or the environment. • 3D Investing provides independent evidence of whether a fund or company lives up to its claims that it is ESG compliant. These are based on the 3D Investing Framework – Do Good, Avoid Harm, Lead Change. 3D investing is a subsidiary of Square Mile. • MSCI Ratings identifies the leaders and laggards in the ESG space. Based on their rule-based methodology, their seven stage ratings range from the top scorers (AAA, AA) to average (A, BBB, BB) to those behind when it comes to ESG (B, CCC). • Morningstar Sustainability ratings provide an objective evaluation of how funds are meeting ESG challenges. Each fund is ranked within their peer group. • MSCI ESG Fund ratings measure the resilience of funds to long-term risks and opportunities from ESG issues. • Overall Morningstar ratings award funds one to five stars based on past performance. These rankings are based on the performance over the past three years, with risk and costs also taken into consideration, and judged against funds in the same category. • Morningstar Analyst ratings provide forward-looking analysis of a fund based on five pillars: process, performance, people, parent and price. Top-scoring funds receive a ‘gold’ rating.
Click for the top 25 Responsible Ratings Index listings
Royal London Sustainable World Trust
Legg Mason ClearBridge US Equity Sustainable Leaders Fund
Morgan Stanley Investment Funds – Global Brands
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Dr Andrey Zarur of GreenLight Biosciences tells BNP Paribas Asset Management how biology can be used to address some of humanity’s biggest challenges
Disclaimer Companies mentioned herein, are for illustrative purpose only, are not intended as solicitation of the purchase of such securities, and do not constitute any investment advice or recommendation. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
‘We continue to seek out those impactful companies supporting ecosystems through the creation of clean, sustainable solutions to the world’s problems’
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Industrialisation has frequently relied on chemical solutions to address biological problems. But such chemical solutions have often aggravated environmental and biodiversity challenges. However, innovative developments in bioscience are poised to address this challenge in an environmentally meaningful way. We talked to Dr Andrey Zarur, the CEO and co-founder of GreenLight Biosciences, to understand how biology can be used to address some of humanity’s biggest challenges. Using biological solutions to tackle biological problems A fundamental starting point for Greenlight was to challenge whether petrochemicals are needed so frequently to deal with biological processes. Zarur says: “We started GreenLight Biosciences as a means to create a platform where we could develop biological solutions to deal with the many biological problems that we face as a species, which of course include growing food, combating disease, preserving the environment and promoting biodiversity.” Ribonucleic acid, commonly known as RNA, is the key to their approach. RNA serves as the translator or messenger that interprets the genetic code for every living organism on the planet and tells them what to do and how to behave. Zarur explains: “It’s actually the director that tells life how to form, how to thrive, how to grow. And so, the ability to use RNA in a biological process gives you exquisite control over that particular life form.” But the challenge has been to make it inexpensive and widely available. According to Zarur, when GreenLight Biosciences started, RNA cost thousands of dollars per gram because it was made chemically, meaning RNA-based solutions for agriculture were never going to be viable at that price. Zarur and his team took up this challenge, and after eight years of rigorous scientific research found a way to produce RNA at scale. The discoveries that made their work possible was a game changer. He says: “All of a sudden you have something that is as effective as a chemical, as inexpensive as a chemical and can be produced at the same scale.” Reducing food loss Food production was their first challenge. About 1.2 billion tons of food is lost on farms, which contributes to 2.2 Gtons of greenhouse gas emissions, but demand for food is rising, thanks to the growing global population and food security issues. A simple way to address this challenge is to reduce food loss. Forty per cent of food production is wasted each year due to pests, fungi, pathogens, etc. Better protection for food sources, that have fewer unintended environmental side-effects than current chemically-based solutions, would have a profound impact on biodiversity, climate change and food supplies. Zarur outlines how a new generation of RNA-based pest control methods will not only promote food security but do so in a way that is sustainable, clean and good for the environment. The advantage of RNA over chemistry is that it can be extremely specific and designed to stop the fundamental processes of the pests themselves, while designed to be harmless to all of the other insects and biodiversity that live in the same environment – such as all-important pollinators. An additional advantage is resistance. As the planet becomes warmer, many fungi are becoming increasingly resistant to chemical fungicides. Zarur believes that eventually all the chemicals in our food supply could be replaced by biological solutions – fertilisers, plants and stimulants and so on – that are all highly specific and sustainable. Need for patient funding In order for bioscience solutions to achieve its potential in addressing the planet’s many urgent problems, additional financing is required, and asset management has an important role to play. As Zarur states: “The solutions we are trying to bring to market are needed now.” Zarur believes that the asset management industry and capital markets can play an important role in fighting climate change, not only by providing the necessary operating capital but also by offering other investors a valuable vote of confidence. Like GreenLight Biosciences, we are working towards a future where everyone has food to eat, access to medicine and the ability to live in a world with peace and harmony. This is why we are continuing to seek out those impactful companies supporting ecosystems through the creation of clean, sustainable solutions to the world’s problems. Such companies have the potential to affect real change and save lives, and by supporting them we are proud to be a fundamental part of that journey.
sponsored content | aLlianz global investors
Liquid capital: water presents risks and opportunities for investors
water presents risks and opportunities for investors
MIT Joint Program on the Science and Policy of Global Change, 2021 Global Change Outlook World Health Organization, Drinking water World Resources Institute 2015, Aqueduct Projected Water Stress Country Rankings Forbes, 2021, No Water No Microchips: What Is Happening in Taiwan? UNESCO, 2022, Valuing water supply, sanitation services
‘There is a significant sustainability opportunity in developing potential new solutions and technology to help address the different water challenges’
Name Name, job title, Company name
Water is critical for human life but it can also be a threat to life. It has become increasingly important for investors to consider this theme by screening their portfolios for water risks and identifying innovative companies that are rising to the challenge. Water is one of the most essential resources on the planet. It is critical for human life and the global economy, but is under threat. While climate change gets most of the attention from investors, the growing water crisis – inextricably linked with the climate challenge – is moving the theme firmly into the mainstream. Global water use is increasing faster than population growth and shortages are predicted to become a greater problem over the next few decades. It is estimated that half the world will live under water-stressed conditions by 2050 unless we adopt an integrated and inclusive approach to restore the balance. A combination of higher demand and water pollution is pushing some regions to reach their water resource limits, heightening social and geopolitical tensions. Climate change is also exacerbating the problem, affecting the frequency and severity of extreme events like floods, droughts and heatwaves. Water scarcity has social costs Today, 2.1 billion people lack access to safe drinking water, and more than 3 million die each year from water-related diseases. In addition to the direct impact on mortality, the lack of access to safe and affordable water threatens food security, social wellbeing, education and the ability to break away from the vicious cycle of poverty. While water is a finite resource, it is distributed at an artificially low price. Furthermore, the price of water tends to be lowest in the most water-scarce regions despite the high risks of drought or damage to long-term water infrastructure. This evident paradox directly contributes to the unsustainable management of water. A more proportionate method of valuing water would not only improve water efficiency, but also encourage greater investment into water and sanitation infrastructure. Look out for the risks Water stress poses a risk across industry sectors and economic regions around the world. In addition to direct operational risks, businesses face physical, regulatory and reputational pressures too. Climate-related temperature changes and weather events, as well as natural disasters, are likely to further reduce the availability of water. On a regional basis, the Middle East is likely to be the most affected area by 2040, according to the World Resources Institute (WRI). The US, China and Australia are also projected to experience a significant increase in water stress. Awareness is increasing about how the scarcity and excess of water can have a significant economic impact on companies. Agriculture is an obvious example, but many other industrial activities rely on water. For example, in 2021 semiconductor factories in Taiwan had to reduce production due to droughts, relying on tankers instead to provide water. Sectors such as finance and energy are also affected. For instance, financial firms may have a high revenue exposure to sectors with an aggregated high exposure to water risks. In the energy sector, hydropower is reliant on a direct supply of water, while nuclear and thermoelectric plants require significant amounts of water for cooling. Investment opportunities There is a significant sustainability opportunity in developing potential new solutions and technology to help address the different water challenges. To meet the United Nations Sustainable Development Goal to provide the necessary infrastructure for safe drinking water by 2030, Unesco estimates that annual water investments must triple in the next decade to around $114bn a year. Potential water efficiency solutions will not only need to focus on minimising water intensity, but also on developing new production processes and products that are less reliant on water, seeking to addressing pollution and creating efficient infrastructure. Water-related challenges are already evident around the world and are likely to rise. There are lots of ways to gain exposure to the theme of water in an investment portfolio as well as manage the risks. Exhibit 1 illustrates opportunities for investors to access the water theme through potential investments into companies working across the sector. Exhibit 1: Water as a thematic investment opportunity Read a full version of this article here. Key takeaways • With climate change already accelerating the frequency of floods, droughts and heatwaves, the water crisis is likely to intensify for billions of people around the world. • Water stress poses financial risks across industry sectors and economic regions, and it’s important for investors to consider these risks across their portfolios. • A growing number of innovative companies are working to use technology to combat the water crisis, which presents an attractive opportunity for investors to gain exposure to this theme.
Global Disclaimer Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK). 2673727
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Source: Allianz Global Investors
Topic Water supply Sub-topic Water network operators Water infrastructure
Topic Water efficiency Sub-topic Automation controls Farming equipment Meters & leakage detection Modernise & upgrade
Topic Water quality Sub-topic Waste water treatment Monitoring & testing
