November 2023
All eyes on COP28
ESG Clarity speaks to industry leaders from across the world to find out what they hope will be achieved in Dubai
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Tension mounts ahead of this year’s COP
By this time next week, we’ll know the outcomes of Finance Day at this year’s conference of parties. As ever it’s been a tense build-up to one of the most important events in the ESG Clarity calendar, with readers waiting to hear the results of the global stocktake and further guidance on developing their transition plans. After attending a disappointing conference last year, and with the controversies surrounding this year’s presidency, I’ll admit I’m struggling to remain optimistic. But reading Downing’s Roger Lewis’s wishlist, as well as the hopes from seven investors around the world for their countries, continents and markets, goes some way to remedy that. If you have nevertheless succumbed to COP28 fatigue, this issue of the magazine still contains our regular fund data analyses, as well as a Q&A with Triodos’ Rosl Veltmeijer and Michael Nelson’s exploration of social risk disclosure. I hope you enjoy the issue, it’s actually my last as today I leave ESG Clarity for pastures new. It’s been a pleasure creating these magazines – long may they last.
Spotlight
COVER feature
This conference will be the first ‘global stocktake’ since the Paris Agreement in 2015. Ahead of the summit, ESG Clarity speaks to industry leaders from across the world to find out what they hope will be achieved in Dubai
Claudia Wearmouth, Columbia Threadneedle global head of responsible investment, tells Natasha Turner about managing expectations when it comes to engagement
‘Be clear about what you can achieve’
As climate change impacts spell devastating consequences for economies and communities the world over, Stephanie Maier reminds us what is at stake and calls for decisive action in Dubai
COP28: Course correction
Also in this issue ...
Climate change is expected to cause catastrophic social upheaval but the latter is missing from much disclosure
Investors ‘turn blind eye’ to social risks
Roger Lewis, head of responsible investment at Downing, shares his hopes for renewables, offsets and climate targets
My COP28 wishlist
Global emerging markets were challenged by macro factors throughout 2022 but this year we saw the sector rebound
Macro matters
Pietro Bertazzi, global director for policy engagement and external affairs, CDP, on ISSB standards adoption and COP28
Critical disclosure
ESG Clarity digs into some of the new entrants that shot into the top 25 of the Responsible Ratings Index since the rebalance
Newcomers under the lens
Rosl Veltmeijer, fund manager of the Triodos Sterling Bond Impact fund, discusses investing in social trends and outlooks for bond markets
Fuelling impact bonds
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Natasha Turner Global editor, ESG Clarity
Vian Sharif, head of sustainability, FNZ, founder of NatureAlpha and member of TNFD technical experts group
As climate change impacts spell devastating consequences, Stephanie Maier calls for decisive action in Dubai
Course correction
Vian Sharif says disclosure recommendations will empower investors to manage risks associated with nature and biodiversity
ESG Clarity digs into six biodiversity funds to find out how investors should be building nature-positive portfolios for the long game
COVER story
Fund selector comment Amy Clarke argues for a new approach to testing portfolios Read >> RRI The rationale behind adding climate and governance criteria to ESG Clarity’s Responsible Ratings index Read >> Interview Christophe Boucher on why ABN Amro is joining the Net Zero Asset Managers initiative Read >> ESG Clarity Intelligence Martin Buttle explains how investors can take action on modern slavery Read >> Sector review Varied exposure among managers to semiconductor firms is leading to different outcomes Read >> Q&A Mathieu Nègre of UBAM Positive Impact Emerging Equity examines SDG alignment in emerging markets Read >> Fund manager comment Nuveen’s Ben Kerl builds the case for investing in real estate companies Read >>
COP28 begins on 30 November, when all eyes will be on Dubai and the high-level discussions happening there. The conference is set to spotlight climate finance and the outcomes have the potential to impact people around the world. From the role of private finance, the results of the global stocktake, development of green tech in Asia to natural capital implications for Africa, investors across the globe have shared their expectations for the conference the potential impact on the markets they operate in. Click on the map below to read insights from regional experts
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Click here to listen to youth groups and climate activists on their hopes for COP28
In a joint effort to address climate challenges and drive the region towards impactful outcomes at COP28, representatives from 27 countries, including governments, civil society and private sector met at the end of October at the Latin America and the Caribbean Climate Week, where the region’s environment ministers agreed on a joint proposal to take to the UN Climate Change Conference that approaches six themes: climate change, biodiversity, pollution, gender, environmental education, consumption and sustainable production. As Latin America presents several desirable characteristics when it comes to advancing renewable energy projects, with a fortunate positioning in terms of natural resources and energy matrix, this group also drafted a 51-point declaration in which they urge developed countries to create a set of mechanisms to support the region’s efforts on climate change through financing. Brazil has an exceptional interest in the developments of COP28 due to the first global stocktake, where countries will evaluate their progress and shortcomings regarding the Paris Climate Change Agreement. The outcomes of the stocktake will drive the renewed and revised goals that countries will present at COP30, which will take place in Brazil in 2025, and the country will have an important role as the conference host to push for ambitious and robust goals. Brazil itself, following the initiatives from Mexico and Colombia, has put forward a proposal for a Brazilian Sustainable Taxonomy, with a set of rules that will be presented at COP28. This taxonomy aims to define sustainable activities, transforming and guiding the economy towards a more sustainable and regenerative model. Chile, Peru and Dominican Republic are also in the process of developing their taxonomies.
‘Outcomes of COP28 will drive the goals presented at COP30 in 2025’ Eduardo Figueiredo, director, head of Brazilian equities, abrdn
Latin America
I hope countries report real progress at COP28 on reducing their greenhouse gas emissions; however, the challenge is that countries, such as the US, are behind in its goal to halve emissions by 2030 and so we need to act more swiftly than we have. By making climate finance a priority to address at COP28, international decision makers have already signalled that investments need to play a critical role. It’s crucial that the gathering not get weighed down by differences and instead focus on actionable solutions. It’s up to participants to deliver to meet this challenge. There are more opportunities for private climate finance to unleash the needed capital than ever before and at least three bills in the US have unleashed capital aimed at developing regulations, technologies, and investment to transition to a low-carbon economy. The Infrastructure Act provides funding to shore up transportation infrastructure and modernise the electric grid system. The Chips Act supports research and development of microchips that enable electrification of cars and will cut down on greenhouse gases used in plants, and of course, the Inflation Reduction Act, which has already stimulated expanded electric vehicle purchasing, pilot hydrogen energy centres and solar installations – with more to come. Do we need more investment? Of course. But we’re hoping that there will be clear directives for investors to prioritise climate finance.
‘We’re hoping for clear directives for investors’ Leslie Samuelrich, president, Green Century Funds
US
African investors have multifaceted expectations from COP28. First, they seek ambitious commitments and actionable plans from global leaders, given the stark impact of climate change and escalating nature loss. Africa’s economic growth heavily relies on its natural capital, with up to 62% of its GDP dependent on nature. Preserving our natural resources is not just an environmental concern; it’s vital for our long-term economic and social wellbeing. With reports that ecosystems and other natural solutions could contribute more than a third of the total climate mitigation needed by 2030, nature and nature financing will be central themes. It aims to demonstrate how businesses are innovating to meet nature-related goals through science-based targets, comprehensive reporting and integrating frameworks developed by initiatives such as the Taskforce on Nature-Related Financial Disclosures to address environmental risks. African investors also face significant challenges in accessing private climate finance, despite our abundant natural capital and renewable energy potential. COP28 offers an opportunity for constructive dialogue with the international community to address these challenges and secure a sustainable future for our region and the planet.
‘An opportunity to secure a sustainable future for our region and the planet’ Dorothy Maseke, Africa lead, African Natural Capital Alliance
Africa
COP28 will centre around the first global stocktake since the Paris Agreement. We hope this will give political opportunity to reset ambitions higher, rather than the opposite trend we have seen in 2023 so far. The Emirati presidency this year is expected to focus away from fossil-fuel phasedown discussions to a holistic discussion across sectors. It is also expected to focus on carbon capture and offsets as viable solutions, while it is acknowledged that these should be reserved for tackling residual emissions in hard-to-abate sectors with little decarbonisation alternatives. Regarding climate finance, the global stocktake puts pressure on overcoming the barriers to deploying flows to where they are needed. We think that talks will accelerate mechanisms to attract private capital to developing countries. The UK government has rolled back the concrete methods to achieve its net-zero commitments. Looking at emerging markets, we must focus on making the green transition less of a trade-off versus exploring existing natural fossil fuel capitals. We remain hopeful this can be achieved.
‘Political opportunity to reset ambitions higher’ Louisiana Salge, head of sustainability, EQ Investors
UK
Among potential highlights of the COP28, we hope to see transition strategies made more explicit. But the co-opting of the agenda by fossil fuel interests will generate further scepticism that the COP forum has become too closely aligned with the traditional economic interests of sovereigns and corporates. Progress was made since COP27 and there were reasons to be optimistic. We are seeing significant technological advances in energy efficiency and climate solutions, the capital being allocated to sustainability is increasing, and targeted climate policies are shifting perceived wisdom. We do not expect any major developments on the phasing out or down of fossil fuels, but pressure to redirect subsidies could be impactful for new carbon removal or storage technologies. Progress on methane emissions and renewable energies is also very likely. COP28 will be the first conference meeting to explicitly discuss the link between climate change and global health trends. The topic of who and how climate is financed is an evergreen topic, but we expect discussions on transforming the climate finance system. Trade was voluntarily set aside from the Paris Agreement, but we expect it to be a major focus on the finance thematic day.
‘We hope to see transition strategies made more explicit’ Matt Christensen, global head of sustainable and impact investing, AllianzGI
EU
UAE investors expect continued discussions over the involvement of private finance, as well as the need to reform multilateral development banks to unlock additional finance and take more investment risk. Ultimately, this could enable private financing of climate-positive projects. In addition, the low-carbon economy will be a key topic. The low-carbon economy presents huge new opportunities for the UAE in renewables, solar, hydrogen, capture technologies, and a range of other tools to achieve decarbonisation. Key stakeholders who could finance a low-carbon economy will be at the discussion table. The MENA region, especially UAE and Saudi, is also focused on developing regional carbon markets. This will be a big talking point at COP28. The carbon market is seen as a ‘win-win’ by providing investments in Africa and the global south, while also creating an opportunity for corporates to buy credits to offset their emissions. For the UAE, and indeed regional companies, understanding their carbon footprint and the necessary strategies to reduce this remains a challenge. Change is happening but not fast enough, thus limiting the ability to create trusted, investible projects. However, investment is happening, and the UAE’s nationally determined contributions clearly indicate an alignment with the country’s plan to double the economy to aed3trn ($900bn) by 2031. For the UAE, investment in climate-related projects fulfils both economic and environmental goals, if carried out effectively.
‘Reform multilateral development banks to unlock finance’ Luma Saqqaf, founder, AJYAL Sustainability Consulting
Middle East
I would expect favourable policies out of Asia and more support around the areas of green tech. The current elevated oil prices are driving governments to push for energy independence by investing in renewables and/or nuclear technology. For significant progress in this area, we will have to see more announcements of strategies to overcome some of the technology gridlocks, such as energy storage and grid infrastructure, and this could present investment opportunities, similar to what we have seen in the wake of the Inflation Reduction Act in the US. In addition, a lot of eyes will be on the fossil fuel companies at COP28 and the debate on the wording around the phase out or phase down of those fuels. I would also expect we see a few more announcements ahead of the event, similar to China publicly declaring an action plan dedicated to methane emission control earlier this month. The continued reliance of coal in China, India, Indonesia and Vietnam will likely come up as well. There is hope that the loss and damage fund will see more details emerge at this COP as well.
‘I would expect more support around areas of green technology’ Kathlyn Collins, head of responsible investment and stewardship, Matthews Asia
asia
Next
Investing responsibly, and understanding the impact investments can have on people and the environment, is no easy task. But it’s navigating this complexity that has kept Claudia Wearmouth in this field for more than 15 years. Wearmouth started her career at a startup charity, New Philanthropy Capital, analysing the impact of charitable giving, before making the switch to asset management and responsible investment. She joined then-F&C in 2007, screening investments for ethical funds as part of maternity cover, and is now global head of responsible investment. “If it was easy, everyone would be doing it with their eyes closed,” she says. “Understanding how complex and intertwined issues are is what gets me out of bed. I also want to be a good role model for my four young girls – I want them to look up to me and see that I’m trying to do my bit to channel money into sustainable development.” Tools of the trade Wearmouth does her bit by running a team of 40 responsible investment experts, whose analysis is used by investment teams across the firm. They have spent “an awful lot of time” working on a global proxy voting policy that has just had its first year of use and of which Wearmouth says she is very proud. As an example, Columbia Threadneedle voted for a shareholder proposal at Honeywell last year requesting the company report on climate lobbying, and environmental and social due diligence. The team has also uploaded “a large number of new ESG data tools” onto a company-wide technology platform and helped investment teams navigate regulation such as Sustainable Finance Disclosures Regulation, leading to the recent announcement that the firm has reclassified two funds to Article 9 and eight as Article 8. The company now has €40bn AUM in responsible funds as at 30 June 2023. Sustainable Development Goal (SDG) analysis is also available to investment teams “as a starting point to get their teeth into, rather than something biblically true,” Wearmouth explains. At present there is one overall SDG methodology that does not specify geographical differences at a top level, but does consider specific regional reasons for companies on a case-by-case basis to ensure they are correctly reflected. This often involves discussion between the responsible investment team and the portfolio manager/fundamental analyst that raises the company for review of how the methodology is applied. One example that is often debated is domestic supermarkets in emerging markets, which may provide low-cost access to food to local communities. Another example would be something like financing companies and banks that provide loans or seed funding to small, local business in emerging markets as well.
Click to read Claudia Wearmouth’s biography
Click to see ABN Amro IS’s Article 9 fund range
‘Understanding how complex and intertwined issues are is what gets me out of bed. I also want to be a good role model for my four young girls – I want them to look up to me and see that I’m trying to do my bit’
Claudia Wearmouth, global head of responsible investment, Columbia Threadneedle
Claudia Wearmouth’s biography
Claudia Wearmouth is the global head of responsible investment at Columbia Threadneedle Investments. She joined Columbia Threadneedle through the acquisition of BMO GAM (EMEA) in 2021, having previously been with BMO GAM and F&C Asset Management since 2007. Roles during this period included analyst and senior analyst, before becoming director of governance and sustainable investment and then co-head of the responsible investment team. Prior to this, Wearmouth spent five years at a startup charity called New Philanthropy Capital where she focused on analysing the impact of charitable giving and advising high-net-worths and corporates on their charitable giving strategies. She graduated in 2001 from Durham University with a BA in economics.
Example of net-zero alignment analysis, as % of portfolio emissions
Source: Net Zero Investing: Columbia Threadneedle Investments Approach, November 2022
Not assessed
Aligned
Aligning
Committed
Not aligned
Exploding engagement space But it seems for Wearmouth the most exciting development has been the ever-changing landscape of engagement. At the time of writing, she was preparing to give a talk at Columbia Threadneedle’s investment conference about the evolution of 25 years of responsible investment and where the industry is headed. And, spoiler alert, a lot of change has been in stewardship. “The space is really exploding in terms of engagement,” Wearmouth says. “You have to be really clear with engagement and not overstate your role. You’re one stakeholder, you’re one of often many other investment houses suggesting ideas or having that debate. As a house we are more cautious, which I would rather be than overstate and underdeliver.” Where Wearmouth thinks engagement can be useful is in informing analysis about holdings – a way of gaining ESG insights that can be fed to the investment teams rather than creating big changes at companies. Nevertheless, she’s seeing demand for engagement-based strategies, she says, where there’s engagement objectives with every holding coupled with a thematic focus (the firm launched its CT SDG Engagement Global Equity Strategy in 2019). “Now what I want to do is continue to innovate and bring some new strategies to the fore, which I would like to leverage on that engagement piece,” she says. Another essential factor of engagement is transparency. “I really care about being authentic, doing things properly and having that trust with clients,” Wearmouth says. “Spell out the caveats, ‘here are the drawbacks, here are the issues’. “We did that with net zero,” she adds. “We published all our methodology – ‘this is what it does, here’s where the gaps are’. But I think that’s what investors need to do because you can’t do it all – it’s about being clear about what you can and can’t achieve.” Columbia Threadneedle signed the Net Zero Asset Managers’ initiative (NZAM) in 2021 opting to use the Paris Aligned Investment Initiative’s Net Zero Investment Framework, which the firm helped to develop and which is one of three bases for net-zero methodology suggested by NZAM. Companies are rated against eight categories to reach an overall alignment rating, which can then be used to assess the alignment of a portfolio. For the 7.36% strategies committed to net zero, at least 70% of financed emissions are aiming to be aligned or engaged. COP28 expectations Net zero and Paris alignment will be front of mind for many as we head into COP28 and, like many of her peers, Wearmouth is not optimistic about the conference. “Expectations are quite low,” she says. “There will still be a big gap for that 1.5 degree target and I definitely want to see more clarity on national commitments but, as with COP27, international disagreement is likely to mean any definitive language is probably very unlikely. “The need to mitigate severe impacts of climate change is more obvious than ever.” Wearmouth references the severe impacts of recent wildfires, heat waves and floods – “[my kids] see it in the news,” she says. “They’re engaged and asking questions but it’s baby steps, right. It’s about incrementally building and making them understand how the world works and how it fits in. And for me to be able to say that I’m doing my bit and working for a firm that’s thinking about how do you take this into account? What can you do differently? I just love that.”
Investing responsibly, and understanding the impact investments can have on people and the environment, is no easy task. But it’s navigating this complexity that has kept Claudia Wearmouth in this field for more than 15 years. Wearmouth started her career at a start-up charity, New Philanthropy Capital, analysing the impact of charitable giving, before making the switch to asset management and responsible investment. She joined then-F&C in 2007, screening investments for ethical funds as part of maternity cover, and is now global head of responsible investment. “If it was easy, everyone would be doing it with their eyes closed,” she says. “Understanding how complex and intertwined issues are is what gets me out of bed. I also want to be a good role model for my four young girls – I want them to look up to me and see that I’m trying to do my bit to channel money into sustainable development.” Tools of the trade Wearmouth does her bit by running a team of 40 responsible investment experts, whose analysis is used by investment teams across the firm. They have spent “an awful lot of time” working on a global proxy voting policy that has just had its first year of use and of which Wearmouth says she is very proud. As an example, Columbia Threadneedle voted for a shareholder proposal at Honeywell last year requesting the company report on climate lobbying, and environmental and social due diligence. The team has also uploaded “a large number of new ESG data tools” onto a company-wide technology platform and helped investment teams navigate regulation such as Sustainable Finance Disclosures Regulation, leading to the recent announcement that the firm has reclassified two funds to Article 9 and eight as Article 8. The company now has €40bn AUM in responsible funds as at 30 June 2023. Sustainable Development Goal (SDG) analysis is also available to investment teams “as a starting point to get their teeth into, rather than something biblically true,” Wearmouth explains. At present there is one overall SDG methodology that does not specify geographical differences at a top level, but does consider specific regional reasons for companies on a case-by-case basis to ensure they are correctly reflected. This often involves discussion between the responsible investment team and the portfolio manager/fundamental analyst that raises the company for review of how the methodology is applied. One example that is often debated is domestic supermarkets in emerging markets, which may provide low-cost access to food to local communities. Another example would be something like financing companies and banks that provide loans or seed funding to small, local business in emerging markets as well.
Goldman Sachs
30%
Bank of America
29%
Wells Fargo
31%
Public Storage
35%
Raytheon
38%
Percentage of climate resolutions supported at companies in 2023
Travelers
56%
Chubb
72%
Boeing
91%
Caterpillar
97%
Percentage of climate resolutions supported at companies in 2022
Last year, I reflected on investor expectations for COP27 coming at the end of an important year for sustainable investment. One year on, did any of the progress we hoped for come to fruition? What can we expect from COP28 in Dubai? COP27 – lacklustre progress Last year’s COP could be characterised as lacking in ambition and progress, despite the long-awaited announcement on the ‘loss and damage’ fund. In light of significant climate policy measures in 2022, notably the US Inflation Reduction Act, we hoped to see greater momentum to scale climate action and financing. As COP28 approaches, we should remind ourselves what is at stake. We live in a world where climate change impacts are having disastrous consequences for economies and communities. At the end of the hottest year on record, investors are looking for decisive action. COP28 – a packed agenda The agenda in the UAE is unsurprisingly full. The global stocktake inevitably shows we are behind on progress. The question is whether this COP presidency can ultimately corral parties to communicate a joint message for strengthening action and a path forward. There could well be the much-anticipated ‘moment for course correction’ and ramping up of ambition that the UN Climate Change Executive Secretary hopes for. In turn, this could spur greater ambition for the revised nationally determined contributions due in early 2025, along with national adaptation plans and national policy measures to support them. However, the run-up to the conference has not been plain sailing. Critical role of financing Sustained climate investment from both public and private sector is still necessary to meet climate goals. Bloomberg New Energy Finance estimates that between $3.1trn (£2.5trn) and $5.8trn in annual climate investments are required to reach net zero, and this need is especially acute in developing economies. While much of this finance will come from private sources, governing bodies have a critical role to play in helping de-risk climate investment in emerging economies and spur investment. By acting first, either by building up critical infrastructure or providing incentives, private investment could be made more attractive if better risk return ratios were supported by developed economy governments. And nations have yet to fulfil a long-term ongoing promise of $100bn in annual climate investment to developing countries. Sustainable finance therefore continues to play a key role in the transition to a net-zero economy, but the actions of policymakers at COP28 have the potential to supercharge their ability to effect change. The energy transition One anticipated outcome of COP28 is a commitment to triple renewables capacity globally by 2030. The recently updated IEA Net Zero by 2050 Scenario roadmap reflected upward revisions for solar energy but lower wind deployment to 2030. The socioeconomic dimensions of the energy transition will also be in focus – how to drive a just transition addressing universal energy access and the opportunity for job growth. New investments must unlock financial flows to support transition, mitigation and adaptation, especially as developing economies drive forwards. Indonesia, for example, is set to release plans for a $20bn energy transition plan this month, while South Africa plans to unveil an implementation plan for its $8.5bn Just Energy Transition Partnership. The phasing out or phasing down of fossil fuels will once again be on the agenda with a strong ask from the High Ambition Coalition. Against a backdrop of a COP president that runs the state-owned Abu Dhabi National Oil Company, the question is whether this will help or hinder meaningful action from the oil and gas sector, and further progress on the methane pledge made at COP26. Spotlight on nature and adaptation Nature will feature more prominently with specific reference to its role in adaptation, food and agriculture, as delegates attempt to progress the agreements made as part of the Sharm-El Sheikh adaptation agenda, as well as the ambitious goals in the Kunming-Montreal Protocol. Doubling adaptation finance by 2025 is a critical first step but we need to look at addressing a broader array of adaptation responses, including those that focus on nature-based solutions and ecosystem-based adaptation approaches. These will be critical in preserving natural life, as well as those that depend on it. Driving future policy The task before policymakers at COP28 looms larger than ever. It is crucial that delegates do not lose sight of the stakes. The extent to which this year’s Dubai summit delivers, or at the minimum, signals renewed commitments to ‘solutions pathways’, will drive the future policy and investment landscape.
‘The question is whether this COP presidency can ultimately corral parties to communicate a joint message for strengthening action and a path forwards’
Stephanie Maier Global chief sustainability officer, GAM Investments, and member of ClimateAction100+ steering committee
Natasha Turner, global editor, ESG Clarity
Climate change is expected to cause catastrophic social upheaval but the latter is missing from much disclosure. Michael Nelson reports
Engagement within a portfolio Royal London Asset Management is one firm that seeks to engage its investment holdings on social risks and opportunities. Simonetta Spavieri, senior engagement analyst at Royal London AM, says a lot of scenario analysis, at least for climate change, is based on technological and economic modelling that is not geared to answer socio-political questions. “We have worked to ensure the social risks and opportunities of the transition to net zero are understood and managed by corporates through planning for a just transition, engaging with energy utilities, banks, oil and gas companies, automakers and social housing providers,” adds Spavieri. “As investors, we consider the social issues of the climate transition a material risk, and companies should plan for a just transition to enhance the credibility of their climate plans. When companies fail to prepare for a just transition and do not adequately manage the level of change to bring their workers, customers, communities or supply chain along with their decarbonisation plans, they risk losing skills, their licence to operate and the ability to scale solutions. They can also hamper their ability to source materials from suppliers.” Meaningful mapping Social risks are governed by laws and regulations, such as on forced labour and human rights, and on well-established soft law and ‘best practice’ principles. According to Knapp, since they are ultimately about people, social risks are also closely scrutinised by the wider public. They can be the target of litigation claims often supported or driven by NGOs, and breaches of accepted standards tend to be incendiary in all operating environments, which can significantly affect a company’s social licence to operate. This will have a significant negative impact on reputation, felt particularly at B2C companies. On a broader economic level, concludes Spavieri, if many companies do not factor in the social impact of their decarbonisation plans, and how they will take vulnerable stakeholders into consideration, public acceptance of policy could be reduced, and decisions designed to advance the transition and protect customers may not take place. “Not including social considerations into climate plans results in a disorderly transition to net zero, and possibly a slower route that locks in further climate physical risk across our portfolios in the longer term,” she says. “Climate physical risk to portfolios also means further negative social outcomes as climate impacts disproportionately affect the most vulnerable members of society.”
The risks associated with climate change are beginning to be well understood by the investment community, with climate-related financial disclosures mandated in many jurisdictions. But there are fewer disclosure mechanisms relevant to people and communities in development to allow asset managers to account for social risk. Climate change is expected to cause seismic social upheaval even without meeting critical tipping points or 4C warming. Heat stress, for example, could kill millions and trigger mass migration across the world. According to Jakob Thomä, co-founder and research director at Theia Finance Labs, climate stress-test exercises, economic impact analyses or other risk exercises that seek to understand how climate change affects social stability and, by extension, the economic and financial impacts of social conflicts, are hard to find. “Our estimates suggest social risks could be amplified by two or three times when compared with direct climate risks. Consider a typical coup in Africa can cut GDP by half and forms faster than a hurricane over the Atlantic. Likewise, the Troubles in Northern Ireland ended up having a bigger impact on GDP than most mainstream estimates on the economic costs of climate change,” he says. “Ignoring these risks is the functional equivalent of trying to understand if there is a shark in the water by just scanning the horizon for a fin. It cannot be ignored if risks are to be meaningfully mapped. But people have turned a blind eye to it because of how complex it is, and also the daunting implications one must think through when considering these risks for society more broadly.” Maria Knapp, partner at global risk consultancy Control Risk, agrees. She says that, since people issues are harder to quantify, and there are generally fewer metrics relevant to social risks compared with SBTi-type climate risks, financial accounting for social risks is always going to be challenging. One disclosure framework on the horizon is the Taskforce on Inequality and Social-related Financial Disclosures, which is aiming to launch in the first half of 2024 and develop a framework built on existing standards, benchmarks and ratings. Screening for social risks Asset managers, therefore, are encouraged to identify what the most important issues are affecting their investment targets. Social risks can be defined by the sector and industry in which the target operates, as well as the local social dynamics and dependencies of the target’s operations. “Scenario planning together with climate risk forecasting is an essential part of considering the financial and broader impact of social issues in the short, medium and longer term,” says Knapp. “For instance, potential climate stress impact on social capital – ie your workforce (cost, location and other impacts) – or local community dependencies can be examined this way. This should start with risk mapping the most salient risks related to your assets or targets – even better if you can do this across your investment strategy. “Then consider which are the possible scenarios that will the most significantly impact those risks. This gives you a gradient of risk to help define where to double down attention and resource towards performance improvement.” Beyond climate, Knapp says diversity, equity and inclusion metrics are critically important, and they are relatively easy to quantify. But asset managers should not stop there. It is important to take a wide-lens view of social risks to include issues around workforce, human rights impacts, equitable access, data privacy and so on depending on the nature of the target’s operations. For social risks, it can be more valuable to set an ambition of what ‘good social governance’ looks like, and set performance objectives where there are clear opportunities for a company to perform better, she says.
‘Ignoring these risks is the functional equivalent of trying to understand if there is a shark in the water by just scanning the horizon for a fin’
Jakob Thomä, co-founder and research director, Theia Finance Labs
‘Not including social considerations into climate plans results in a disorderly transition to net zero, and locks in further climate physical risk across our portfolios in the longer term’
Simonetta Spavieri, senior engagement analyst, Royal London AM
Loss to farmers in Australia over 20 years to 2019 as a result of climate change, largely from drought
AUS$1bn
Additional deaths predicted per year between 2030 and 2050 from undernutrition, malaria, diarrhoea and heat stress alone
250,000
Source: World Health Organisation, Australian Bureau of Agriculture and Resource Economics
Click for TISFD summary
TISFD summary
Members of the interim secretariat of the Taskforce on Inequality-related Financial Disclosures, and the organisations preparing a Taskforce on Social-related Financial Disclosures, have begun working toward integrating the two initiatives to form a ‘working group’ that will launch the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) in the first half of 2024. Aiming to strengthen the development of financial disclosures regarding inequality and social-related issues, the TISFD will attempt to meet the distinct needs of providers of capital, companies, regulators, civil society and labour organisations to assess material financial risk to enterprises as it relates to inequality and social issues. Once launched, the taskforce will start developing the disclosure framework, built upon existing standards, benchmarks and ratings to clarify the disclosure landscape on inequality and social-related issues, addressing gaps and weaknesses through comprehensive, evidence-based and stakeholder-informed research.
‘The delicate balance for policymakers in Dubai in December is energy security, cost of living and decarbonisation, which can lead to fickle attitudes towards gas and coal’
Nicknamed ‘Hope-enhagen’, the climate conference in Copenhagen in 2009 delivered nothing. And despite the 27 previous COPs, none have achieved the simplest solution to climate change: commitments that legally bind a country, company or community to reduce the emissions of six types of greenhouse gas. I share a birthday with the date the Paris Agreement on Climate Change was signed in 2015, so given this and the outcomes of previous COPs, what would a birthday wish for COP28 outcomes look like? Easing regulation for renewable power The counterweight to these encouraging developments is the threats that exist. Solving these would be the first wishlist item to come out of COP28. There are delays and problems in permitting for renewable installations and grid connectivity. This leads to the real risk that clean power generated is lost. Few countries can compete with the billions of green spend of the US’s Inflation Reduction Act, though they can still reduce administrative complexity for renewable power. An additional linked risk is the reversion to fossil fuels. The delicate balance for policymakers in Dubai in December is energy security, cost of living and decarbonisation, which can lead to fickle attitudes towards gas and coal. Commitment to climate change targets With a record hot June and then July behind us, and stories of record-breaking extreme weather and temperatures continuing, limiting warming to 1.5 degrees is sadly looking less and less likely. Indeed, these acute incidents remind us that 1.5 is an average global rise and some regions (read: Artic or Sahel) will be affected much more, and indeed likely already feel this. Is 1.7 degrees the new best case, and should COP28 recognise this? Probably. Making realism on targets – with renewed vigour and commitment – the second wishlist item. Enabling growth of renewable energy After hyped launches at the start of this decade, there have been setbacks to net-zero carbon. Some investors, insurers and banks have left their respective sectors’ commitments, like net-zero asset managers. The mid-year progress update from the Climate Change Committee to help the UK government is prescient. It wants to see shifts towards actual implementation – including renewables, electric vehicles, heat pumps, hydrogen and carbon capture – in order to meet stated targets and the latest, sixth carbon budget. Whichever temperature target is agreed, or commitment is supported, or government sentiment is in force, climate change always returns to mitigation and reducing greenhouse gas emissions. And current – plus future – renewable power technologies play a central role in this. This makes a continuing commitment to enabling the renewable power sector’s growth the third item on the COP28 wishlist. Offsetting carbon A fourth and final item, related to net zero, is carbon offsetting. What might a more mature market, catalysed by agreements at COP28, look like? Will there be no more scandals around verification, the rule of law or rule of property? Outlawing ‘carbon neutral’ claims, as the EU is pioneering for 2026, could be a big theme. And there could be further clarity on quality removal offsets with additionality like air capture, on working with suppliers under the so-called ‘insetting’ and on the ability of countries to trade offsets to meet their targets. What do future COPs have in store for us? Looking ahead beyond this year’s COP28, we can certainly expect promises and progress towards these four items. Legally binding reduction targets – the biggest wish – are deliberately omitted here given the unlikelihood, but the global stocktake of countries’ nationally determined contributions will be a good test of the Paris Agreement’s logic of ‘name and shame’. The Global Decarbonisation Alliance announced in May is another positive indicator, helping item number two. But a credible, internal framework that every single stakeholder commits to, that meets this small list plus the many more required commitments, now that’s something worth wishing for.
Roger Lewis Head of responsible investment, Downing
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Stephanie Maier, global chief sustainability officer, GAM Investments, and member of ClimateAction100+ steering committee
There are thousands of listed companies in the global emerging markets region. Many of these actively incorporate ESG considerations into their operations. However, it is important to recognise the disparity among ESG data providers, leading to different ESG scores for the same company. In terms of performance, responsible/sustainable strategies with a growth approach have faced challenges in recent times. They have struggled as the companies they are investing in have been part of the cohort of growth stocks that have been de-rated. Simultaneously, these strategies have avoided sectors such as oil due to ethical exclusions. As a result, this has impacted on their performance, as these areas of the market have generally held up well. Macro factors In 2022, global emerging markets were very macro driven. Various factors affected investor sentiment, such as geopolitical risks following Russia’s invasion of Ukraine, surging global commodity and energy prices due to fears over energy security, higher interest rates, China’s property market woes and the country’s continued lockdowns – which were abruptly abandoned towards the end of the year. As such, there was a wide dispersion of performance within the region’s markets and sectors during the year. The volatility and drawdowns experienced last year meant that in general the best-performing stocks were very limited, and the returns led by select leaders. In January 2023, most global emerging markets rebounded, initially due to early optimism of China’s economic reopening and on expectations of a lower growth environment in the west and weaker US dollar. However, as the year progressed, concerns grew over recession risk, especially in developed markets, the state of the banking sector across the globe and ongoing US-China tensions. Stewart Investors Asia Pacific Leaders Sustainability Managers David Gait (pictured left) and Sashi Reddy target primarily large- and medium-sized Asian companies. The strategy is run with an emphasis on sustainable development as the team seeks quality companies it believes can make a positive contribution to a better, more sustainable world. The team includes ESG factors in its assessment of the sustainability and quality of companies. Management integrity and the attitude to shareholders is critical, as well as the sustainability of the franchise or business. So too is the execution and interaction with employees, suppliers and customers alike, as well as the impact of business activities on the local community and environment. The team does not screen companies on purely ethical or moral reasons, but it is unlikely to invest in companies operating in the gambling and tobacco industries as it considers the long-term sustainability positioning to be poor. Since its launch in 2003, this fund has a strong track record, but the emphasis on capital preservation and quality means the strategy has typically lagged behind when the wider market is led by lower-quality stocks. The upside to such an approach is that the fund has tended to be resilient when markets have fallen and volatility has increased. For those concerned about the risks of investing in this region, such as the permanent loss of capital that can arise from poor corporate governance, disclosure and transparency, this fund offers investors a more conservative way to access the region and would be better suited to long-term investors. It benefits from a team that has diligently applied its approach through different market conditions. It spends considerable time and effort looking at the quality of a business franchise, its management and financial strength. UBAM Positive Impact Emerging Equity Given fund managers Mathieu Nègre and Eli Koen (pictured, left to right) will only invest in companies that have a positive impact on the environment or society, ESG factors are inherently considered in the investment process. The team’s proprietary Imap process is designed to measure the extent of a company’s impact and, in practice, only the highest-ranking stocks are considered for investment. The team’s impact engagement framework assesses if a company’s approach to its operations are in harmony with its products and services, and this helps the team focus on key issues for company engagement. There is a strong team-based approach with all members searching for both emerging and developed markets for opportunities. The investment process is clear and thorough, and the managers are knowledgeable and have worked together for almost 20 years following emerging markets. The team is supported by an external impact advisory board, which gathers thought leadership from industry experts and provides independent scrutiny of the fund’s holdings. The team has demonstrated a consistent approach amid challenging times for economies and markets since the fund’s launch in 2020. However, the strategy is not without risk. As is the case with many impact funds, UBAM Positive Impact Emerging Equity has biases to growth factors, which can provide headwinds. It is also an all-cap concentrated portfolio and there will be times where the strategy underperforms as the market chases other themes for returns. Stewart Investors Indian Subcontinent Sustainability The management team behind this strategy, Sashi Reddy (pictured left) and David Gait, believe sustainable development is non-negotiable in the Indian subcontinent. These countries face substantial challenges that must be addressed, such as the prevalence of malnutrition in very young children. ESG ideals are central to the strategy. The managers seek companies that make sustainable products and services as well as those that contribute to economic and social development, such as those providing responsible finance, as these play an important role in building a sustainable future. Companies that contribute to better environmental outcomes are also included. The team does not screen out stocks purely on ethical or moral reasons, but it is unlikely to invest in companies operating in certain sectors such as gambling. The team engages with companies in the hope of encouraging them to ignore short-term pressures and focus on long-term sustainable returns. This strategy focuses on the real risks of investing in this region and therefore will appeal to long-term investors. There will be times when the fund is out of favour with the wider market, such as when riskier stocks are in demand or when market participants are chasing certain themes or sectors.
‘The team seeks quality companies it believes can make a positive contribution to a better, more sustainable world’
Amaya Assan Head of fund origination, Square Mile Investment Consulting and Research
Performance has ticked up during the past 12 months
Performance standout among peers
‘The team’s impact engagement framework assesses if a company’s approach to its operations are in harmony with its products and services’
‘The team engages with companies in the hope of encouraging them to ignore short-term pressures and focus on long-term sustainable returns ’
Roger Lewis, head of responsible investment, Downing
Pietro Bertazzi, global director for policy engagement and external affairs, CDP, speaks to Natalie Kenway about ISSB standards adoption and COP28
Imap is UBP’s proprietary scoring system that judges the impact intensity of each stock and assigns it a score out of 20 – five points for intentionality, materiality, additionality and potential. A score of 12 is the minimum threshold for acceptance into the portfolio and watchlist.
Imap explained
Last year, CDP was among the 20 organisations that signed up to help firms implement ISSB standards. What were the biggest challenges for firms around disclosure and how did CDP help them overcome this? The lack of harmonisation and standardisation around environmental disclosure, often referred to as ‘the alphabet soup’, is something we know companies and investors have struggled to navigate. There is a global harmonisation effort, which is why CDP supported the development of the ISSB and why, from 2024, we are aligning our global disclosure platform with the ISSB climate standard. This will help reduce the reporting burden on companies through an alignment of requirements. It will also provide investors with access to corporate environmental data that is consistent, comprehensive and comparable across regions and regulatory requirements. Disclosure is a journey that corporates can be supported on. So, we’ve always listened to companies and investors to tailor support in the areas they tell us they need it. One of the most important areas are on the disclosure of Scope 3 emissions. Scope 3 emissions are 11.4x higher than operational emissions, most companies have struggled with this. Supply chains can be complex webs that involve millions of dollars of purchasing, and hundreds, if not thousands, of suppliers and products. Calculating Scope 3 emissions can be a challenging and drawn-out process, with buyers often taking on the role of a ‘carbon personal trainer’. CDP has supported these companies through our supply chain programme, which helps companies to engage their suppliers, pinpoint risks and identify opportunities. In 2022, more than 280 members, with $6.4trn (£5.1trn) in purchasing power, requested more than 47,000 suppliers to disclose. The ISSB standards were launched in June this year and later incorporated into the CDP platform. How have the standards been received generally? CDP will align our platform with the ISSB climate standard from next year. This means that from 2024, more than 23,000 companies worth 66% of global market capitalisation will be asked to disclose against it. The ISSB standards have been well received, as they were developed to answer calls from the global market for more harmonisation and standardisation on the reporting of climate-related financial disclosure. A reason for their warm reception is the standards are rooted in the Taskforce for Climate-related Financial Disclosure (TCFD) recommendations, which are widely used (and CDP is already aligned with). This means companies already using the recommendations will be well prepared to report in line with the standards. Many were also happy to see Scope 3 included in the standards. CDP sees Scope 3 as a key component of high-quality disclosure. The reality is that we cannot build a resilient economy and stop irreversible climate change without measuring and managing Scope 3 emissions. However, by including reliefs for Scope 3, the ISSB showed it won’t throw all companies in at the deep end, it will support them to start this journey. CDP and the ISSB, through our collaboration, will be providing joint capacity-building activities to support companies to disclose against the standard through CDP over the coming months. Are you seeing signs ISSB will be adopted widely by firms? Yes, we expect the ISSB to follow a similar trajectory to the TCFD and to receive widespread adoption. It’s important that companies pair their climate-related financial disclosure with disclosure on their environmental impacts. Do you think it will become mandatory in many countries? Yes, we anticipate many countries will use the ISSB standards to underpin their mandatory disclosure regulation. Just a month ago, Brazil announced ISSB-aligned disclosures would be mandatory for all listed companies from 1 January 2026 and the UK has signalled it will follow a similar path. The ISSB’s standards have also been endorsed by IOSCO and welcomed by the G20 and G7. In terms of promises from last year’s COP, where have you seen progress? What is on your wishlist for COP28 and what will help investors better understand how sustainable their portfolios are? We have seen some progress in the past year. From the private sector, it’s great to see disclosure increasing again. CDP has seen a 24% increase in disclosure year on year. The number of ambitious net-zero commitments has increased yet again. However, are these commitments leading to action? This year, CDP analysis showed that only 24% of disclosing companies are actually on track to meet their targets. At COP28, I will be closely watching the outcome of the first global stocktake. This should provide a clear roadmap for all actors, not only governments, to drive transformational action on climate and nature. We hope to see the stocktake recognise the crucial role of disclosure from corporates and local governments and outline a truly collective way forward. It should tell every investor to engage their portfolios to disclose, set science-based targets for climate and for nature, have a transition plan in place and keep disclosing annually so they can track progress and continue to align their capital in a sustainable way.
Pietro Bertazzi, global director for policy engagement and external affairs, CDP
‘We cannot build a resilient economy and stop irreversible climate change without measuring and managing Scope 3 emissions’
Following the implementation of new criteria to ESG Clarity’s Responsible Ratings Index last month, for this issue we’ll dig a little deeper into some of the new entrants that have shot into the top 25 since the rebalance
WS Evenlode Income, Wellington Global Stewards and Schroder ISF Global Sustainable Growth each take a different approach to sustainable investing but are all aligned to global temperature goals – sector exposure helps here – as well as having low exposure to climate and human rights risks. WS Evenlode Income Managed by Hugh Yarrow, Ben Peters and Chris Moore, the TB Evenlode Income fund changed its name to WS Evenlode Income on 2 October this year and has continued to perform well over the long term despite underperforming the sector and FTSE All-Share in September due to a lack of exposure to oil, mining and banking. On the plus side, this boosts its sustainability credentials, which are constantly monitored by the firm’s ESG team. The team has been engaging portfolio companies, most recently to discuss their reporting plans under the EU’s Corporate Sustainability Reporting Directive.
Click for the top 25 Responsible Ratings index listings
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. • Implied Temperature Rise from MSCI ESG Research is an intuitive, forward-looking metric, designed to show the temperature alignment of funds with global temperature goals. • Fund exposure to climate tranistion risk and opportunities. MSCI provides a variety of metrics for assessing the carbon characteristics of an index or investment portfolio. Based on both reported and estimated Scope 1 & 2 carbon emissions, MSCI measures the carbon responsibility, efficiency and exposure attributed to an index or fund. • Aligned with best practices on board independence. The fund’s weighted average percentage of independent board of directors. Aligned with best practices on board diversity. The fund’s weighted average percentage of women on board. • Fund exposure to UNGC violations in accordance with the MSCI ESG Research methodology. • Fund exposure to red flag controversies are very severe ongoing controversies with the company’s direct involvement. Controversies may be related to the environment, customers, human rights, labour rights or governance, in accordance with the MSCI ESG controversies methodology. The percentage ‘%’ represents the sum of the weights and the numbers in brackets ‘(0)’ represent the count of fund holdings that are facing very severe ongoing controversies with the company’s direct involvement. Controversies may be related to the environment, customers, human rights, labour rights or governance, in accordance with the MSCI ESG controversies methodology.
Wellington Global Stewards This fund’s temperature alignment and low climate transition risk is perhaps not surprising given its high weighting to IT companies (although it is underweight the benchmark in this sector) and it is targeting net zero by 2050 in line with the Paris Agreement. IT was the main cause for underperformance in September, however. The fund targets companies displaying good ‘stewardship’, which is assessed via a proprietary scorecard. The scorecard looks at whether companies demonstrate appropriate duty of care towards their key stakeholders, including large employee and customer bases, complex supply chains and their engagement with the environment.
Schroder ISF Global Sustainable Growth This fund, managed by Charles Somers and Scott MacLennan, has very similar sector exposure and holdings to Wellington Global Stewards, making it unsurprising to see the RRI criteria so closely aligned. With a less specific focus on stewardship, it is slightly below Wellington when it comes to the board independence and diversity of its companies, but has performed well over the long term.
RRI 5 Size £3.3bn Global category UK equity large cap Temperature Aligned Climate transition risk and opportunities exposure Low
Board independence best practice alignment 79% Board diversity best practice alignment 43% UNGC violations exposure 0 Red flag controversies exposure 0
RRI 5 Size £1.2bn Global category Global equity large cap Temperature Aligned Climate transition risk and opportunities exposure Low
Board independence best practice alignment 83% Board diversity best practice alignment 38% UNGC violations exposure 0 Red flag controversies exposure 0
RRI 5 Size £4.1bn Global category Global equity large cap Temperature Aligned Climate transition risk and opportunities exposure Low
Board independence best practice alignment 80% Board diversity best practice alignment 35% UNGC violations exposure 0 Red flag controversies exposure 0
Fuelling the impact bond market
Rosl Veltmeijer, fund manager of the Triodos Sterling Bond Impact fund, tells Michael Nelson about investing in social trends and outlooks for bond markets
How does Triodos define impact, and how do you evidence that you’re making an impact? About six years ago, we started looking at the biggest trends in society – for example, demographic changes, climate change, loss of biodiversity and developments in the tech industry – and what challenges those trends may bring. From these, we identified seven investable transition themes that are needed for a future that benefits both planet and society. Each bond instrument must contribute to one or more of these transition themes to generate positive impact, so that is an important starting point for us in terms of how we define impact. But they must also meet our minimum standards, which provide a safeguard to make sure investments with a social benefit do not jeopardise the environment and the other way around. For example, if there is a company that produces windmills but is also susceptible to corruption, then we would not invest in it. In terms of measurement, we assess each investment based on how they contribute to the UN’s Sustainable Development Goals, focusing mainly on the products and services of a company. How do you support companies on their transition journey? We are quite a small investor in the grand scheme of things, so we don’t engage with power, we engage on content. Engagement is something anybody can do, as long as they ask meaningful questions, but what is helpful for us is that we are a long-term investor with a concentrated portfolio, which means we can build relationships with these companies over time and show consistency in what our objectives are. A large portion of your fund is devoted to social inclusion and empowerment. Can you explain why this is such a crucial aspect of your investment strategy? Social inclusion is our largest theme at 38% exposure, and typically what we consider under this theme are companies that provide access to financial services such as development banks, the European Investment Bank, etc, which focus on investing in renewable energy projects alongside the rural economy. It is very important for us that these development banks provide real loans to the real economy with a triple-bottom-line focus. Second, what is very important is the digital divide. So, we also invest in companies providing access to information through digital networks, such as British Telecom, Deutsche Telekom and Pearson. It is vital people have access to information and the opportunity to connect with one another. Do recent struggles in the ESG bond market concern you for the future? The bond market has struggled generally, not just ESG bond funds, and that is due to multiple factors, from a strong rise in interest rates as a result of the pandemic and the war in Ukraine. Our sterling bond fund was launched at the end of 2020, which in hindsight was a terrible time to launch a bond fund because that was the beginning of the rise in interest rates. But things are slowly changing, and instead of negative interest rates, savings and deposits are starting to offer decent positive interest rates, so they are becoming a good alternative for investing in the stockmarket. And now we have reached the end of the rate hike cycle, we expect rates will remain high in the coming period and that investors will return to the bond market also. We have been lucky in that, although we have days where we have some outflow, we have more days of inflow, so the fund is still growing in terms of new money coming in. What are your predictions for the future of the bond market, but also for the sustainable investment industry as a whole? In terms of the bond markets, of course, interest rates are very important, and we expect these yields to stay at a more elevated level, based on the normalisation of monetary policy on a global scale and the presence of sticky inflation. We are also expecting credit spreads to widen based on higher default rates, because what we are seeing now is that these tighter financial conditions are starting to hurt the profitability of companies that are debt heavy. In terms of market size, we still need a tremendous amount of investment, not only for the energy transition, but also in scaling up grid capacity and climate adaptation. In the UK specifically, it is quite a challenge to invest in the outdated water infrastructure, and health and social care. I expect this will fuel the green and social bond market, because these instruments are fit for purpose to finance these activities. Hopefully, that money will spread across more of those kinds of markets. At the minute, it is still very much concentrated in certain high-emitting sectors, but there are other themes companies should think about, such as biodiversity, the circular economy or education. Obviously, investment is still needed in energy transition, but I expect the social market to grow much further as well.
Rosl Veltmeijer, fund manager, Triodos Sterling Bond Impact fund
‘We are quite a small investor in the grand scheme of things, so we don’t engage with power, we engage on content’
Click for Rosl Veltmeijer’s biography
Rosl Veltmeijer’s biography
Rosl Veltmeijer has been working for Triodos Investment Management since 2001 and joined the portfolio management team in 2017. Before that she was head of research, responsible for developing and applying sustainable investment criteria alongside Triodos’s engagement activities. Veltmeijer holds a master’s degree in social banking and social finance from the University of Plymouth, and a master’s degree in investment management from the Vrije Universiteit Amsterdam.
