Behind the scenes at COP26
What two weeks in Glasgow was really like
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After it was postponed from 2020 due to Covid-19, we spent the year counting down to the most hotly anticipated event on the climate calendar: COP26. Deputy editor Natasha Turner and I had the privilege of attending the event in Glasgow in early November and have dedicated this magazine to the insights, analysis and expert comment ESG Clarity readers are used to centred around the commitments and pledges announced at the UN’s climate summit.
We spoke to investment management professionals on the ground and have summarised their – and our - views in these articles in interactive formats. Look out for video interviews, audio clips and more.
For more on COP26 check out our Guide to COP26, which we updated throughout the event, and register for our Global ESG Summit on
2 December. We look forward to digesting and analysing more on the announcements there.
One thing we have realised: COP26 has prompted more questions than answers and it is something we will be discussing over the next few months and beyond – but let’s hope the action steps up and the lip service steps down. As we know, there is no time to waste.
Global head of ESG insight, Bonhill
Natasha Turner shares her experience of two weeks in Glasgow covering the climate change conference – and where she hopes there might be changes adopted by the investment industry
AXA Investment Management’s senior management team on their ‘brave and bold’ investment policies and defend the GFANZ commitments at COP26
Compromise is key for change
EdenTree’s Ketan Patel reflects on the importance of aligning portfolios with science-based targets
Follow the science
Also in this issue ...
Vanguard’s John Galloway on engagement, stewardship priorities and better governance practices
Empowering the voice
of the shareholder
GIB Asset Management’s
Venetia Bell assesses the good
and the bad of the conference
Milestones and missteps
EQ Investors’ Louisiana Salge shares her experience at COP26, what she wants to see happen next, and how the commitments will need policing
Call the COPs
Announced on Finance Day at COP26, the UNCDF climate impact ETF product excludes fossil fuels
Climate ETF to finance ‘greater good’
Christine Dawson looks at how climate pledges made at the summit were received around the globe
For companies in the Asia-Pacific region, disclosing to stakeholders their approach to ESG issues is still new territory
New dawn in Asia Pacific
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Natasha Turner shares her experience of two weeks in Glasgow covering the climate conference and where different voices are being brought into the investment industry
Of course, the investment industry present in Glasgow could only interact with other people that were also able to access the city. The conference as a whole has been criticised for its lack of representation – particularly of delegates from the global south – and Chinese president Xi Jinping and Russian president Vladimir Putin’s absences were certainly felt.
In the finance world, the launch of a new Women in Finance Climate Action report in the green zone during COP26 was met with criticism for not including anyone from the global south in its 12-strong group. “That is a totally legitimate concern and we accept that,” Amanda Blanc, Aviva group CEO and one of the leads on the report said.
Bringing a wider group to the table will clearly be key, not least in helping find those investable solutions the industry will now be looking for. And the solutions are out there. Back at my breakfast, the panel discussion has begun – a selection of blended finance platforms bringing things such as solar technology to sub-Saharan Africa and renewable energy and sustainable transport projects across the UK. “We’re here, we’re investable,” was their message.
Let’s hope the conversations and collaborations seen at COP26 continue so that by COP27 we can look back on some tangible progress.
‘Key for me has been hearing from voices I don’t usually hear in the finance community, particularly youth’
Sagarika Chatterjee, director of climate change, Principles for Responsible Investment
Click to listen to
ESG Clarity’s podcast from Glasgow
A group of men in suits are standing around a breakfast bar chatting over a cup of coffee. It’s a fairly common precursor to a finance industry event, but perhaps unlike other industry events, they’re talking about Greta Thunberg, a teenage girl, and discussing her remarks from climate marches in Glasgow a few days prior.
Thunberg is of course a powerful force in the fight for climate action, and is known and discussed by pretty much everyone who hasn’t been hiding under a rock for the past few years. But to me this scene of serious men in suits gravely debating a teenage girl – especially after a lack of face-to-face discussion and debate over lockdown – really epitomised the two weeks I spent at the COP26 conference in Glasgow and surrounding events.
The willingness of the industry to engage with other voices – be that youth, women, indigenous people, corporates, regulators and more – was clear, and is surely the only way real progress will be made.
By now ESG Clarity readers will no doubt have read, digested and dissected the high-level finance pledges from the first week of COP26, as well as the Global Finance Pact from the end of the second with the help of our Guide to COP26 where we posted live coverage and commentary reacting to the event. Our audience will also have seen the numerous ‘hot takes’ and seemingly opposing realities of the conference condensed into 280 characters on Twitter.
Without wanting to add to the churn, or present some sort of black and white response to what is a highly complex situation, this article will highlight just a few points that demonstrate this aptitude for engagement and therefore capture what two weeks from 1-12 November in Glasgow was really like.
After the first week of running around the blue zone covering the main financial announcements from COP26, I headed to the World Climate Summit Investment COP, which was held on 7-8 November. Here I was pleasantly surprised to find a fringe event that wasn’t just a London investment conference picked up and moved to Glasgow, but a real effort to bring together as many viewpoints as possible.
Tucked away in a corner of the Hilton Hotel, I caught up with Sagarika Chatterjee, director of climate change at the Principles for Responsible Investment. “One of the key things for me has been hearing from voices I don’t usually hear in the finance community – particularly youth,” she said.
“A particular voice that stood out to me was Clover Hogan, a young climate activist who was doing a session on eco-anxiety and then turning that into steps young people are taking to try to redress the balance. They feel left out of the decisions, but are the ones that will really be impacted. This really stuck with me – how can I relate it to what I do and how can it be addressed in our conversations in the investment world in a meaningful way?”
There were many examples like this at Investment COP. Mark, an environmental activist I chatted to, was critical of the nationally determined contributions and instead called for a global approach – another view that could also be found within the investment community.
Investment COP also brought home the diversity of opinion in the responsible investment world. Although issues such as global carbon pricing received pretty much universal consensus from those I spoke to, the jury’s still out on many issues, such as the role of regulation and what private finance can, and should, achieve on its own.
For example, Paul LaCoursiere, global head of ESG investments at Janus Henderson Investors said: “A fundamental [debate] is whether at its core this is a capital markets problem or it’s a government policy and consumer behaviour problem and how much of a role capital markets can play does really depend on that. I’ve had four or five debates and discussions about that.”
Similarly, while members of the investment community, such as KBI Global Investors’ head of responsible investing Eoin Fahy, might have hoped from a sooner net-zero commitment from India than 2070, sustainable finance expert Ben Caldecott commended there being a pledge at all particularly from a country not at fault for most of the world’s carbon emissions.
Another fringe event that brought together a range of voices well was put together by Federated Hermes. This took place 4-5 November next to the main COP conference centre situated at the SEC, and may have been missed by those tuning in to the main announcements coming out of the blue zone. Despite the rather lavish set-up – being given a goody bag to hear about climate poverty is somewhat jarring – the event managed to bring together voices from science, law, campaigning, academia, investment and more.
One speaker that resonated was Vicky Sins, a climate and energy benchmark lead at the World Benchmarking Alliance. She shared the experience of people in her hometown in the Netherlands, where many generations of workers have worked at a steel plant in the area. The plant is an integral producer of the country’s steel, and the largest employer in the area. But it may also be harming the health of residents, and is also a polluter.
How will the transition affect these people? It’s a story we hear a lot when discussing the just transition, but what was unique about Sins’ account was her personal insight into the concerns of the residents in an area she knows so well. Hearing from people ‘at the coalface’, as it were, really illustrates the complexity of the situation and hits at the frightening realities of climate change.
GIB Asset Management group chief sustainability officer has welcomed the chance to engage with corporates at COP26 (click here to read the article in this e-zine), a sentiment echoed by UK Sustainable Investment and Finance Association CEO and ESG Clarity panellist James Alexander when I met up with him at the conference. We also saw the launch of a campaign calling for tighter and deeper corporate governance frameworks within the finance industry from the B Corp Finance Coalition UK, as referenced by EQ Investors’ Louisiana Salge here.
But I must admit, entering the green zone was rather surprising. Expecting to see mostly civil society, it was instead filled with corporate stalls showcasing their green credentials. It’s easy to see why eyebrows might be raised by their inclusion.
Click to listen to
Sagarika Chatterjee’s audio clip from Glasgow
Sagarika Chatterjee’s audio clip from Glasgow
Compromise is key for change
AXA IM’s senior management team tell Natasha Turner about their ‘brave and bold’ investment policies and defend the GFANZ commitments at COP26
Compromise often comes with negative connotations; it can imply not aiming high enough or settling for less. But for Hans Stoter, global head of AXA Investment Managers, it’s how change will be achieved when it comes to the climate crisis.
At the time of writing, it’s the first day of the World Climate Summit Investment COP and I’ve sat down with Stoter and AXA IM executive chair Marco Morelli in a room off the bustling foyer. Both have been speaking at the event – in Morelli’s case to unveil AXA IM’s new climate commitments.
From April 2022, the firm will look at holdings as either climate leaders, transition leaders or climate laggards, with the commitment to divest from the latter if their net-zero transition plans are not up to scratch.
It has also upped its oil and gas policies: “We already excluded tar sands from the old policy, now we’re going further with strict measures around other forms of what we deem as a more polluting extraction of oil and gas, so deep sea, arctic and fracking,” Stoter explains.
“We will have strict metrics around the percentage of revenue linked to each of those three to determine whether we exclude or not,” he adds. “And the companies we will exclude as a result of that we will actively divest from.”
Companies where oil sands make up more than 5% of production, where shale and fracking make up 30%, and those from the Artic Monitoring and Assessment Programme, will be excluded from portfolios. AXA IM will also exit all coal investments in OECD countries by 2030, and throughout the rest of the world by 2040.
“If we don’t see progress and strong commitments from companies, we need to be brave and bold in our investment decisions and be ready to divest. The road to net zero is all about transition. We must give companies the time to adjust, but we must also adopt a no-compromise approach with investee companies that don’t take climate change seriously,” adds Morelli.
Fans of GFANZ
If AXA IM is taking a no-compromise approach with companies, where then do the pair see this as part of the solution? The answer is in alliances, they say.
Investment COP is taking place four days after a number of high-level financial announcements made at COP26, including the commitment from UN special envoy on climate action and finance Mark Carney that the group he chairs, the Glasgow Finance Alliance for Net Zero (GFANZ), will deliver $100trn (£74.7trn) of private capital to net-zero solutions over the next three decades.
Enthusiasm for the announcement has been matched with criticism that GFANZ allows its members to continue to fund fossil fuel expansion, and that only some member assets are being aligned with net zero.
AXA IM is a founding member of GFANZ and has 41% of its assets on the path to net zero by 2050, according to Stoter. “If we bring together the financial industry through a number of initiatives, like Mark Carney is doing, we will always have to compromise something,” he says when these criticisms are put to him.
“Bringing together a large group that agrees on specific measures means we can’t go to the extreme, because then we will lose an important part of the group that we want to bring on board. I’d rather have 80% of an agreement than 0%, because 100% is not achievable. And it’s easy to critique that we should be at 100%, and I agree personally [we should be at 100%], and as a company we are willing to go further, but at the same time it’s good there’s this 80%.”
Morelli adds: “There are so many different people who play a role so there’s an interconnection but also a potential for a diverging trajectory if you put together governments, regulators, companies, asset managers and asset owners. The challenge is to what extent those different constituencies can find a common lending, giving them each of them a shared set of rules to play with, this is the main message.
“The big question mark is how do we figure out that this is where we stand? Everyone shares the high-level message; the question is how each of the different players is going to be seriously active.”
As negotiations on the high-level announcements begins, that message seems fitting: compromise can get everyone around the table speaking the same language, but once the rules are set, action must be taken.
‘If we don’t see progress and strong commitments from companies,
we need to
be brave and bold in our
and be ready
Hans Stoter and Marco Morelli biographies
Hans Stoter started his career at Nomura Bank and Philips Electronics, before joining ING Investment Management in 1998 as portfolio manager investment grade credits. He joined AXA IM in June 2018 as global head of fixed income and interim global head of multi-asset client solutions. He was appointed global head of AXA IM Core in April 2020.
Marco Morelli began his career with roles at KPMG, Samuel Montagu and UBS, joining JP Morgan in 1994. He moved to Monte dei Paschi di Siena in 2003 and became deputy CEO in 2006. After stints at Intesa San Paolo Group and Bank of America Merrill Lynch, he took the role of executive chairman of AXA IM in 2020 and is a member of the committee. He is based in Paris.
Click here for
Hans Stoter and
executive chair, AXA Investment Managers
Marco Morelli on what regulation and global policy is needed to achieve climate goals and his personal drivers for wanting to be part of the climate change solution.
The UN climate change conference COP26 was a watershed moment for ESG investors, providing an opportunity to illustrate why and how aligning portfolios is key in addressing the climate emergency.
The challenge in Glasgow should by no means be underestimated, more so with the absence of key countries like China and Saudi Arabia, which all have an important role in reducing global carbon emissions. The recent report by the UN’s Meteorological Organisation highlights greenhouse gases rose more in 2020 than the average for the previous decade.
The major catalyst remains the burning of fossil fuels, which has left methane levels at double the amount from what they were in 1750. The efficient allocation of capital into key areas of the economy by all investors, not just ESG specialists, will play a key role in delivering a less carbon-intensive future.
SBTs vs net zero
The debate around science-based targets (SBTs) and net-zero targets has come to the forefront, but both initiatives are not mutually exclusive, they are complementary. SBTs came via a partnership of organisations including the UN Global Compact, Carbon Disclosure Project and World Resources Institute, which developed a methodology that provides companies a clearly defined framework to reduce emissions in line with the Paris Agreement. More than 2,000 companies have already signed up.
Conversely, the net-zero targets are focused on first reducing the carbon emissions of a business or, for unavoidable emissions, using offsets in order to reach net zero. Although net zero garners much of the political headlines, SBTs will play a greater role in lowering total emissions, and this is where businesses can play a pivotal role in climate change. In the EdenTree Responsible and Sustainable UK Equity Fund, more than 60% of the companies in the portfolio have committed to a range of measurable and reportable targets.
The science behind measuring carbon has moved along markedly in recent years and more investment managers are publishing the carbon footprint of their funds across a greater number of asset classes. At EdenTree Investment Management, we have been measuring and publishing the carbon footprints of our funds for six years. The Responsible and Sustainable UK Equity Fund has lowered its emissions by 40% since 2016 and is expected to align with the sustainable dDevelopment scenario by 2050, representing a potential temperature increase of 1.5C by 2050, compared with 4.5C for the benchmark.
‘We have been measuring
and publishing the carbon footprint of
our funds for six years’
Fund manager, EdenTree Responsible and Sustainable UK Equity Fund
Ketan Patel biography
Ketal Patel joined EdenTree Investment Management in 2003 as a research analyst. He began his career at JP Morgan, before moving to Insight Investment as a global healthcare and biotech analyst. He is co-manager on the Amity UK, Global Equity and UK Equity Growth funds. He has been a CFA charterholder since 2009, and holds a post-graduate degree in both geography and economic history from the University of London.
Click to read
Ketan Patel’s biography
the voice of the shareholder
Natalie Kenway caught up with Vanguard’s John Galloway, at COP26 in Glasgow, to discuss engagement, stewardship priorities and how enhanced disclosure promotes
better governance practices
What does good governance look like?
Firstly, good governance starts with a company’s board of directors. An effective board should be independent and reflect both diversity of skill, experience, and opinion and diversity of personal characteristics – such as gender, race, and ethnicity. Secondly, boards should have oversight of a company’s strategy and effective governance of material risks, including environmental and social risks. Third, executive remuneration should be linked to long-term performance and should incentivise a company’s outperformance of its peers. Finally, we look for shareholder rights that empower shareholders to use their voice and their vote to ensure the accountability of a company’s board.
You have been in this role for over a year – what have been your
Investment stewardship is a core responsibility for Vanguard, so one of our key priorities has been the continued investment in our programme to ensure we have a robust and deep team of governance professionals, and the right areas of focus and strategies to protect and promote long-term value for investors.
Since the beginning of 2020, Vanguard’s global team of multidisciplinary analysts and researchers has grown. This enables us to increase engagements with portfolio companies across global markets with a focus on emerging and materialised risks, including climate change risk, pandemic risk, and diversity, equity and inclusion matters.
In addition, as a signatory of the UK Stewardship Code, a priority has been how we disclose and report our investment stewardship activities. Enhanced disclosure helps to promote good governance practices, and also helps to provide investors and public companies with our perspectives on important governance topics and issues we address through shareholder votes. For example, we frequently publish insights and perspectives on our rationale for key votes. We will continue to do this through our annual and semi-annual reports, future voting insights, and quarterly disclosure of our voting record.
‘We look for shareholder rights that empower shareholders to use their voice and their vote to ensure the accountability of a company’s board’
John Galloway, global head of
investment stewardship, Vanguard
Tell us about your engagement success stories?
At the highest level, we measure success by how well we continue to promote and safeguard Vanguard’s investors’ interests through our efforts to promote good governance practices. Take climate risk disclosure as an example. In the five years since the Paris Agreement was ratified, we’ve seen greater adoption of clear and consistent climate risk reporting frameworks. We have also seen signs of other, more qualitative progress in our engagements.
More boards are getting smart on climate risk, either through board education or by adding directors with relevant skills and backgrounds. More companies are setting targets aligned with the Paris Agreement, and more companies are performing and disclosing scenario analysis. Those are the types of signs of progress we are looking for in our engagements.
What are your stewardship priorities for the future?
As the market evolves, we will similarly evolve by broadening and deepening our stewardship capabilities to continue to meet our fiduciary duty to fund investors. For example, we went to Glasgow for COP26 because climate change poses a material risk to long-term investors, and part of our role is advocating on their behalf. We will continue to focus on identifying any material risks to long-term investment returns, and to build the expertise to ensure our stewardship policies and practices encourage company boards to effectively govern these risks and to protect long-term investors.
How do you see stewardship evolving across the investment management sector more broadly?
The role of an asset manager is to protect the long-term investment returns for investors. With greater awareness of different ESG risks across sectors and businesses, there is a need for investors and businesses to provide useful disclosures to the market about those risks and companies’ plans to mitigate them.
We can expect to see increased use of data and metrics to drive strategies and inform decisions as investors hold more nuanced conversations on environmental and social risks with company boards and leaders. And we expect to have those conversations in a growing number of markets around the world.
Milestones and missteps in Glasgow
GIB Asset Management’s Venetia Bell assesses the good and the bad of the conference and how its success will be measured by what we do now
Everyone was talking about COP26. Despite ongoing Covid-related travel restrictions, almost 40,000 people registered for the conference, making it the largest COP to date. The voice of business was amplified compared with previous events, and virtual access to many sessions meant the summit’s reach was amplified and participation democratised.
Perhaps, as the host nation, we were particularly engaged, but I have been overwhelmed with interest about what it was like being in Glasgow. The question most often asked is: are you encouraged or disappointed by the outcome?
Moment of truth
Glasgow was supposed to be the summit where global leaders committed to close the gap to deliver a 1.5C world, but unfortunately this key milestone was not achieved. According to Climate Action Tracker, full implementation of binding long-term targets and nationally determined contributions would still result in limiting global warming to about 2.1C above pre-industrial levels. Add to that a last-minute watering down of the final text around coal power and fossil fuel subsidies. Clearly, more needs to be done.
On the more optimistic side, however, more countries have made commitments, and those with existing commitments have tended to show progress in how they will implement them. The Global Methane Pledge was promising, as was the Glasgow Declaration on Zero-Emission Cars and Vans.
Critical thematic issues seemed to rise up the agenda. Nature was put centre stage with the landmark pledge by more than 100 leaders to halt and reverse deforestation and land degradation by 2030. Sustainable oceans were brought into the conversation, for example, with the Friends of Ocean Action’s launch of the Blue Carbon Challenge. And with the launch of the Alliance for Clean Air, 10 founding corporate members have committed to decreasing their air pollution footprint and help to deliver clean air.
Mobilising finance was one of the four main goals of COP26, and again it is easy to be both optimistic and pessimistic. On the one hand, the Glasgow Financial Alliance for Net Zero’s (GFANZ) announcement – that more than 450 firms across 45 countries representing more than $130trn (£96.8trn) of financial assets had committed to net zero – was hugely encouraging.
The announcement of the new International Sustainability Standards Board was also welcome. As a lack of consistency in reporting has been a major complaint from practitioners, as it is hard to compare the performance of different entities.
More financial regulators around the world are enhancing their approaches to climate-related risk, with 100 central banks and supervisors now members of the Network for Greening the Financial System.
On the other hand, many have criticised GFANZ’s bold statement, noting inherent double counting in the methodology and the significant challenges in turning the commitments into money on the ground. Although helpful, sustainability standards will never be a panacea, with the risk being that they encourage a box-ticking, reductive approach that is no substitute for deep sustainability analysis and verification. And in the same way that better accounting standards have not eliminated financial manipulation and misrepresentation, so neither are global standards going to eliminate greenwashing.
The reality is that the challenges facing us, both people and planet, are complex, nuanced and incapable of being boiled down into a single glass, either half full or half empty. Making our world sustainable is a journey along which the most important step is always the next one. Hopefully, we will be able to look back and see Glasgow as a significant milestone that spurred positive change, but only if we all put in the hard work over the coming years to turn hopes and commitments into outcomes.
The widespread interest in COP26 is a good starting point, but to those posing the question about degrees of optimism, I would turn the question back and ask: what are you personally going to do to ensure we have a sustainable world?
our world sustainable
is a journey along which the most important
step is always the next one’
Group chief sustainability officer, head of strategy, GIB Asset Management
Venetia Bell biography
Venetia Bell joined GIB Asset Management from the Bank of England where she was deputy to the chief operating officer. Her responsibilities now include guiding the group’s sustainability efforts as well as scaling and mobilising capital for sustainable investment strategies. She is a certified investment fund director and a trustee of two charities, among other accolades.
Click to read
Venetia Bell’s biography
EQ Investors’ Louisiana Salge shares her experience at COP26, what she wants to see happen next, and how actions on the commitments will need policing
What happened at COP?
Over the two weeks of the climate summit, representatives from countries around the world met in Glasgow for the 26th time, discussing the necessary actions to mitigate global climate change and limit warming to 1.5 degrees since pre-industrial temperature levels. Research published at the summit indicated the short-term plans put in place by countries currently would amount to a rise of 2.4 degrees.
At COP26 I witnessed a flurry of new commitments from the sidelines: developed countries agreed to support developing nations in their transition with $100bn a year, many pledged to stop deforestation to protect our natural carbon sinks, and to focus on reducing high-impact methane emissions (from gas leaks and agriculture) by 30% by 2030.
The US and China have announced more collaboration – a geopolitical surprise to many of us. Over the weekend of 13-14 November, the formal COP26 negotiations concluded and the Glasgow agreement was published. For the first time, nations agreed to “phase down” coal and agreed to come back with better national decarbonisation taregts next year. Besides that, however, there is not much concrete progress.
What’s the role of the private sector?
You may sense my frustration with our public sector officials. However, COP26 has put a new hopeful spotlight on the private sector. While private businesses are to blame for much of the destruction of our natural ecosystems and contribution to climate change, I can now sense a tide change by taking on voluntary responsibility to remediate.
The global finance sector has never been a brave participant at COP. Yet this year’s announcements by the Glasgow Financial Alliance for Net Zero (GFANZ) coalition, claiming $130trn will be managed in line with net zero by 2050, put finance in a new leadership position.
Details of this headline need working out. I am concerned by double counting, limited AUM coverage, and the lack of consistent frameworks to effect real economic impact. Action on the commitments also needs policing. Still, it indicates an important mentality change.
EQ Investors has worked to push impact investing into the mainstream since 2012, with the vision that, eventually, all investors will have the objectives to create blended value that goes beyond financial returns. Our ongoing engagement with fund managers on that front is becoming more fruitful. For the first time, I am witnessing large asset managers and owners understand the strategic position, and thus responsibility, they hold in transitioning to a low carbon, sustainable economy. By placing a value on decarbonisation of investee firms, these will transition faster as they respond to intensified shareholder pressure and new expectations of value creation that goes beyond their quarterly financials.
The missing message about finance at COP26
EQ investors is also a Benefit corporation (B-Corp), which means we run the business for the benefit of all stakeholders, including the environment, not just shareholders. This aim is written into our constitutional documents. When we set a goal, such as to adhere to net zero by 2030, we are held accountable.
COP26 missed out on a key message for finance. This is a key reason why the team at EQ and I went to Glasgow, announcing a strong call to action at an event organised with a coalition of other B-Corps.
Finance firms can set as many targets and stated intentions as they like, but they need to be held to account. Those committing to net zero by 2050 today will unlikely be leading global finance by the time those stated targets should be met. We need to instil long-term incentives for businesses to do the right thing for society and the environment.
If global finance is serious about acting on their responsibility to mitigate climate change, to fund the transition and stop funding businesses that are lagging, they should change their constitutional documents to reflect this better purpose. We are calling for a move away from shareholder primacy not just in the way investee businesses conduct their operations, but also the way finance is governed. The move to stakeholder purpose is key.
Being at COP26 and meeting with clients, partners, competitors, and civil society has given us even more motivation to help all clients invest in the world we want to live in. We will play an intentional part in transitioning our financial system to net zero, hold fund managers to their comittments and enable clients to join in on this journey. Climate-aligned investment is the only way to mitigate the investment risks and capitalise on the immense opportunities from the green transition to come.
‘Without stronger net-zero 2050 comittments
by key nations, we are unlikely to create the degree of green transformation needed to meet our warming targets’
Senior sustainability specialist, EQ Investors
Louisiana Salge’s biography
Louisiana Salge joined EQ in October 2018 after completing a masters in sustainable business at Imperial College London. She is now responsible for innovating EQ’s approach to sustainable investing. Louisiana oversees EQ’s ESG and impact integration strategy across all assets, EQ’s stewardship efforts and sustainability data reporting. Previously, Louisiana spent a year working for a Cleantech innovation research company before starting her masters. She now also holds the CFA IMC and CFA ESG Investing qualification.
Click to read
Louisiana Salge’s biography
Click to watch Louisiana Salge’s video interview at COP26
Louisiana Salge’s interview at COP26
to finance ‘greater good’
Confronting climate change will require the kind of innovative finance instruments and products that will shift capital flows towards climate-friendly ventures. The more such instruments and tools come online, the more investors will have choices in where to invest their capital, and the more that capital can actually be a driver of appropriate climate action.
With this in mind, Impact Shares, the non-profit ETF sponsor backed by The Rockefeller Foundation, announced on 3 November at COP26 the launch of the Impact Shares MSCI Global Climate Select ETF (NTZO) in collaboration with the United Nations Capital Development Fund (UNCDF), the UN agency that makes public and private finance work for the poor in the world’s 46 least developed countries (LDCs). NTZO is based on an index licensed by MSCI.
“The need to address climate change impacts has never been clearer, especially for the world’s poorest and most vulnerable countries,” says Preeti Sinha, executive secretary of UNCDF.
The new ETF, based on the MSCI ACWI Climate Pathway Select Index, was co-created by Impact Shares and a working group of the Global Investors for Sustainable Development (GISD) Alliance. In 2019, UN secretary general António Guterres established the GISD, a group of 30 world business leaders, to arrive at solutions that scale up private finance and investment necessary to achieve the UN Sustainable Development Goals (SDGs).“
The GISD Alliance was convened to help move money behind the SDGs,” says Investec CEO Fani Titi, a GISD member. “With this climate ETF aimed at tackling SDG 13, we have created a real opportunity for investors to finance greater good. It is exciting to see our work with the UN and other partners to develop standards and tools to mobilise investment in sustainable development paying off in this investment product.”
The NTZO ETF includes UN values in its methodology: companies in the index must abide by the UN Global Compact, and entities that profit from weapons, guns, alcohol, tobacco, or palm oil are excluded. Recognising the urgency of moving to a net-zero economy during the UN Conference of Parties (COP) meeting and beyond, the index also excludes companies that own or profit from any form of fossil fuel.
Stuart Doole, managing director, research at MSCI, says: “The MSCI ACWI Climate Pathway Select Index was constructed through an approach that targets companies with climate transition opportunities, minimises climate transition risks, reduces carbon emitters using Scope 1, 2 and 3 emissions criteria, and includes companies with carbon reduction targets following an annualised 7% year-on-year decarbonisation trajectory.
“The index also targets an improved ESG profile as compared with its parent market capitalisation weighted index, the MSCI ACWI.”
Impact Shares, a non-profit fund manager, will donate the net management fee on NTZO to UNCDF to build climate resilience and adaptation in the LDCs. This fee donation gives the investing public an innovative new way to support the work of the UN.
“Extreme weather events and intensifying climate volatility are a stark reminder of the urgency of accelerating the carbon transition,” says Ethan Powell, CEO of Impact Shares. “Broad collaboration among key organisations such as the UNCDF and GISD are crucial in moving investors to decarbonise their portfolios and support the transition
to a more sustainable economy.”
‘The need to address climate change impacts has never been clearer, especially for the world’s poorest and most vulnerable countries’
Preeti Sinha, executive secretary, UNCDF
Christine Dawson takes a look at the perceptions of the climate change commitments announced at the summit from all corners of the globe
There is only one planet and one climate, but the differences in how regions and countries will be affected by climate change are huge. Similarly, sustainable investment professionals all playing a part in mobilising private capital for a common agenda face unique regulation, market and policy circumstances depending on where they are in the world.
There were big headlines from COP26, however, with commentators saying it went some way to unifying and progressing the global climate cause. We had India, Australia and Brazil’s commitments to reach net-zero carbon emissions in the coming decades, and there was the joint pledge of finance firms managing $130trn (£96.9trn) to reach net zero, as well as the formation of the International Sustainability Standards Board (ISSB), which plans to provide a international baseline of sustainability-related disclosure standards.
ESG Clarity asked asset managers from around the world to share
their views on what the key takeaways and impacts of COP26 will be for their regions.
For UOB Asset Management’s Victor Wong, climate pledges made at the summit, such as curbing methane emissions and phasing out public finance for coal-fired power, are key.
“These pledges are particularly salient for Asia as it is seen as one of the regions most vulnerable to climate change,” he says.
Wong notes the updated emissions reduction targets from China and India, the world’s third-biggest emitter, pledging to have net-zero carbon emissions by 2070.
In south-east Asia, Wong says, there is rising demand for sustainable infrastructure as the region transitions towards a lower-carbon economy. And in Asia more broadly, he says sustainable investing opportunities will likely lean towards the adaptation and mitigation of climate change – like energy efficiency technology, renewables, green transportation, carbon capture and storage innovations as well as hydrogen technology developments.
“We may also see increased capacity building, education, potential technology transfer and additional levels of climate financing from developed countries and organisations,” comments Wong.
In the US, Wellington Management’s Wendy Cromwell expresses huge support for the goals of co-ordinated climate action at COP26, saying the event was “a catalyst for aspiration, action, and accountability”.
She highlights COP26’s focus on preserving forestry and slashing methane emissions, the Securities Exchange Commission’s request for input on climate change disclosures and the ISSB’s ambition to deliver global sustainability reporting standards by June 2022.
“These developments should enhance investment decision-making by providing better transparency to market participants,” says Cromwell.
However, Cromwell adds one challenge her team would be looking out for was supply destruction outpacing incentives for renewables adoption.
“This can lead to inflation, which is problematic from a political will standpoint,” explains Cromwell.
Sura Investment Management’s María Ruiz Sierra says the energy transition led by coal phase-out and clean energy developments represents a considerable challenge for Latin America, where
countries rely not only on using fossil fuels but also extracting
and exporting them. Ruiz Sierra says the industry impacts on
public budgets in the region.
“However, [there is] great potential for developing a thriving renewable energy sector that can bring opportunities for a just transition. We have seen some countries like Chile and Colombia taking the lead, but we must scale this further through public policies, and public and private investments,” says Ruiz Sierra.
She also observes the imperative of ending deforestation as pivotal to Latin America as the region has a bigger share of the total emissions compared with other regions in the world, while ending deforestation is a key solution for climate mitigation.
“Forests are the most advanced and cost-effective carbon sequestration solution we have,” she adds.
According to Ninety One’s Nazmeera Moola, one of the key COP26 outcomes was the growing recognition any significant achievement to abate climate change will require strong participation by such emerging markets. In Africa, she says, many such markets are focusing on how to expand electricity production without a large increase in fossil fuels.
She points out current investment in energy systems is one-tenth of the $1trn (excluding China) per annum the Energy Information Administration estimates is needed to achieve a net-zero trajectory in emerging markets.
“We see an opportunity to fund the transition in emerging markets by providing debt funding for a range of projects that result in real-world carbon reduction or carbon avoidance,” comments Moola.
Despite some disappointment, with government agreements and commitments in the first week of COP26, she says the summit got everyone to the table and saw many key emerging markets making net-zero targets for the first time.
“While many of these commitments are insufficient to limit global warming to 1.5C, if agreement is reached to increase ambitions in the next 12 months, COP26 would have served an important purpose,”
But, she warns, much more ambitious inter-country and inter-regional funding between developed and emerging countries will be needed to catalyse accelerated decarbonisation in emerging markets.
Michael Marks of Legal & General Investment Management (LGIM) says in order for the efforts of COP26 not to go to waste, the private sector needs to now double down on its efforts to drive change while scaling up support for renewable energy.
Marks is optimistic about the level of global pressure that is driving for change and encouraged by the focus on the built environment.
“It has been encouraging to see a focus on cities and the built environment, given that the sector contributes up to 40% of global greenhouse gas emissions, and we have a strong commitment to achieving net-zero carbon in our real estate portfolios,” he says.
“We are at a critical juncture and will need global collaboration
and clear and joined-up regulation to achieve meaningful change,” Marks continues.
He says it is now necessary governments put in place policy frameworks that make it economically feasible for both investors and corporates to invest in key decarbonising technologies across emerging and developed markets.
‘These developments should enhance investment decision-making by providing better transparency to market participants’
Wendy Cromwell, vice-chair and head of sustainable investment, Wellington Management
Nazmeera Moola's video interview from COP26
Click to watch Nazmeera Moola’s video interview
María Ruiz Sierra, chief of sustainable investing, Sura Investment Management
‘Forests are the most advanced and cost-effective carbon sequestration solution we have’
Nazmeera Moola, chief sustainability officer, Ninety One
‘If agreement is reached to increase ambitions in the next 12 months, COP26 would have served an important purpose’
Michael Marks, head of responsible investment integration, Legal & General Investment Management
‘We need global collaboration and clear and joined-up regulation to achieve meaningful change’
Victor Wong, head of sustainability office, UOB Asset Management
‘These pledges are particularly salient for Asia as it is seen as one of the regions most vulnerable to climate change’
in Asia Pacific
For companies in the Asia-Pacific region, disclosing to stakeholders their approach to ESG issues is still new territory –but there are a small and growing number of responsible funds
There is a diverse range of responsibly invested equity funds within the Asia-Pacific region as well as a range of factors that can affect the sector. This can be due to the variety of individual economies, the different stages of development and progress on ESG, and the breadth and intricacies of their markets.
By and large, for many companies in Asia, disclosing to stakeholders their approach to ESG issues is still new territory. Companies in the region vary in their quality of governance, disclosures and transparency, and there are plenty of state-owned firms, as well as entrepreneurial businesses, with poor track records of fair treatment towards minority shareholders.
As such, evidencing and reporting both from a financial as well as non-financial (ESG factors) perspective differs widely, and information from third-party ESG providers can also vary due to different approaches of assessing the ESG credentials of companies.
There are a small but growing number of responsible funds in Asia, with some taking a passive or active approach and including either a range of exclusions (for example, tobacco, gambling etc) or a mixture of exclusions and/or sole focus on impact (investing in firms providing solutions to environment or social issues).
There is also a group of funds that take a revenue-based approach, investing in stocks listed outside this region, often in firms whose business activities are focused on Asia. Whether some strategies are focusing on the whole of the region or a single country, the growing use of ESG factors in a fund’s investment process is of interest to a range of investors and is often used to great advantage both to enhance returns and, perhaps even more importantly, to understand and manage risk.
How ESG is assessed within a fund is therefore an important component of understanding a manager’s strategy, investment philosophy and style of management.
Stewart Investors Asia Pacific Leaders Sustainability Fund
• Company 3
• Fund 3
• Responsible Investment category Exclusion/responsible/sustainable
The fund is managed by the Sustainable Funds Group within Stewart Investors, an autonomous unit within First Sentier Investors, which is responsible for its own investment decisions and recruitment. The managers seek to preserve and grow investors’ capital over time through investment in high-quality companies run by responsible management teams over the long term. They measure quality by looking at a company’s management team, its franchise and financial strength.
However, they also follow the philosophy that quality companies are stewards of sustainable development and are a cut above others. In essence, these firms, which are driving positive change and are leaders in sustainability, with high governance standards, are good employers and do not take for granted the local community, environment, or their licence to operate.
As a result, they measure the quality of these companies by analysing their ESG factors, as well as a company’s history, management structure and attitude to shareholders, business practices, cashflow and valuation. The final portfolio typically holds 30-60 stocks and is constructed without reference to a regional index. Investments tend to be in large- and medium-sized companies, and those capitalised below $1bn (£737m) are generally avoided. The managers will not exclude companies on the basis of ethical considerations such as animal welfare, though they are unlikely to invest in those operating in the tobacco and gambling industries.
Over the fund’s history, it has typically defended well in falling markets and this is a characteristic we have come to expect from this strategy. While the quality emphasis is a sensible strategy to have over the long term, especially in a region that can suffer large drawdowns, the unconstrained nature of the portfolio can be a double-edged sword at times. For instance, country and sector allocations – which are driven by stock selection – can be quite sizeable, and can therefore impact on performance, for good or ill.
Stewart Investors Indian Subcontinent Sustainability Fund
• Company 3
• Fund 3
• Responsible Investment category Exclusion/responsible/sustainable
The Stewart Investors Indian Subcontinent Sustainability Fund is also managed by the Sustainable Funds Group within Stewart Investors. The team are long-term investors and have an absolute return mindset in the way they approach company research. They are passionate believers that the monies entrusted to them should be invested in the highest-quality companies run by responsible management teams. The whole team follow a process that over time has evolved to explicitly include ESG factors.
They pay particular attention to the owners and management teams in charge of such companies as they believe a firm’s ability to deliver long-term sustainable returns is closely correlated with the company’s management culture. The impact of business practices on the local community and environment is important, but the team will consider a range of financial and non-financial factors, including the quality of a company’s financial positioning and sustainability of its cashflows.
The team take the view sustainable development is crucial for the Indian subcontinent and companies that recognise the rich tapestry of opportunities and threats in this region, and who are willing to promote sustainable development, stand to benefit handsomely.
The subcontinent is home to a large and growing universe of quality companies with family owners and stewards who often have long-term time horizons, and are successfully investing in the region’s sustainable development, such as in healthcare and environmental efficiency.
ESG ideals are central to the strategy, and the managers look to invest in firms 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.
Firms that contribute to better environmental outcomes are also included. The team do not screen out companies purely on ethical or for moral reasons, but they are unlikely to invest in those operating in certain sectors, for example gambling, as they consider the long-term sustainability of these sectors to be poor.
The portfolio typically has 30-60 holdings chosen from across the market capitalisation spectrum. Investments are based on companies’ individual merits and are not in reference to the composition of an index.
FSSA Greater China Growth Fund
• Company 3
• Fund 3
• Responsible Investment category Exclusion/responsible/sustainable
First Sentier Stewart Asia seeks to be a long-term investor in quality companies. As responsible stewards of investors’ capital, the team look for companies where management have a longer-term vision of growth and returns, possess a level of integrity and a broader sense of corporate responsibility. ESG factors are a crucial element of the investment process.
Indeed, the team say investments ought to have a social purpose. Companies that ignore their impact on the environment or that do not look after their customers, employees, suppliers and the larger community are unlikely to reward long-term investors.
The team pursue a rigorous research process, where company and country visits help build their collective knowledge and assessment of a business’s growth sustainability, franchise, financial strength and management. Investments will primarily be in large and medium-sized companies that are based in or have significant operations in China, Hong Kong or Taiwan.
Given the emphasis on quality, this strategy might struggle in periods when investors are chasing certain themes or when riskier stocks are in demand. The upside to such an approach is that the team’s companies have tended to be more resilient in down markets and have, in aggregate, yielded solid risk-adjusted returns over the long term.
FSSA is an autonomous investment management unit within First Sentier Investors, and is responsible for managing its own investment decisions and recruitment. This is an important feature and allows the team valuable investment freedoms, including the ability to implement their distinctive style of management.
The FSSA team run a significant amount of Asia-Pacific and China equity assets, but they are well resourced and have the necessary supportive infrastructure. Additionally, they have shown they are willing to cap the size of their funds should they deem they are near to capacity and that further capital may be detrimental to future returns.
‘Companies that ignore their impact
on the environment
or that do not look after their customers, employees, suppliers and the larger community
are unlikely to reward long-term investors’
Head of fund
origination, Square Mile Research
Responsible rating of three Asia funds
Click to see Responsible rating
of three Asia funds
Source: Square Mile
In this COP26 special, ESG Clarity and Bonhill Intelligence (formerly Last Word Research) take a closer look at funds dedicated to tackling climate change
This fund has been awarded top ratings by both Morningstar and MSCI, giving it an RRI score of 5.0. Since May 2020 there has been consistent net inflows into the fund, totalling £1.2bn in the past 12 months to September 2021, and assets under management now stand at £8.4bn in total. The fund is run by Thomas Sørensen and Henning Padberg, part of the fundamental equities team at Nordea, and has a strict exclusion policy. Its top 10 holdings include names such as Republic Services (4.13%), Linde (3.58%), Waste Management (3.48%) all based in the US, and French firm Air Liquide (3.15%).
Click for fund details and performance graph
Allianz Continental European
The Nordea – 1 Global Climate and Environment Fund
This fund is another that has again achieved the highest score of 5.0 in the RRI, after also being awarded top ratings from both Morningstar and MSCI. It is run by Angus Parker and has around £226m in assets under management. The fund’s largest weighting is in Schneider Electric (3.84%), followed by Prysmian (3.79%) and Infineon Technologies (3.59%). According to recent commentary from Parker, two tech companies have boosted performance – Japan’s Omron and Apple.
Click for fund details and performance graph
HSBC GIF Global Equity Climate Change Fund
Finally, top ratings from Morningstar and MSCI mean the Sarasin Climate Active Endowment vehicle also has an RRI score of 5.0. The £3.7m charity fund is a diversified, multi-asset portfolio run by Phil Collins and Henning Meyer, who focus on engagement on climate with companies. Its active ownership tools range from voting and engagement, public calls for action and building coalitions with like-minded stakeholders. Sarasin’s team is advised by the Oxford Martin School of Investment and Engagement Principles and only invests in companies or funds where directors have committed to a 2050 or 2070 net- zero emission pathway.
Click for fund details and performance graph
Sarasin IE Multi Asset Dynamic
Sarasin Climate Active Endowment
‘Experts have predicted that, by 2050, there will be more plastic in the sea than fish,
Click here for the full Responsible Ratings Index
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.
• Morningstar Sustainability rating provides 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.
• Lipper/Refinitiv ESG scores are designed to objectively measure ESG performance, commitment and effectiveness based on publicly reported data across the three pillars – environmental, social and governance.
• 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.
• FE Crown ratings are quantitative ratings of one to five crowns based on past performance, stockpicking, consistency and risk control. FE fundinfo provides these ratings to distinguish funds that are strongly outperforming their benchmark. Funds awarded five crowns are in the top 10%.
• FE fundinfo Risk scores define ‘risk’ as a measure of volatility relative to the UK leading 100 shares, which have a risk rating of 100. More volatile funds have a score above 100, while those below 100 are more stable. This offers investors a reliable indication of relative risk.
• 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 full Responsible Ratings Index
Sarasin Climate Active Endowment
Launch date 1 Jan 1988 | RRI 5.0 | Morningstar Sustainability Rating 5
MSCI 5 | Morningstar Rating Overall 4 | Global Category Aggressive Allocation
Global Broad Category Group Allocation | Sustainable Investment Overall No
Fund Size £600m
HSBC GIF Global Equity Climate Change Fund
Launch date 31 Jul 1987 | RRI 5.0 | Morningstar Sustainability Rating 5
MSCI 5 | Morningstar Rating Overall 5 | Morningstar Analyst Rating Neutral
Global Category Europe Equity Large Cap | Global Broad Category Group Equity
Sustainable Investment Overall No | Fund Size £4.6bn
The Nordea – 1 Global Climate and Environment Fund
Launch date 21 Feb 1973 | RRI 4.7 | Morningstar Sustainability Rating 4
MSCI 5 | Morningstar Rating Overall 5 | Morningstar Analyst Rating Neutral
Global Category Europe Equity Large Cap | Global Broad Category Group Equity
Sustainable Investment Overall No | Fund Size £400m
The phrase ‘good COP, bad COP’ has been used extensively over the past two weeks to assess the recent Glasgow summit. The key positives were:
• net-zero commitments being set by some high-profile emerging market countries (India by 2070 and Russia and Saudi Arabia by 2060);
• a new methane pledge to cut emissions by 30% by 2030;
• a plan to end deforestation also by 2030;
• an agreement to end the use of coal (although not signed by India, China or the US); and
• various pledges in the transportation sector.
What is still not clear is how all these pledges will be funded, but we do know there will be greater need for both the public and private sectors to work closely together. Janet Yellen, the US treasury secretary, said: “The gap between what governments have and what the world needs is large, and the private sector needs to play a bigger role.”
The International Energy Agency believes there must be at least a $150trn (£111.6trn) spent over the next 30 years ($5trn a year) to achieve net zero. This will need to be funded from a variety of sources including government debt, corporate bond and loan issuance, and carbon taxes. We expect to see tougher US and EU rules on climate risk reporting shortly, which will help to channel more funds to areas that need it. Here’s where funding could come from:
It has been encouraging to see high-profile sovereign green bond deals from the EU and the UK attract record investor demand. The EU’s recently issued €12bn (£10.1bn) 15-year maturity green bond is the largest green bond issued to date and will help to finance member states’ environmentally beneficial projects.
This bond is the first in the EU’s €250bn programme of green bond sales earmarked for the coming years. We hope such interest is set to grow. It will represent a small portion of the overall funding needed, but collaborative action is crucial.
While, for now, it appears the EU is steering the way forward on the green transition with record financial commitments and regulatory change, it will only be a matter of time before such policies are more heavily replicated in the US and in emerging markets.
As more government loans and grants fall into some key sectors, notably energy, transportation, utilities and real estate, we would expect the cost of green capital to continue to fall. Such support provides assurance of the government’s long-term commitment to emerging green technologies, which reduces the risks associated with investing in them and in turn lowers hurdle rates, thus driving down the cost of capital.
As such, the ‘greenness’ of governments’ budgets, in particular the EU one for now, will unlock further opportunities in green financing, including the issuance of more green bonds, loans, asset-backed securities and sustainability-linked debt. This means the probability of simultaneously financing positive environmental change, while also creating economic value, is increasingly likely with the ‘greening’ of government budgets.
The Glasgow Financial Alliance for Net Zero will continue to drive capital away from heavy-polluting sectors and companies to those adapting their businesses for a low-carbon world. As a result, COP26 will continue to drive an ever-more nuanced marketplace – rewarding companies with a keen eye on climate-related risks and opportunities through the lens of governance, strategy and risk management.
Companies will face greater investor scrutiny on their climate disclosure, decarbonisation targets and pathways. As carbon metrics become better understood, so too will differentiation between corporates, financials and sovereigns, leaving active asset managers a wealth of opportunity to add value for their investors both financially and environmentally.
‘The gap between what governments have and
world needs is large, and the private sector needs to play
a bigger role’
portfolio manager, Federated Hermes
Janet Yellen, US treasury secretary
sponsored content | abrdn
on climate opportunities
As the world seeks climate solutions, multi-asset strategies are looking particularly compelling
With China now aiming to be carbon neutral by 2060 and companies making rapid progress in alternative energy technologies, we are on the cusp of a revolution. We expect to see a massive shift in the way we live and work. Forecasts suggest 20-fold growth in revenues for electric vehicles and renewable energy by 2050. This is a fantastic long-term growth story.
There are many investment solutions that seek to capitalise on the climate opportunity. Among them, we believe a multi-asset approach is particularly compelling. Here, asset managers can offer investors a focused exposure to the climate theme, while carefully managing the risks that sometimes come with higher return potential.
Achieving strong thematic exposure can be harder than you think
The first challenge for investors is how to access the climate theme. It can be surprisingly hard to find investment funds with strong exposure to the technologies that will drive the low-carbon transition.
This is counterintuitive, given the dozens of sustainability funds on the market. But if you take a look at the top-10 holdings in many funds with ‘climate’ or ‘sustainable’ in the label, you will frequently find mainstream names like Microsoft or Amazon. These companies may have good operational environmental policies, but they are not strongly exposed to the climate opportunities theme. Why, then, are they in the portfolio? We suspect it is because most sustainability or climate funds have standard equity benchmarks and tight tracking-error limits that require them to hold benchmark-like exposures.
Indeed, our initial analysis suggests that standard global equity benchmarks only have a 5-10% exposure to EU Taxonomy-aligned activities. We find that many funds that are labelled ‘sustainable’ do better than this, doubling the level of exposure to 20%. However, this still leaves 80% of funds exposed to activities that are not strongly associated with the sustainability theme.
One solution is to forgo standard equity benchmarks and instead start with a list of companies whose core businesses are to provide climate solutions. This means investors can potentially align 75% of their portfolio with the EU Taxonomy, rather than a mere 20%. Though, this does mean that such a fund will perform differently to standard equity benchmarks. However, we believe that if an investor is serious about gaining strong exposure to the climate theme, then the portfolio has to look different to a benchmark that is only 5% exposed to this theme.
Managing risk associated with concentrated thematic exposures
While strong thematic exposure might be an investor’s goal, there can be dangers in taking a highly concentrated exposure to sustainability themes. The S&P Clean Energy Index provides a good example. It sold-off during the pandemic shock in March 2020, then rose sharply, before falling again by 50% from its peak in January to May this year. Overall, it has offered investors decent returns – but put them through quite a rollercoaster ride. By our calculations, the volatility of exchange-traded funds (ETFs) based on this index has been around double that of standard equities over the last three years. There is a similar story for other thematic ETFs.
How can we achieve a smoother investment journey?
We believe diversification provides the answer. And one way is through a multi-asset approach that seeks to ensure diversification at two levels: through equities and across asset classes. Within equities, investors can have broad exposure across the full range of companies exposed to the climate theme. Investors can also diversify across asset classes. For example, by holding pure climate exposures in ‘green bonds’, renewable energy infrastructure and ‘green equities’.
To illustrate this, we created a model multi-asset climate portfolio. The strategy was able to retain a very high exposure to the climate solutions theme – but with less than half the volatility of the S&P Clean Energy Index.
Final thoughts …
We believe positive environmental change will come in part through the investments and the choices we make. One way is by investing in companies that are engaged in activities that seek to help the world mitigate, or adapt to, climate change. In doing so, as investors we can play our part to ensure climate change is not inevitable.
‘It can be surprisingly hard to find funds with exposure to the technologies that will drive the low-carbon transition’
* These figures relate to simulated past performance. The simulation was performed using a model portfolio of equity, credit and infrastructure securities with high EU Taxonomy alignment. When interpreting the results, the investor should always take into consideration the limitation of the model applied. The returns are shown before fees and other charges. The impact of any charges will reduce the performance shown. Figures are shown in GBP. Source: ASI, Bloomberg, MSCI, S&P. August 2021.
The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Please consider the below risk factors:
• The fund invests in equity and equity related securities. These are sensitive to variations in the stock markets which can be volatile and change substantially in short periods of time.
• The fund invests in securities which are subject to the risk that the issuer may default on interest or capital payments.
• The fund’s price can go up or down daily for a variety of reasons including changes in interest rates, inflation expectations or the perceived credit quality of individual countries or securities.
• The fund invests in emerging market equities and / or bonds. Investing in emerging markets involves a greater risk of loss than investing in more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks.
• The use of derivatives carries the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions, such as a failure amongst market participants. The use of derivatives may result in the fund being leveraged (where market exposure and thus the potential for loss by the fund exceeds the amount it has invested) and in these market conditions the effect of leverage will be to magnify losses.
The fund is a Sterling dominated unit trust, an authorised open-ended investment company (OEIC). The information contained in this marketing document should not be considered as an offer, investment recommendation or solicitation, to deal in the shares of any securities or financial instruments. It is not intended for distribution or use by any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication or use would be prohibited. No information, opinions or data in this document constitute investment, legal, tax or other advice and are not to be relied upon in making an investment or other decision. Subscriptions for shares in the fund may only be made on the basis of the latest Prospectus and relevant K
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BNP Paribas Asset Management
The six myths of thematic investing
To help fund selectors pick the best funds in the environmental thematic investing arena, we bust the common myths that persist in the sector
Thematic investing has experienced a marked upturn in recent years, with a strong focus on sustainable investing. However, several myths perpetuate around this area that could inhibit fund selectors from making an effective judgement. We explore these myths with our Environmental Strategies Group to help fund selectors distinguish between those funds that say and those that actually do.
Myth 1: what is the trade-off?
The concept of taking high levels of risk for higher returns is often associated with thematic funds. To create alpha and mitigate risk, technological know-how and acumen are crucial. There is a wide array of opportunities among companies that address environmental challenges which provide the opportunity for both young disruptive companies that are already active in this space alongside more established ones.
So, how should fund selectors navigate environmental opportunities? Companies operating in the sustainability arena are often very specialised and so technical expertise is key. Understanding and identifying which technologies are likely to survive, which will be the most disruptive, whether they will be scalable etc are some essential questions to consider.
Myth 2: shorting stranded assets is unethical
Climate change is not only an existential risk, but also one of the greatest commercial opportunities of our time.¹ From an investment perspective, the opportunity is not just about finding the winners. There will be fundamental losers in the energy transition as companies with strong environmental credentials are more likely to outperform those that have unsustainable business models and are vulnerable to transition risk.
Obsolete assets can be capitalised upon by using alternative strategies. Shorting stocks should not be considered unethical even in the context of a sustainable fund. After all, by successfully shorting stranded assets a fund manager can recycle these profits into funding other businesses that are creating sustainable solutions.
Myth 3: are ESG ratings enough?
ESG ratings are embedded into our framework, however, third-party ESG ratings are not relied on explicitly to determine our view of sustainability and here’s why. Fundamentally, ESG has a different definition to sustainability. Sustainability takes a full company view of whether – on net – a company adds or detracts from our environment and sustainability.
ESG takes a more compartmentalised approach, judged largely through company disclosure. This leads to some of the planets most unsustainable companies (coal or oil extraction) having better ESG scores than their clean energy counterparts. Fund selectors should look for active funds and source opportunities across the capitalisation spectrum.
Myth 4: not diverse enough?
Environmental thematic investing is not just about clean energy. The diversity of businesses focused on the provision of environmental solutions is huge. Opportunities in the energy transition alone cover a range of sectors, and that’s not including the companies focused on improving the planet’s biodiversity, revolutionising food production, conserving water usage and developing solutions to limit our use of plastics.
Efforts to establish a more circular economy, that focuses on recycling, repair and regeneration, will also spawn investment opportunities as economies evolve in a fashion that strives to no longer overshoot our planet’s dwindling resources. In short, it’s actually a very broad thematic opportunity that will likely impact all industries, to varying degrees.
Myth 5: you need an established fund track record
Sustainable and environmentally-focused investing is still a young investment discipline while being a rapidly growing area with new funds being created all the time. As a starting point, a team’s track record can be a useful indicator, but past performance should not be considered an indicator of future returns. In fact, there are very few investment teams that have a long track record in understanding these industries.
So what should fund selectors focus on? Firstly, it’s important that every company is fully aligned with the theme the fund is trying to pursue. Also, top-down considerations are just as critical as bottom-up ones such as macro and political. Finally, it’s important to focus on the ‘E’ in ESG. This is where the most investment, growth and tech-enabled innovation is taking place, and where the world faces its greatest challenges.
Myth 6: a public investment vehicle can’t achieve impact
There is a common belief that true investment impact can only be achieved through venture capital, private equity or via direct project finance. While powerful, these are also harder to scale, very niche and harder to access. This explains our all-cap approach and why we can achieve significant impact by investing and engaging with younger and promising companies in the environmental space, by providing them with capital and advice to further their presence in the markets that they operate.
To truly succeed, environmental themes must be accessible to all investors – after all it’s investors and the wider society who are driving the growth of ESG and sustainable investment products.
Are you ready to invest with a pure thematic approach?
There is no denying the search for greener solutions to power and protect our planet will be a significant investment opportunity, but the speed with which these solutions are evolving creates a challenge for fund selectors. Finding effective, environmentally themed funds will take research and an open mind as well as the conviction to invest purely and, as a result, with an unconstrained approach.
At BNP Paribas Asset Management, we have developed a range of thematic strategies that proactively invest in companies that champion greener policies, environmentally positive practices, as well as the energy transition.
To find out more visit bnpparibas-am.com
‘A more circular economy, that focuses on recycling, repair and regeneration will spawn investment opportunities’
Source: https://www.bloomberg.com/news/articles/2020-11-09/carney-calls-net-zero-ambition-greatest-commercial-opportunity, August 2021.
Baillie Gifford’s Kate Fox and Lee Qian explain how responsibly deployed capital can be a powerful mechanism for change
sponsored content | baillie gifford
sponsored content | J.P. Morgan asset management
Paul Quinsee, J.P. Morgan Asset Management’s head of global equities, on a wealth of environmental investment opportunities
sponsored content | Jupiter asset management
Biodiversity: sustainable investing’s new frontier?
Abbie Llewellyn-Waters explains why biodiversity is the next big theme for sustainable investing
While the eyes of the world were turning to COP26, labelled as humanity’s last chance to save the planet, another equally important event on sustainability got underway in Kunming, China in October 2021. The second part of the COP15 Convention on Biological Diversity is set to take place next spring.
Biodiversity encompasses terrestrial, marine and other aquatic ecosystems, from plants and trees to simple organisms and animals. The significance of this topic can’t be stressed enough, both from a natural capital cost and from a financial one as well. The World Economic Forum predicts that between 2011 and 2050, biodiversity loss may cost the world economy up to $10trn (£7.4trn).
While many of the outcomes from COP26 were climate-change related, the discussions around biodiversity were encouraging. During the conference, more than 130 countries, including Brazil, the Democratic Republic of Congo and Indonesia, have pledged to end and reverse deforestation by 2030. These countries are home to 90% of the world’s forests with the Amazon rainforest alone housing roughly 10% of the world’s biodiversity.
Over half of global GDP is dependent on biodiversity yet we continue to use nature’s resources much more quickly than they can be replenished. A reversal of deforestation would have far-reaching impacts to the threat of biodiversity loss. We expect that companies’ impacts on nature will increasingly become an internalised cost of doing business, similar to how efforts are being made to curb carbon emissions to slow climate change. We believe that the companies best placed to succeed in the future are the ones that are already changing their business practices to be more sustainable.
We can find opportunities to invest across a broad range of sectors by identifying companies that seek to actively reduce and eliminate any adverse effect on the natural world. The Jupiter Global Sustainable Equities strategy looks to invest in exceptionally robust companies with durable franchises. Our hope is that many of the learnings from climate change negotiations will be able to be directly applied to natural capital, helping to shift the policy landscape much more quickly.
‘The companies best placed to succeed in the future are the ones that are already changing their business practices to be more sustainable’
Abbie Llewellyn-Waters, head
of sustainable investing, Jupiter
This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI. 28278
sponsored content | M&G Investments
Randeep Somel, manager
of the M&G Climate Solutions Fund, explains the need for a circular economy
A circular economy incorporates an economic system aimed at eliminating waste with the continual use of resources. Much of the time not only is this possible, but economically it works out better. Rather than the traditional ‘take, make and waste’ linear approach, circular economies employ ‘reduce, reuse and recycling’ to create a closed-loop system that minimises the use of resource inputs and the creation of waste, pollution and carbon emissions.
From an economic standpoint the circular system aims to keep products, equipment and infrastructure in use for longer, improving the productivity of these resources. So rather than the motor going out on your fridge and you having to replace the whole fridge, you can simply just change the motor. The same with your washing machine, cooker and anything else you can think of. It’s going to take small steps and a change in consumer behaviour, but the opportunities are vast.
Sending waste to landfill is a large source of carbon emissions, so not only would a circular economy save on those, you also save on toxic chemicals and waste and potential pollutants to soil, water streams, air and biodiversity. By constantly reusing resources and avoiding landfill we benefit the planet and our own finances.
A circular approach
While reducing energy-related emissions remains the largest effort in our aim to reach net zero, a recent study by the Ellen MacArthur Foundation showed that nearly 25% of carbon emissions can be got rid of completely if we adopt this circular approach. This is supported by Accenture research, who estimate that the circular economy could generate $4.5trn (£3.33trn) of additional economic output by 2030 just as a result of the savings created. As regulations develop to get use to net zero by 2050, don’t be surprised over the coming years to hear the promotion and adoption of a more circular economy.
The problem at the moment is that the term ‘circular economy’ is being used as an open phrase. It’s not like renewable power where we know what to do and how to switch. When it comes to the circular economy, every industry, every country and every household will have different plans on how to incorporate it. It’s not a one-size-fits-all approach, instead a behavioural change is required.
When it comes to sustainability, including the circular economy, recycling and reducing waste, northern Europe and specifically Scandinavia are the leaders. They have been at the forefront of this for quite some time and they remain there now. In terms of laggards, southern Europe is a bit more behind, the US is further behind and the emerging markets are way behind. So the opportunity still remains vast, the challenge is getting people to understand that this is something they need to do and that small contributions can be incredibly powerful. The circular economy is a micro event, not a macro one.
Here are two examples of companies that promote a circular economy as part of their business model. Ball Corp is the world’s largest aluminum can manufacturer, making cans for your beans, soups and beers. Given that aluminium can be recycled indefinitely, some 75% of aluminium ever produced is still in use today. The global recycle rate for aluminium cans is 69% supported by the fact the residual product has an economic value and can be easily stored during the collection process. The net impact is that Ball Corp helps save 4.25m tonnes of CO2 emissions per year. That is the equivalent of removing 945,000 petrol cars off the road a year.
The American company Darling Ingredients is a world leader in the recycling of leftover meat-based products and used cooking oil. They go to abattoirs across the country to pick up waste meat, which is then converted back into food, feed and biodiesel. Essentially, they get paid to take away someone else’s garbage and by rendering meat by-products, the carbon is captured and reused, rather than released into the environment as a greenhouse gas. The overall net impact was that in 2019 the company saved 5.5m tons of CO2, the equivalent of the estimated annual emissions of the UK city of Leeds.
The value of a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast.
‘By reusing resources and avoiding landfill, we benefit the planet and our own finances’
Randeep Somel, fund manager, M&G Climate Solutions Fund
Source case studies: companies corporate websites from Ball Corporation and Darling Ingredients. These figures are based on the latest information available from company literature and reports.
sponsored content | royal london asset management
Mike Fox, head of
sustainable investments at
Royal London Asset Management, explains the role of our external advisory committee
For Professional Clients only, not suitable for Retail Clients.
Fund managers tend to get the limelight, yet we wouldn’t achieve much without the support of a team of bright, talented and multi-disciplinary people. Fund manager George Crowdy and I work closely with the wider responsible and sustainable investment teams, which help us to look at sustainability issues, corporate governance and building the long-term engagement that encourages positive corporate behaviour.
The team has a flat, collaborative structure in which everyone has an equal vote as to whether a company is eligible for our funds. Diversity of opinion is essential: managers need to be challenged as ‘group think’ is disastrous in any decision-making process. There are times, however, when we cannot come to a conclusion on an issue. At this point we bring in our external advisory committee.
Checks and balances
If you run a sustainable fund, you can buy in third-party research and effectively ‘outsource’ decisions about the sustainability of each investment. Or you can do much of the research yourself, as we do, and be fully responsible for those decisions. We prefer the internal model as we think it is more flexible and gives better research insights.
If you do your own research, however, you need some form of oversight. Fund managers can be susceptible to inherent biases towards something that is financially attractive, but sustainably less sound. Our internal structure is designed to offset this, but our advisory committee is there as an extra check to challenge us, help to ensure we act in the spirit of our sustainable funds – as well as to share its knowledge and experience.
Our advisory committee comprises of four external specialists with complementary expertise from the academic, corporate, client and investment worlds that are relevant to sustainable investing. It is also independent – of me, the team and Royal London Asset Management as a whole. It meets three or four times a year. We focus the committee’s time on the controversial, difficult areas. That’s either where we can’t agree internally whether individual companies meet our sustainable investing criteria; or for complex issues without a precedent, where we want a framework to guide our thinking.
At our meeting this month, we will be discussing recent criticism of the sustainable investment industry from both within and outside the asset management sector, including allegations of greenwashing and exaggerated claims. Nothing should be above constructive criticism, so we must be open-minded to those who disagree with the approach and implementation of sustainable investing. We will be asking the committee to critique both us and the asset management industry to understand if and how we need to approve.
We have some sympathy for criticisms of funds that claim ‘impact’ when only buying equity and debt from other investors. We also believe that superficial portfolio metrics do more harm than good as they oversimplify a complex world. For example, to aggregate disparate industries and businesses up to portfolio metrics we think is a false fit for areas other than carbon and diversity, where we can get consistent numbers.
Sustainable investing is for those who want to know they are invested in companies on the right side of environmental and social change. Well implemented, it is an effective and increasingly mainstream form of investing. Those are laurels that need no further embellishment. We shall see if the committee agrees with us.
Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
For further information on any of our products and services, please contact us
Find out more
• For further information, please visit rlam.co.uk/intermediaries
• Find out more about our range of sustainable funds at rlam.co.uk/sustainable
• Browse our latest thought leadership articles here
• View contact information
For Professional Clients only, not suitable for Retail Clients.
‘We ask the committee to critique both us and the asset management industry to understand if and how we need to approve’
Mike Fox, head of sustainable investments, Royal London Asset Management
The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
For more information on the funds or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk
Issued in November 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
sponsored content | ThomasLloyd
value through renewable energy in Asia is the
heart of ThomasLloyd’s
Asia is recovering rapidly from the Covid pandemic. The International Monetary Fund (IMF) forecasts economic growth of 7.2% this year and 6.3% in 2022, while the United Nations projects its population to increase by 180 million over the next five years.
‘Building back better’ means not just stronger domestic economies, but less reliance on imported goods in order to improve the balance of payments. In the Philippines, for example, crude oil imports have fallen sharply over the past two years but are still running around 90,000 barrels per day, while coal imports amounted last year to almost 30m tonnes.
The right technology, the right geography
In our target markets in Asia, energy security, system resilience and reducing dependence on expensive oil imports remain key drivers of energy policy. Soaring oil, gas and coal prices make the renewable energy proposition even more compelling and could even lift the operating margins of renewable energy producers.
The right technology, the right geography and the most experienced developers remain well-placed to benefit from the recent turmoil in energy prices. So, too, do their investors and the communities in which they operate.
Energy prices are making news headlines around the world. In the US, crude oil (WTI) has hit $82.28 per barrel, the highest since 2014 and up 70% since the beginning of 2021. In the UK, the price of natural gas futures has more than tripled from £56.40 at the start of the year to £233.51. In Europe, meantime, the price of coal has more than doubled from $69.50 per tonne to a high in early October of $190 per tonne.
With the world’s major nations in a phase of rapid, synchronised recovery from the Covid pandemic, the IMF predicts the global economy will grow by 5.9% in 2021 and 4.9% in 2022, the fastest two-year pace of growth in more than 50 years. As central banks across G7 continue with highly expansionary monetary policy, there’s little wonder that price pressures everywhere are growing.
In the US, consumer price inflation has risen from an annual rate of just 0.1% at the depths of the Covid shutdown to 5.4% today. In the UK, CPI inflation is at 3.1% and in the eurozone it has hit a 13-year high of 3.4%. Problems with global supply chains, freight forwarding and labour shortages will see price pressures persist for many months, possibly years, to come.
Wholesale electricity markets cannot be unaffected by these developments. UK baseload power has risen from £67.75 per MWH to a recent high of £282 and in Germany it is up from €49.78 to a high of €159.50 per MWH.
Higher prices for fossil fuels will surely hasten the push towards renewable energy, but as we have seen in Europe, power generation is still at the mercy of the weather. A month of especially calm September weather severely impacted the effectiveness of wind power, leaving countries scrambling to make up the shortfall through gas and coal burning.
For those countries where weather is much less variable, and the climatic conditions are highly favourable, the cost-competitiveness of renewable energy is only going to increase. The sun is guaranteed to shine 12 hours a day in India, while in the Philippines, the sugar cane trash that powers our biomass plants is available at every harvest time.
Delivering sustainable value through renewable energy in Asia is the heart of our investment philosophy. That heart continues to beat strongly.
‘Soaring oil, gas and coal prices make
the renewable energy proposition even more compelling’
sponsored content | Triodos Investment Management
Building an impactful fintech portfolio in emerging markets
Inclusive fintech solutions are taking centre stage fuelled by younger investors
The speed of fintech adoption in emerging markets is accelerating, fuelled by deeper mobile and internet penetration and a young, tech-savvy population. Platforms are mushrooming and investment activities are increasing.
Fintech has also taken centre stage in the financial inclusion industry in recent years. Think digital-lending platforms where small businesses can apply for a loan in just a few minutes, apps that allow people to pay for utility bills or school fees, or pay-as-you-go systems that use mobile technology to give people access to electricity via solar home systems.
Recognising the potential of inclusive fintech solutions and building upon its unique longstanding track record in financial inclusion, Triodos Investment Management is building an impactful fintech investment portfolio.
‘Microfinance is key in rebuilding economies in emerging markets’
Microfinance is proving more important than ever during Covid-19, both for crisis management and economic recovery in emerging markets. At the same time, providing micro loans during this period is more challenging than ever. How are microfinance institutions and banks in emerging markets navigating Covid-19 and its economic impact? How does this affect the Triodos Microfinance Fund?
Five questions for Tim Crijns, fund manager at Triodos Investment Management.
is more important than ever during
For over 25 years Triodos IM has been active as an investor in financial inclusion/microfinance. Find out more here.
Download the paper Investing in fintech for greater financial inclusion and learn more about this rapidly evolving and dynamic industry and Triodos IM’s investment approach.
sponsored content | Wellington management
Investment in a wireless communication company in Africa illustrates how Wellington seeks to deliver impact in practice, say Tara Stilwell and Campe Goodman
Impact investing is coming of age as investors are increasingly attracted by its potential to help people and the planet, while still achieving competitive returns. But how does this work in practice? Our investment in a wireless-communication company in Africa illustrates how we seek to deliver impact within our digital divide theme.
11 impact themes
Public markets offer a rapidly growing impact opportunity set that spans sectors, industries and market capitalisations. At Wellington, we focus on 11 impact themes in three categories:
Life essentials – clean water, health, affordable housing and sustainable agriculture & nutrition
Human empowerment – education & job training, digital divide, financial inclusion and safety & security
Environment – alternative energy, resource efficiency and resource stewardship
Each impact theme offers a range of potentially attractive impact stories.
Identifying potential impact investments
We require impact investments to be material, additional and measurable. That is, the majority of a company’s or issuer’s products, services or projects must align with one of or more of our impact themes (material). The core offering must address a need that is unlikely to be met by other entities or technologies (additional). And we must be able to quantify the impact the company or issuer is achieving based on a relevant impact thesis or ‘theory of change’ (measurable).
Any potential investment must also offer the prospect of competitive financial returns. We conduct holistic research on a company or issuer and its sector, analysing financial fundamentals, the competitive landscape and ESG issues.
How one company helps bridge the digital divide
Closing the digital gap between the developed and developing world and between rich and poor populations within countries is one of our impact objectives and a key means of reducing inequality. The Covid-19 pandemic has accelerated the transition towards a digital economy and underscored how a lack of internet access can hinder social inclusion and economic empowerment. Without access to reliable digital services, many already disadvantaged people and businesses could fall further behind as we rapidly shift towards a digitally led economy and society.
We therefore look at financially attractive companies or issuers that can help bridge that divide through their core products or services. One such attractive investment opportunity is in Africa, where most countries rank lowest in the Economist Intelligence Unit’s Inclusive Internet Index. We believe the company’s digital infrastructure and wireless communication services facilitate social and economic empowerment of underserved communities across Africa. Along with this impact theory of change, we also find the company’s financial fundamentals attractive.
To measure and track this company’s impact progress, we developed key performance indicators (KPIs) in line with the Impact Management Project’s
Five Dimensions of Impact framework. These are:
What – what is the outcome and how material is it for stakeholders? This company helps to break down barriers to internet access, a meaningful impact outcome which translates into productivity gains and helps improve lives through access to digital technology.
Who – who are the stakeholders experiencing the outcome? In this instance, we measure the total number of customers gaining digital access (over 100 million), along with the number of customers benefiting from increased availability of financial services (over 50 million), and the number of countries reached (more than 50).
How much – what is the degree of impact of these outcomes? Here we focus on the number of homes and businesses receiving fibre broadband and the number of smart devices connected to networks as a result.
Contribution – has the company’s or project’s effort resulted in a better outcome than would have otherwise occurred? In this example, we assessed the reduction in price per gigabyte in the provider’s largest market (more than 50%), as well as the aggregate savings accrued to customers (more than $180m)
Risk – what is the risk that the impact will differ from or fall short of what was expected? The main risks we identified were underserved customers becoming less of a priority for the company and a drop-off in the quality of service. Our analysis found both risks to be low probabilities.
We overlay these KPIs with regular qualitative assessments of a company’s commitment to its impact goals. We seek to understand a company’s or an issuer’s holistic impact – looking at any negative externalities, such as environmental damage, associated with the company’s or issuer’s wider business activities, as well as any unintended negative consequences associated with the specific investment that would outweigh its positive impact, for example, the impact of a new recycling facility on local communities. For this company, we identified the environmental impact of its network of sites and the increased exposure of vulnerable populations to cyber-crime as the two main negative externalities. In practice, our analysis found the impact to be minimal, with the company undertaking appropriate action to mitigate that impact. The company also showed a willingness to engage with us on further mitigation.
Alignment with the United Nations Sustainable Development Goals
While we do not manage our portfolios to a targeted level of alignment with the United Nations Sustainable Development Goals (SDGs), our high standards for inclusion result in an investment strategy that naturally supports many of the SDGs. All the companies and issuers we invest in offer what we consider to be much-needed solutions to many of the major challenges identified in the SDGs. In our view, the impact thesis for this company aligns with the goal of fostering industry, innovation and infrastructure (UN SDG9), and specifically Target 9C within that goal, to ‘provide access to the internet’.
We also seek to ensure the fulfillment of our theory of change through informed and active ownership. In this case, our engagement with the company centred on securing disclosure on customer segmentation, customer satisfaction and affordability. Our engagements gave us conviction on the company’s commitment to increasing its scale and broadening its reach in rural and otherwise underserved populations across Africa.
Learn more about our impact investing approaches and explore further case studies: Global Impact Annual Report
‘Impact investing is coming of age as investors are increasingly attracted by its potential to help people and the planet, while still achieving competitive returns’
Campe Goodman, portfolio manager, Wellington Global Impact Bond Fund
The views expressed are those of the author. Other teams may hold different views and make different investment decisions. This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. While any third-party data used is considered reliable, its accuracy is not guaranteed. This commentary is provided for informational purposes only and should not be viewed as a current or past recommendation and is not intended to constitute investment advice or an offer to sell or the solicitation of an offer to purchase shares or other securities
The example is for illustrative purposes only and should not be interpreted as specific security recommendations or advice. KPI data is based on issuer or company reporting, proxy data and Wellington analysis. | Wellington determines the goals and targets that, in our view, each portfolio company or issuer is aligned with. Language for the goals and targets has been abbreviated, but not otherwise altered, from UN.org. Wellington Management supports the United Nations Sustainable Development Goals. | Sources: Wellington Management, UN.org. Data is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness. In Europe (excluding the United Kingdom and Switzerland), this material is provided by Wellington Management Europe GmbH (WME), which is authorised and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). This material may only be used in countries where WME is duly authorised to operate and is only directed at eligible counterparties or professional clients as defined under the German Securities Trading Act. This material does not constitute investment advice, a solicitation to invest in financial instruments or information recommending or suggesting an investment strategy within the meaning of Section 85 of the German Securities Trading Act (Wertpapierhandelsgesetz).
In the United Kingdom, this material is provided by Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (FCA) in the UK (Reference number: 208573). This material is directed only at eligible counterparties or professional clients as defined under the rules of the FCA.
In Switzerland, this material is provided by Wellington Management Switzerland GmbH, a firm registered at the commercial register of the canton of Zurich with number CH-020.4.050.857-7. This material is directed only at Qualified Investors as defined in the Swiss Collective Investment Schemes Act and its implementing ordinance.
International Telecommunications Union, 2020.
Harald Edquist, et al, ‘How Important are Mobile Broadband Networks for Global
Economic Development?’, Imperial College Business School, May 2017.
The Inclusive Internet Index 2021. Source: The Economist Intelligence Unit.
The Impact Management Project, impactprojectmanagement.com.
Why does bridging the digital divide matter?
A 10% increase in mobile broadband adoption may correlate with up to a 2.8% increase in GDP
Developed countries – 86.6% versus developing
countries – 47%