November 2022
Radical rethink
What will it take for the investment industry to meet the pledges of last year’s Conference of the Parties?
Scroll for contents
Our sponsors
Powering through energy transition challenges Allianz Global Investors
Positive change Baillie Gifford
Sustainability shift drives economic resilience Fidelity International
Europe’s energy crisis: what are the options? J.P. Morgan Asset Management
Is the future sustainable? Royal London Asset Management
Progress? What progress?
At the time of writing, COP27 is drawing to a close – and it’s hard to feel optimistic about what has been achieved at the so-called ‘implementation’ summit. The ESG Clarity team has been covering the announcements on the ground and from here in the UK, and picking up reaction from professionals in financial services. While further net-zero guidelines from the UN and ISO have been welcomed, and initiatives pledging to assist development economies with their just transition have ramped up, there seems to be an immediate lack of, well, implementation. Action has been planned … for next year and beyond. New working groups have been set up … to start their research. We have had very limited updates on progress since last year’s COP26 and general evidence that more action is being taken now to protect people and planet from climate change. Even though organisers described the newly created loss and damage fund as a ‘breakthrough agreement’, commitments from private finance are still lacking. From our conversations with asset managers, the companies with huge influence over businessess’ net-zero journeys and climate transition plans, they are busy engaging with portfolio holdings on these points, which is a positive to grasp on to and we look forward to being updated on their progress in due course. But what was being called for by the industry before COP27 took place – a ‘rethink of international financial architecture’, closing the ambition gap and addressing the increasing urgency around climate change – has so far been largely been missed. In this issue of ESG Clarity’s digital magazine, we have focused on bringing you analysis of the more encouraging steps made on nature, agriculture and the just transition, as well as real and honest perspectives from Egypt and around the world.
Spotlight
COVER story
There was a sense of scepticism going into COP27 about the outcomes that would be achieved. Natasha Turner asks what it will take for the investment industry to meet the pledges of last year’s Conference of the Parties
CEO of Principles for Responsible Investment David Atkin says there will be a significant uplift in the organisation’s programme of work on nature in the next 12 months following announcements at COP27
PRI sets sights on nature
We won’t survive the ESG odyssey by aiming for complete precision in our climate investing modelling, writes Andrew Parry of JO Hambro Capital Management, uncertainty and probability should be placed at the heart of the agenda
Reaching Ithaca
Also in this issue ...
Sawan Kumar, head of stewardship at Evenlode Investment, discusses how companies can improve their disclosures
‘TCFD has been a blessing’
WWF International’s Margaret Kuhlow on credible net-zero plans for financial institutions – why they matter and what they look like
Enabling the transition
Industry experts from around the world give their verdict on the Finance Day announcements at COP27
Global reflections
Mobilising private capital towards developing markets is crucial to support climate action, says GAM Investments’ Stephanie Maier
Upping the ante
Why more and more investors are opting for fixed income with an ESG focus
Reaching for global impact bonds
The Conference of Parties knows how to put on a good show, but is it achieving its aim of uniting nations on action against climate change?
An (honest) guide to COP
Bonhill Group Plc is a leading global media company, delivering cutting-edge analysis, insight, networking and data for financial services and business solutions communities. We offer forward-thinking products and provide high-quality information that leads to better, and informed, decisions. ©2022 Bonhill Group Plc
Read
EDITORIAL
interview
FUND MANAGER COMMENT
Q&A
comment
analysis
esg clarity intelligence
sector review
LGT Wealth Management’s Phoebe Stone says climate change can’t be tackled until food production and soil health are a bigger talking point
Turning over soil health
Fidelity International’s Jamie Harvey outlines how the UN SDGs provide a powerful framework for growth
Sustainability shift drives economic resilience
Allianz’s Matt Christensen on investors’ vital role in helping build a green and secure energy future
Powering through energy transition challenges
sponsored content
For investors focusing on innovations that make the world cleaner, safer, healthier and more inclusive, the long-term outlook is a positive one
Is the future sustainable?
J.P. Morgan Asset Management on the impact on Europe of diminished Russian gas flows
Europe’s energy crisis: what are the options?
Natalie Kenway Global head of ESG insight, ESG Clarity
Baillie Gifford’s Kate Fox and Lee Qian discuss how responsibly deployed capital can be a powerful mechanism for change
Positive change
Sponsored content BNP Paribas Asset Management on solar and the new narrative Read >>
RRI How Pictet Global Environmental Opportunities is calculating climate-related physical risks Read >>
Sponsored content J.P. Morgan Asset Management’s Jennifer Wu on climate change investment risks Read >>
Sponsored content The Jupiter Ecology Fund – a natural home for your capital Read >>
Sponsored content Baillie Gifford says responsibly deployed capital is a mechanism for change Read >>
Q&A Shelagh Whitley of the PRI on the impact of climate change and biodiversity loss on business Read >>
Analysis ESG Clarity finds out how professional investors across the globe are taking nature into account Read >>
Comment The investment industry must incorporate the urgency of activists in its actions if it’s to realise net zero Read >>
ESG Clarity Intelligence Fed Hermes’ Sonya Likhtman on committing to net-positive biodiversity impact Read >>
Comment The future looks bright for clean energy investors, says Victory Hill’s Richard Lum Read >>
Funds in focus As investors look beyond renewables for opportunities, climate-conscious funds gain momentum Read >>
Tony Goldner of the Taskforce on Nature-related Financial Disclosures
Ninety One CEO Hendrik du Toit on building a greener future
Companies and asset managers must rethink how they assess physical risk
Natasha Turner asks what it will take for the investment industry to meet the pledges of last year’s Conference of the Parties?
Scroll
COP27, with its logistical chaos and its lack of voices around the table (see the video below for more on this), will not have resulted in that rethink. Aviva investors are calling for another Bretton Woods, 80 years on, to facilitate this, but whether it is this, innovative blended finance solutions or progressive financial regulation, the message is clear. “We need that money now,” Margaret Kuhlow, global finance practice leader at WWF International said. “On the ground you’ll see lots of people walking around with examples of what’s happening to their family at home now. We need a lot more, and a lot faster.” Click below to watch footage of ESG Clarity on the ground in Sharm el-Sheikh.
But the failures since COP26 and the lack of announcements at COP27 may also point to other realities. One of these could be that as more targets are being set, it is likely more targets will be missed. Nonetheless, the idea of ‘keeping 1.5 degrees alive’ was prevalent at COP27, despite the reality that the Earth will surpass this. Current policies will likely result in a rise of 2.8C, a recent UN report found. Another reality might be the finance system itself is not structured in a way that will adequately facilitate a transition to net zero. “We need nothing short of a complete rethink of the international financial architecture to repurpose it so that it can help capital flow from where it is – developed countries – to where it needs to be – developing countries – so we all can secure a future that we would wish to retire into rather than one where there’s climate carnage and chaos,” Aviva Investors chief responsible investment officer Steve Waygood told ESG Clarity before the conference.
According to Moola, this year has been focused on how the industry carries this out, how carbon markets get functioning on the African continent, figuring out how ‘transition’ is assessed and exploring the different forms of finance needed to facilitate that. To this end, the investment industry has been encouraged by the guidance from policymakers shown at this year’s conference. Net-zero guidelines have been published and global baselines agreed. For example, the UN expert group set up by UN secretary-general António Guterres released a report, Integrity Matters: Net Zero Commitments by Business, Financial Institutions, Cities and Regions, requiring firms to not invest in new fossil fuel supply or deforestation, a limited use of carbon credits, the inclusion of Scope 3 emissions and the exclusion of lobbying. And the ISO released guidelines that aim to create a common definition for net zero and related terms; set high-level principles for all participants who want to achieve climate neutrality; give actionable guidance; and provide transparent communication, credible claims and consistent reporting on emissions, reductions and removals. Gold standards were set for financial institutions by the UK’s Transition Plan Taskforce, which published its new disclosure framework, and International Organization of Securities Commissions (IOSCO), whose consultation on voluntary carbon markets is looking to develop best practice. Click below to watch investment professionals’ thoughts on Finance Day announcements at COP27.
The promises of COP26 have been broken. $100bn (£84.38bn) of capital has not been mobilised, and only around 30 new or updated nationally determined contributions have been provided. Unsurprisingly, there was a sense of “scepticism and pessimism” coming into COP27 about the outcomes that would be achieved, Andrew Griffiths, director of community and partnerships at Planet Mark, told ESG Clarity at the conference. It was certainly the case that no big finance announcements were made in comparison with last year, but that could be explained by the confusion they caused. “We’ve spent the past year trying to figure out how to [meet those pledges],” Nazmeera Moola, chief sustainability officer at Ninety One, said. “And it’s a lot more complex than making the pledge to do it.”
‘A new Bretton Woods’
Moving targets
Focus on ‘transition’
Nazmeera Moola, chief sustainability officer, Ninety One
cover story
Home
Next article
‘We’ve spent the past year trying to figure out how to [meet those pledges]. It’s more complex than making the pledge to do it’
Steve Waygood, chief responsible investment officer, Aviva Investors
‘We need nothing short of a complete rethink of the international financial architecture’
CEO David Atkin shares the organisation’s focus for next year following announcements at COP27
With the link between climate and nature starting to be considered by investors, industry experts were encouraged to see discussions about nature risk crop up with more frequency at COP27 this year. “Nature-based issues and nature-based risk just keep featuring in the discussions,” the Taskforce for Nature-related Financial Disclosure’s executive director Tony Goldner told ESG Clarity in Egypt, while WWF’s global finance practice leader Margaret Kuhlow added the environmental NGO is being included in many more finance conversations. These discussions were also apparent to Principles for Responsible Investment (PRI) CEO David Atkin, who says that as a result, there will be a “significant uplift in our programme of work [on nature] in the next 12 months.” “The biggest thing we will address is that link between nature and climate,” he tells ESG Clarity at COP27. “You can’t solve the climate issue unless you are seriously addressing the nature piece.” This year, the PRI has hosted several webinars on nature and finance and is asking signatories to sign a statement calling on world leaders to agree a global economic plan for halting and reversing nature loss ahead of the UN Biodiversity Conference next month (COP15). Atkin stepped into the CEO role at the PRI in December last year, relocating to the organisation’s headquarters in London from Australia and replacing Fiona Reynolds, who held the role for a decade. After his first year in the job, Atkin says the PRI’s signatories are looking to the organisation to provide the tools and analysis needed for firms to digest and implement the announcements made at the conference. “Our signatories are expecting us to provide more granular analysis, but also programmes of work that are dealing with the gaps we’ve identified. Whether it’s around data or the just transition, we’re giving our signatories the tools they need to address climate change.” Watch video below for more from Atkin at COP27.
‘Our signatories are expecting us to provide more granular analysis, but also programmes of work that are dealing with the gaps we’ve identified’
Click to read David Atkin’s biography
David Atkin’s biography
David Atkin served as a board director at the PRI between 2009 and 2015 before becoming CEO on 10 December 2021. Before that he served as CEO of three Australian asset owners – Cbus, ESS Super and Just Super – and as deputy CEO of investment manager AMP Capital.
David Atkin, CEO, Principles for Responsible Investment
By Natasha Turner
Key announcements In terms of the COP27 announcements for which the PRI will be providing signatories with analysis, alongside the focus on nature, Atkin says he is most encouraged by those on deforestation, the just transition and allocating capital to developing economies. In particular, Atkin pointed to the German government’s pledge to double its financing for forests to €2bn (£1.75bn) through 2025 as part of the Forest and Climate Leaders’ Partnership launched at COP27, for which more than 25 countries have committed to end deforestation by 2030. The Ministry of International Cooperation and the Tony Blair Institute for Global Change published a Guidebook for Just Financing at COP27, which sets out a definition for just financing addressing risk factors, and provides a mapping of climate capital providers based on their access criteria, risk appetite, regional and sectoral focus, ticket size and financing instruments to address the limited access of developing countries to climate funds. The focus on allocating capital to developing economies took many forms, including the launch by Egypt’s COP27 presidency and the United Nations Economic Commission of the Green and Social Sustainable Bonds in order to fill financial gaps in African economies and attract private capital. Pushing on policy The PRI CEO also says firms are looking to the PRI to engage in more policy work, showing the ambition of organisations across the globe to progress responsible investing. But while influencing policy is important, Atkin stresses firms should not wait: “Everyone would like to see that the policy settings were clear and transparent and that we understood what the roadmap was. “The key message for our signatories is let’s just get on and do what we can do. “If you get too despondent about lack of progress, that can create inertia. We don’t have time for inertia. We’re just going to get on and break down the problem, work out what our role is and what we need to do to address and to make progress, and then be transparent about it and hold ourselves accountable to it.”
We won’t survive the ESG odyssey by aiming for complete precision in our climate investing modelling – uncertainty and probability should be placed at the heart of the agenda
COP27 came hot on the heels of the UN publishing a report that highlighted the need for stronger commitments, as the world is on track for a 2.5C temperature rise by 2100. Tensions in the Glasgow Financial Alliance for Net Zero group prompted it to abandon requirements for its members to additionally sign up for the UN’s Race to Zero campaign, with three US banks reportedly considering withdrawing from the alliance. Yet, the ambition of ESG markets continues to grow, while concrete actions are vague and stalled, raising concerns about net-zero and Paris-aligned commitments. The ESG and sustainable investing space has long supported the narrative of the need to integrate ESG factors in the decision-making process. Asset managers have responded to the call by creating departments specialising in ESG research, engagement and reporting, subscribed to a number of initiatives, increased their data budget to accommodate these ESG factors and improved their disclosure. As expected, this journey to Ithaca has been long and difficult, with many challenges on the way that have reshaped how the finance industry operates. And while ESG covers a broad spectrum of topics, climate change has gained significant attention and resources. Stalled narrative The narrative has successfully brought substantial changes to the finance industry. Despite its success, the ESG sphere remains on the same narrative path. By disregarding, or downplaying, the importance of financial return or claiming an inherent and ever-present positive ‘ESG premium’, it kept a flame of scepticism alive. The proliferation of data providers and frameworks covering ESG is further blurring the scene, as many disagree with each other on identical topics. While Ithaca in Homer’s Odyssey was a precise destination Ulysses needed to reach, the ESG world keeps pushing Ithaca further out by hesitating to speak about the specifics. Despite that, financial services are embracing sustainable investing as a worthy investment choice, as a sustainable economy operating within planetary boundaries that is a crucial requirement in delivering that objective. However, there is still a lot of work to do. The effort has been to convince investment teams to ‘speak the ESG language’ and improve their decision-making process by integrating some abstract ESG model. Under the ‘E’ pillar, there is a plethora of climate change models used in finance, which always seem to provide unrealistically precise numbers. The projections span extensive periods, have unclear assumptions and rarely discuss their financial impact on individual enterprises. The latter gets potentially worse by providing too-precise implications for their long-term projections. These characteristics lead to frustration in truly integrating such information into active decision making. Often investors are left asking: ‘What do I do with these numbers?’ The integration of climate models in the investment process should be seamless between the model itself, and the risk and investment teams. These teams are comfortable with uncertainty. They demand it as an essential element in exploiting market inefficiencies. However, their requirements are worlds apart from the current paradigm of implied climate precision, which causes this communication breakdown. Therefore, topics such as uncertainty and probability should be firmly embedded in climate investing agendas. The uncertainty principle There must be a paradigm shift in implementing, integrating and interpretating current climate models. The ESG world has failed to push for this, and the finance world is craving it. So, a transition to a more pragmatic, forward-looking, evidence-based approach of a probabilistic nature is the way forward. Most financial modelling tools have the concept of probability as an integral part of their output across instruments. From probability of default to option pricing and even forecasting stock prices, it gives the portfolio managers a view of the likelihood of events affecting their valuation. But especially in the case of climate change, which is already understood to be a vastly complex system, uncertainty should be part of all inputs and outputs. Oversimplifying this into a single number takes away much of the value it can bring to the investment process. Uncertainty is embedded in ESG-related issues, and climate change is undoubtedly one of the most complex. Bringing the best of two worlds together in a forum where the investment teams can regularly interact with climate experts will bring the abstract climate models much closer on the investment floor. Ithaca is a true integration of climate change into investment decision making. We will not reach it by asking why but by answering how.
‘Topics such as uncertainty and probability should be firmly embedded in climate investing agendas’
Andrew Parry Head of investments, JO Hambro Capital Management
fund manager comment
Margaret Kuhlow, global finance practice leader, WWF International
Natalie Kenway speaks to Sawan Kumar, head of stewardship at Evenlode Investment, about how companies can improve their disclosures and what they are looking for in terms of governance
Were you happy with the announcements on Finance Day at COP27? Did anything catch your eye that will make a big difference? There were some important announcements made, which created some positive momentum towards unlocking some much-needed capital for vulnerable countries. The UK Export Finance Agency (UKEF) became the first export credit agency to announce Climate Resilient Debt Clauses, which will pause debt payments for two years if a nation is hit by a climate disaster. This will provide more flexibility and free up funds for low-income countries to deal with the emergency. There were also disclosures in the carbon markets when Climate Impact Partners and The Global EverGreening Alliance announced a partnership to deliver $330m in community-led carbon removal projects in Africa and Asia. The projects are expected to start from 2023 onwards and will ensure that a revenue share from carbon credit sales will be kept for local communities. This project has real potential and hope for its success, as the partnership will look to create blueprints and expand to other areas of the world to continue delivering environmental and social benefits for communities in need. Let’s talk about stewardship. Can you provide us with some examples of successful engagement with businesses? A good example is a company we held in Evenlode Income, which we started to engage with in 2018 because of a weak remuneration policy. They invited us for an engagement in their London offices and we fed back to them they needed more sensible metrics attached to their policy that were measurable and aligned to the long-term view of the business. They responded that they wanted to keep it quite simple because that’s what they felt shareholders liked. The following year, that policy was voted down by shareholders and there was a big engagement programme. The success story in this case was the metric that we like to see, the return on invested capital was implemented in 2021 and it was also approved by other shareholders. Where have you divested? What causes you to divest? For context, we give a risk score for each company in our portfolio and watchlist from an A to an E, and they tend to be financial and non-financial. One of those 10 risks is ESG risk, for which we’ve developed an internal matrix. We ask 35 ESG-related questions from each company in our portfolio and watchlist, and adjust the score from A to E accordingly, depending on how material E, S or G factors are to that business and to that sector. To answer your question, we wouldn’t necessarily divest from a company purely on ESG grounds unless it was scoring an E. An E would probably cause us to divest because it would have knock-on effects on other risk factors. What are companies doing in terms of reporting and disclosure that helps you with your work? The Taskforce for Climate-related Financial Disclosures (TCFD) has been a blessing. It’s really helped us get a better understanding of the transition risks that are present. Physical risks for the companies we invest in don’t tend to be very material. There are some companies that have to think about that risk, but the TCFD reporting requirements have been really positive. More generally, we tend to rely on CDP, along with company reporting, for our emissions analysis. We look at the company-reported disclosures and when they are not as adequate, we rely on CDP. If there are some discrepancies there, then we do our own modelling. Watch the video interview to hear how Evenlode is engaging with companies on net-zero targets and is reporting in line with the TCFD.
‘TCFD really helped us get a better understanding of the transition risks that are present’
Click to read Sawan Kumar’s biography
Sawan Kumar’s biography
Sawan Kumar joined Evenlode in 2017 and is head of stewardship. He is responsible for providing ongoing analysis of companies from a stewardship perspective and managing Evenlode’s voting and engagement activity. He previously worked as a governance analyst at Schroders and a proxy voting analyst at Hermes EOS.
Sawan Kumar, head of stewardship, Evenlode Investment
What would you like to see companies be doing more of on a voluntary basis? Climate transition plans are quite important to highlight. As we go through this net-zero journey we need to get to by 2050, a lot of the climate transition plans are going to get intertwined with long-term business strategies. We need to be careful there is adequate disclosure within those plans because we don’t want retail investors to just start approving them when they can be quite complex to understand. What do you take into consideration when you’re voting on executive pay? And has this changed amid the cost-of-living crisis? Quantum is one of the things we look at. It decreased around the time of Covid, but now those policies are expiring and we’re seeing a bit of an uptick. I’m sure that will come with shareholder pressure as well. The biggest thing for us is companies in the UK are finally moving away from share price appreciation as the largest weighting metric in their policy. We’re seeing a lot more metrics around return on invested capital and organic revenue growth, which is another really good metric we would prefer to see. Obviously, sustainability metrics are something we’ve been pushing for the past two, three years and we’re seeing that come into come into play in new policies. Alignment is very important and making sure there’s enough disclosure there. These are quite basic things, but something we always ask of companies. Board structure is a top priority for Evenlode Investment, according to the latest stewardship report. Can you explain more on that point? We look at that in our bespoke AGM analysis framework. We don’t use any external research providers for their recommendations, we do our own analysis and within that we look at various different things around who sits on the board, the sector experience, tenures, diversity etc. This is something we’ve been doing since we started the framework, but also now with the new regulations around Sustainable Finance Disclosure Regulation (SFDR) coming in, it’s something we have to start reporting against. Luckily, we have the data for it already, so that shouldn’t be too difficult.
On the diversity point, are you looking at this through the company or focusing on the board? Do you look at gender pay gap reports, for example? At the start of the whole process we were looking at gender diversity just at the top, but we are starting to look at it across the board. The gender pay gap is something we are going to spend a lot more time on next year because we have been doing it reactively as opposed to really spending a bit more time on it purely just because of our resources. The team is growing – we will have a team of four next year in our stewardship team – so there’s going to be more resources for us to do more of a deep dive on these sorts of issues. Finally, how has your team considered the Taskforce for Nature-related Financial Disclosures (TNFD)? It is something we have started thinking about as well. The third version has come out and the final framework is going to be out in September next year. Although we’re not obligated to report until about 2024-5 as a business, we’ve hired a new member of the team that is a bit of an expert in biodiversity. He’s going to be focusing on TNFD reporting.
Evenlode Investment’s voting and engagement in Q3 2022
Source: Evenlode Investment Quarterly Stewardship Report Q3 2022
Voted on 107 resolutions
Voting
Voted on 10 meetings
In 97% of meetings, Evenlode voted with management on all proposals
In 10% of meetings, Evenlode voted against management on at least one proposal
Engaged with 66 companies
Engaged with 15 themes
Engaged the most on net zero, remuneration and board structure
Engagement
Credible net-zero plans for financial institutions – why they matter and what they look like
Climate and ecosystem breakdowns are upon us. Unprecedented floods, droughts and storms in Pakistan, the Horn of Africa and Florida, together with the IMF’s latest World Economic Outlook and Global Financial Stability Report, show what this dual emergency looks like in both humanitarian and economic terms. Financial institutions undoubtedly have a crucial role to play in addressing this compound crisis and enabling the transition to a more sustainable future. The good news is opportunities for scaling credible net-zero and nature-positive investment continue to grow, and transitioning to a nature-positive economy could generate annual business opportunities worth $10trn (£8.52trn) and create 395 million jobs by 2030. While momentum for delivering net-zero emissions in line with the Paris Agreement has grown significantly, and many financial institutions are increasingly addressing nature-related risks, the focus must now shift to accelerating implementation. Ensuring this happens relies in large part on financial institutions and companies having credible transition plans that set out clear actionable steps that increase transparency, combat greenwashing and facilitate transition in the real economy. That’s why, building on existing efforts, such as the UK Transition Plan Taskforce, WWF has defined clear criteria, guiding principles and recommendations to help financial institutions develop credible, ambitious and consistent climate and nature transition plans, and drive the adoption of robust international standards. Three principles To facilitate transformational change and deliver on climate and nature goals, credible transition plans should adhere to three core principles. First, financial institutions should adopt a ‘whole-of-organisation’ approach to transition planning. This means specifying practical actions for implementing science-based targets, ensuring changes are fully embedded across an organisation’s business model, strategy and culture, and securing board approval and senior management buy-in. Second, transition plans should look beyond asset or entity-level risk management and focus on outcomes and impact. This means considering both how an organisation is affected by a changing climate and how it is exacerbating climate change. In addition to delivering alignment with a 1.5C pathway, a credible transition plan should also address other fundamental sustainability challenges, not least nature loss and a just transition. Finally, financial institutions should recognise the accountability and agency they have to leverage influence and incentivise both financial and non-financial value chain actors to pursue positive climate and nature outcomes and deliver economy-wide transition. They must be active agents for change, engaging governments on climate- and nature-related policy, for example, on carbon pricing and blended finance, and setting clear expectations for client and portfolio company transition pathways. Criteria for credibility Building on these principles, financial institutions should meet a set of minimum criteria in developing a credible transition plan. • Ambition and prioritisation – commit to net-zero emissions in line with a 1.5C pathway, set science-based targets that encompass all business and financing activity, and identify high-impact decarbonisation actions with the greatest potential for rapid real economy impact and/or systemic change. • Nature and just transition – set nature protection and restoration goals aligned with national and international goals, manage nature-related risks and opportunities, capitalise on nature as a carbon sink and source of climate resilience, and enable a just transition. • Action and implementation – commit to fossil fuel phase-out, scale financing for climate and nature solutions, and implement credible client, portfolio and stakeholder engagement strategies and escalations processes. • Accountability and verification – establish clear governance structures to hold organisations to account for progress toward net zero and nature-positive targets, seek third-party reporting verification and openly report on progress against defined metrics. • Feedback and flexibility – embed flexibility into implementation, account for any material changes in future iterations of plans while maintaining ambition, and adjust plans to ensure delivery on targets.
Margaret Kuhlow Global finance practice leader, WWF International
‘Financial institutions have a crucial role to play in enabling the transition to a more sustainable future’
Click here to hear more from Margaret Kuhlow on credible transition
WWF’s criteria for credible climate and nature transition plans for financial institutions
Source: WWF 2022
GUIDING PRINCIPLES – A whole-of-organisation approach to transition planning – Focused on outcomes and impact – Accountability and agency of financial institutions
CRITERIA – Ambition and prioritisation – Nature and just transition – Action and implementation – Accountability and verification – Feedback and flexibility
CLIMATE
SOCIETY
NATURE
Shaping ambition and standardisation At COP27, developed countries’ failure to deliver on previously agreed climate finance targets has fuelled mistrust, and there has so far been little agreement on key issues, including doubling funding for adaptation and alignment of financial flows with climate goals. In this context, it is vital that policymakers actively shape both ambition and standardisation of transition plans internationally, including by making them mandatory for financial institutions and large or listed companies, incentivising low-carbon technologies, and driving wider financial system reform.
Stephanie Maier, global head of sustainable and impact investment, GAM Investments, and steering committee member
Sustainable finance professionals across all world regions were watching Finance Day at COP27 closely to see if environmental and social investing would get the boost so desperately needed from global leaders. There were certainly some developments and signals intended to aid implementation of climate finance solutions – for example, the United Nations’ guide for non-state actors’ net-zero commitments and the International Organization of Securities Commissions (IOSCO) paper on carbon markets. However, there was disappointment around states’ failure to materialise the climate finance they committed to last year. Click here for the top takeaways from Finance Day. ESG Clarity spoke to asset managers across the world to see what the developments in the first week of COP27 mean for them as investors, and for sustainable finance in their regions.
By Christine Dawson
Mobilising private capital, especially towards developing markets, is crucial to meet the level of investment needed to support climate action
At this year’s COP27, the world’s first and third-largest emitters, China and India, were lacking in presence, and leaders including Barbados’ prime minister were calling out wealthier counterparts for failing to deliver on promised climate finance. Yet despite some of the uncertainty and clear differences, particularly as governments disagree over who foots the climate bill, what is clear is that the private sector’s role in supporting climate action is only growing in importance. Unlocking investment The UN estimates the world will need up to $7trn (£5.85trn) to move close to achieving the Sustainable Development Goals – critically, private finance isn’t solely expected to bridge this gap, as meeting this level of investment will require “greater synergy between public and private finance”, as US special presidential envoy for climate John Kerry stated. That’s why, for example, talks on COP’s Finance Day focused on the need for governments to mobilise private finance in low-income countries through innovative blended finance tools that de-risk and scale up investment. In the same context of governments seeking to catalyse private investment, perhaps most significantly this led to the US unveiling a new plan, the Energy Transition Accelerator, to unlock private capital and help developing countries cut fossil fuel use and accelerate renewable energy deployment. Importantly, the scheme will only be open to companies with credible net-zero strategies. The conference also saw the launch of a new financing facility, the African Climate Risk Facility, with signatories committing to underwrite $14bn of cover for climate risks by 2030. This could set a precedent for similar schemes whereby policymakers seek to attract private finance to those parts of the world perceived to be higher risk with the ultimate goal of reaching the $2trn dollars per year in clean energy investment required in developing economies. (Some of) the damage is done Those who did attend COP27 were greeted with UN secretary-general Antonio Guterres’ hard-hitting words that the world is on “a highway to climate hell with our foot on the accelerator”. The effect of global warming is becoming increasingly apparent, with currently 22 million people at risk of starvation in East Africa from droughts and the worst floods in Pakistan’s history causing damages of an estimated $40bn. It is clear that serious damage is already occurring, some of which the Intergovernmental Panel on Climate Change warns is irrevocable. That is why the issue of loss and damage, paying for climate breakdown already caused, was a key topic on the negotiating table at COP. Developed countries such as the US and UK have been under intensifying pressure to provide climate finance for those more vulnerable to climate change. There was progress at negotiations with UK prime minister Rishi Sunak setting aside £11.6bn for international climate finance, stating that “climate security goes hand in hand with energy security”, and countries including New Zealand, Scotland and Belgium pledging $20m for less-developed countries suffering from climate disasters such as droughts, cyclones and floods. Yet with turmoil from the Russian invasion of Ukraine to inflation wreaking havoc on parts of the global economy the backdrop to the conference, the concern is governments may yet deprioritise climate action. Washing away greenwashing After bold pledges were made at COP26 last year, financiers have some catching up to do for the action to meet the ambition. This year, a UN High-Level Expert Group issued recommendations for net-zero plans to crack down on promises that are a ‘toxic cover-up’. This was followed by the announcement of a new timebound and action-oriented disclosure framework by the UK’s Transition Plans Taskforce, dubbed the new ‘gold standard’ for corporate net-zero plans. These developments will mean tighter rules for financiers, raising the stakes for the private sector in delivering on promises and taking rigorous action on net zero. The investor outlook As we know from the Glasgow Financial Alliance for Net Zero announcement last year, trillions in private capital is pledged. Building on this, COP27 marked the opportunity for world leaders to convene and work out how to mobilise clean investment in the real economy, particularly in more vulnerable parts of the world. Aligned with this, one of the key asks for COP27 was for governments to update their climate targets. However, despite some updated submissions, 2030 targets still result in 2.4C of warming, some reports have estimated. It therefore remains critical that governments are not thrown off track by today’s harsh geopolitical and macroeconomic conditions. Ultimately, for sustainable growth in global markets, we must make strides in addressing climate change. While COP27 has upped the ante on the importance of mobilising private capital, including some concrete steps towards developing markets, the reality remains that there is much more to do – and fast.
Stephanie Maier Global head of sustainable and impact investment, GAM Investments, and steering committee member
‘COP’s Finance Day focused on the need for governments to mobilise private finance in low-income countries through innovative blended finance tools’
Click here for more from Stephanie Maier on COP27
Emmet McNamee head of stewardship, Principles for Responsible Investment
While a perfect storm of performance issues has slowed appetite for sustainable equities during the past 12 months, more and more investors are opting for fixed income with an ESG focus
This year has been extremely challenging for fixed-income investors who have experienced significant losses in their investments and haven’t enjoyed the diversification benefits of low correlation to equities the asset class typically provides. Within fixed-income strategies, sustainable or mainstream, the main driver of returns has been the big move up in interest rates, triggered by central bank intervention in their crusade to combat high inflation. Meanwhile, in equity markets there has been a style rotation that has penalised sustainable investments due to their typical growth factor bias. These performance issues have significantly slowed investor appetite for sustainable investments in the equity space. In contrast, the interest for sustainable fixed-income strategies has continued and indeed we have seen a plethora of new strategies. These have come in various flavours and forms, from existing strategies that have adapted their investment guidelines to include specific sector exclusions and a positive tilt to ESG factors, to the launch of new strategies with sustainable objectives or some with a more defined impact approach. Within the impact space, initially the focus was on strategies focused on environmental issues and climate change. However, following the pandemic, there has been a significant growth of social bond issuance and we are seeing a corresponding rise in both dedicated social bond funds and impact bonds with a diversified approach, which incorporates both social and environmental solutions. BlueBay Impact Aligned Bond A relatively recent strategy, the BlueBay Impact-Aligned Bond Fund was launched in May 2021. The fund is actively managed by Tom Moulds, My-Linh Ngo, Rob Lambert and Harrison Hill (pictured above, left to right), and does not reference any benchmark. While the managers have a total return orientation, they keep a core exposure to investment-grade corporate bonds and they benefit from the strong, firm-wide fixed-income resources. The fund follows a thematic approach, investing in issuers whose core economic activities provide solutions to social and environmental challenges. The portfolio is invested across four environmental themes (enabling a circular economy; ensuring clean and plentiful water; promoting clean and safe energy; and promoting sustainable mobility and infrastructure) and three social themes (achieving an inclusive society; building knowledge and skills; and ensuring good health, safety and wellbeing). There is a good degree of diversification as every theme will have an exposure of 5-20% at any time. There are also ESG exclusions applied, both product- and conduct-based, as well as a minimum ESG threshold that excludes the issuers with high fundamental ESG risks. For the selection of the issuers, they must fall within at least one of the impact themes defined by BlueBay, one of which is that at least 50% of the revenues or profits must come from a qualifying economic activity. We like BlueBay’s pragmatic approach that states while it is possible to deliver intentionality and measurability within the public markets, additionality is more clearly achievable via private markets, as, with private markets, the investments are for specific new projects. Therefore, we applaud their caution in defining this strategy as ‘impact-aligned’, rather than explicitly ‘impact’. Overall, we think this fund offers a unique approach to achieving positive environmental and social outcomes via investing in global credit markets. The fund invests in issuers demonstrating global leadership of climate action through labelled and unlabelled green bonds Wellington Global Impact Bond The Wellington Global Impact Bond Fund, managed by Campe Goodman and Paul Skinner (pictured above, left to right), is one of the few established, impact-oriented fixed income funds that goes beyond solely focusing on environmental issues. The impact investment process is well thought through. It considers the materiality of the impact activities to the issuer’s overall business (which must be greater than 50%), the additionality of the impact activities (where the issuer must fulfil unmet social and/or environmental needs) and the measurability of the activities (where the impact case must be quantifiable). These considerations have created a very solid base on which the team has built a highly credible impact strategy. Through their impact research, the Wellington impact team has identified 11 impact themes that fall under three broad categories: • Life essentials: affordable housing, clean water and sanitation, sustainable agriculture and nutrition, health. • Human empowerment: safety and security, education and job training, digital divide, financial inclusion. • Environment: alternative energy, resource efficiency, resource stewardship. The fund focuses on more than just delivering a positive social and/or environmental impact, as the managers also aim to provide above-market financial returns. The portfolio is well diversified with investments across the major fixed-income asset classes, including corporates, quasi-sovereigns/supranational organisations, securitised assets and municipal bonds. The quality of the impact reporting is another of this fund’s strengths. The portfolio is monitored through a key performance indicator (KPI) framework to ensure the investments are achieving their impact objectives. For every issuer in the portfolio, the impact team produces a detailed KPI report to quantify the level of impact generated by the issuer to understand its nature and alignment with the strategy’s themes, and to monitor progress over time. With a track record that goes back to January 2018, the Wellington impact bond team has so far delivered a strong track record of returns ahead of mainstream global fixed income indices, as well as achieving significant positive social and environmental impact through the issuers held in the portfolio. Pimco Climate Bond This is a responsible global credit fund that aims to help foster the transition to a net-zero economy while seeking risk-adjusted returns comparable to an investment-grade credit portfolio. The managers look to balance financial returns with positive impact, making sure clients are fairly compensated for the risk taken by delivering investment-grade credit-type returns. The Climate Bond strategy is run by Jelle Brons, Ketish Pothalingham, Grover Burthey and Samuel Mary (pictured above, left to right). It is built and managed from the bottom-up, bond by bond, based on the belief that insights from the research teams are essential to spot the likely winners of the transition to a net-zero economy. The fund invests in issuers demonstrating global leadership of climate action through labelled and unlabelled green bonds. The managers target specific low-carbon investments, as well as climate leaders in major economic sectors demonstrating innovative approaches to environmental sustainability. The process leverages the broader Pimco ESG platform to mitigate social and governance risks. The type of sustainable solutions where the fund invests are climate solution projects such as renewable energy, green buildings, sustainable supply chains, bank lending to support a low-carbon economy, or even food companies focused on plant-based products. We like the combination of green bonds – both labelled and unlabelled – with bonds issued by companies that are leaders in their respective industries in mitigating carbon emissions. This way, the managers can invest in a broad range of bonds, companies and sectors. Therefore, this fund could be considered as an extension to a strategy purely dedicated to green bonds. Importantly, the fund is delivering on its objectives of a reduction of more than 60% in carbon intensity versus the global investment-grade credit market average, a significant allocation to green bonds and issues aligned to the Paris agreement. Finally, the team of ESG analysts engage with 95% of the issuers.
‘The fund invests in issuers demonstrating global leadership of climate action through labelled and unlabelled green bonds’
‘The Wellington impact bond team has so far delivered significant positive impact through the issuers held in the portfolio’
‘We applaud BlueBay’s caution in defining this strategy as “impact-aligned”, rather than explicitly ‘impact’
Eduardo Sanchez Head of fixed income and absolute return research, Square Mile
Phoebe Stone, partner and head of sustainable investing, LGT Wealth Management
The Conference of Parties at its 27th meeting certainly knows how to put on a good show, but is it achieving its aim of uniting the 198 participating nations to take clear action against climate change?
What is COP? Conference of the Parties, or COP for short, is the annual meet-up for the United Nations Framework Convention on Climate Change (UNFCCC), where, as of this year, 198 participating nations come together to try to agree on policies and commitments for tackling climate change. Representatives from these nations attend as delegates and sit through negotiations and discussions, but people from businesses, NGOs, researchers and scientists, the media and other organisations can also attend as observers and press. How long has it been running? The UNFCCC was established at the Rio Earth Summit in 1992 when global co-operation was beginning to emerge, creating an arguably receptive environment for worldwide awareness of climate change, which scientists had been raising their concerns about since the 1970s. Formalising these aims, the first COP was officially held in Germany in 1995, establishing the Berlin Mandate. It has run almost every year since, with the Paris Agreement, signed by 196 parties at COP21 in 2015 and coming into force just before COP22, marking an important turning point for paving the way for mobilising private capital for climate change prevention. But as Nazmeera Moola, chief sustainability officer at Ninety One, told ESG Clarity at COP27 this year, COP26 in Glasgow last year “was the first time the finance sector pitched up at COP in size. It was the first time the US treasury secretary had ever been to a COP, so it was about the pledges as it was the largest quantum of capital being committed to fighting climate change”. What has it achieved? Arguably not much, considering it has been held 27 times and global temperatures are poised to hurtle past 1.5C. Much like we’ve seen at this year’s ‘implementation COP’, where discussions focused on how to put into practice last year’s commitments, COP 22, 23 and 24 were very much focused on how to put the Paris Agreement into place. For many, however, COP has become more about the side events – campaigns, product launches, report results, panel discussions and more – which are now scheduled around the COP calendar.
‘For many, COP has become more about the side events – campaigns, product launches, report results, panel discussions and more – which are now scheduled around the COP calendar’
ESG Clarity covers announcements at COP26 in Glasgow
Protestors in Egypt this year
Greta Thunberg addresses COP24
Opening Ceremony of the Marrakech Climate Change Conference 2016
Opening of UN Climate Change Conference in Paris 2015
The Green Zone in Sharm el-Sheikh
ESG Clarity interviews industry experts at COP27
What’s it like? This makes the conference a hectic affair. ESG Clarity has reported from the ground at two COPs – Glasgow and Sharm el-Sheikh – in the four years the publication has been running, covering live high-level announcements, but also investment industry side events and reaction. With the high-level negotiations squirrelled away in parts of the blue zone, many observers are confined to stalls in the pavilions (areas of the blue and green zone – the ‘civil society’ area – that can be bought up to hold events) with many protestors and other key climate voices restricted access even to these. This, coupled with debate over who is awarded sponsorship, has naturally led to cynicism. As one person tweeted in response to an ESG Clarity EU Committee member on social media: “Way too much at the fringes, which is swamping all the substance. It should be neither a festival for sustainability, nor a revenue opportunity for tourist resorts out of season, nor an excuse for yet more Ted talks – and absolutely not a selfie-opp.” A festival is a fairly accurate description of the atmosphere this year – our video editor likened it to “a big festival without the music”. This pretty well encapsulates the chaos, confusion, exhilaration, double-booking and subsequent FOMO, the sleep deprivation and the chance encounters with people from all over the world doing all sorts of important work (look out for an upcoming article on ESG Clarity Intelligence from a US student running an investment club at his college that the ESG Clarity team met on a COP27 bus). Whether this ‘festival’ can continue in this manner remains to be seen.
Click on arrows to scroll through images
Climate change cannot be tackled until food production and soil health have become a bigger part of the conversation. Recognition of this and investment in the farming industry will bring both opportunities and solutions
Soil is a crucial ingredient, not only in the production of healthy and delicious food, but also medicine, building materials, our clothes and fuel. Soil health is also at the front line of tackling climate change, through the carbon sequestration processes that soil enables. However, despite the central role farming has, accounting for a third of global greenhouse gas emissions, it has taken 27 Conference of Parties (COP) to the United Nations Framework Convention on Climate Change for agriculture to be granted a full day’s discussion. In acknowledgment of the lag in investment in the farming industry, during this year’s COP27 there was the announcement of $8bn (£6.68bn) of funding led by a US-UAE joint initiative. The funding commitments are focused on reducing carbon emissions connected to food production, but also reducing the impact that chemicals used in the production of food have on our environment. There was also an announced commitment from the Rockefeller Foundation to provide grants to 10 organisations scaling indigenous and regenerative agriculture practices around the world. The variety of different solutions to sustainable agriculture promoted at this year’s COP really demonstrates the range of approaches needed to tackle this issue and highlights the requirement to overhaul the agricultural system. Investment and commitment As fund selectors, this is an issue we have been engaging on with the managers of the funds held in the sustainable portfolios, to understand the challenges and opportunities they are seeing for investment in this space. We wrote to our managers to understand how they were tackling various aspects of farming, such as biodiversity, in their processes, and their responses varied from commitments to no deforestation through to examples of strategic rewilding using weeds for ground cover and indigenous mammals as pollinators. Exciting opportunities range from companies that are enabling the delivery of precision farming practices, that can be used by very large-scale agricultural players, all the way through to new agricultural practices entirely. Using precision farming technology results in lower volumes of chemicals being applied to crops, by targeting the areas and varieties that need it. We have also seen a return to more traditional methods of cultivation being readopted and farmers refocusing on replenishing soil nutrients through naturally occurring minerals, enzymes and worms in the place of added chemicals. In terms of engagement, our managers have been inspiring companies to record and report on metrics around water efficiency, uncovered land and biodiversity through habitat potential metrics, and on a broader scale engaging in policy through initiatives such as the Taskforce on Nature-related Financial Disclosures or the Natural Capital Alliance. While the eradication of using chemicals is certainly the best outcome for biodiversity, soil health and earth regeneration, taking steps to scale down usage is certainly of benefit to the soil and fields. It enables farmers to spend less on expensive fertilisers – an added value in the context of the current Russian invasion of Ukraine, which has sent prices of ammonia soaring – and it has also demonstrated an increase in crop yields. Nutrition initiative Encouragingly, at this year’s COP, an Initiative on Climate Action and Nutrition was also launched by Egypt and the World Health Organisation. The goal is to integrate the global delivery of climate change adaption with nutrition and sustainable food systems. These two things are symbiotically intertwined, and it places nutrition and food safety much higher up the priority list for nations. Climate change cannot be tackled without considerable attention paid to agriculture and soil health, and in turn food systems are being increasingly disrupted due to climate change. It is encouraging that these issues are increasingly seen in a less siloed fashion, and reflects the way we view climate change, biodiversity loss and agriculture within our investment selection process. These initiatives bring opportunities for businesses providing solutions but also an awareness of the practices that should be implemented as a standard by companies involved in agriculture.
Phoebe Stone Partner and head of sustainable investing, LGT Wealth Management
‘While the eradication of using chemicals is the best outcome for biodiversity, soil health and earth regeneration, taking steps to scale down usage is certainly of benefit ’
fund selector comment
Daniela Barone Soares CEO, Snowball
Investors have a vital role to play in helping build a green and secure energy future, says global head of sustainable and impact investing Matt Christensen
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors GmbH. For investors in Europe (excluding Switzerland) For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the management company Allianz Global Investors GmbH in the fund’s country of domicile, France, or the issuer at the address indicated below or www.allianzgi-regulatory.eu. Austrian investors may also contact the Austrian information agent Allianz Investmentbank AG, Hietzinger Kai 101-105, A-1130 Vienna. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established branches in the United Kingdom, France, Italy, Spain, Luxembourg, Sweden, Belgium and the Netherlands. Contact details and information on the local regulation are available here (www.allianzgi.com/Info). The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights. For investors in Switzerland For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the management company Allianz Global Investors GmbH in the fund’s country of domicile, France, the Swiss funds’ representative and paying agent BNP Paribas Securities Services, Paris, Zurich branch, Selnaustrasse 16, CH-8002 Zürich or the editor either electronically or by mail at the given address or regulatory.allianzgi.com. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors (Schweiz) AG, a 100% subsidiary of Allianz Global Investors GmbH. The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights. 2562998
Overhauling the world’s energy mix to create a greener and cleaner future may not be easy or straight-forward, but it is very necessary. Well-honed arguments are required to convince the public. Vested interests need confronting. Companies offering sustainable solutions need support. And the funding gap needs to be tackled urgently. The panic around energy security sparked by the war in Ukraine is the latest hurdle towards energy transition and it is important to explore how to overcome it. Russia’s abundance of oil and gas has led to reservations across Europe and further afield about relying on it. This raises the important question of whether energy transition and energy security are complementary or conflicting. Can both these goals be achieved? And if so, how? Tomorrow and beyond The traditional energy mix is not proving particularly robust. An overreliance on fossil fuels supplied by specific countries, has put many regions in a precarious situation. Shortages are now a reality and the subsequent economic damage could be high. All this accelerates the urgency to push ahead with the green energy transition. A shortfall of fossil fuels from Russia may have sparked a scramble for replacement supplies, but more sustainable and more secure sources of energy are the more reliable answer for tomorrow and beyond. The route map for getting there is already clear. The Intergovernmental Panel on Climate Change (IPCC) declared in April this year that to limit global warming to 1.5C by 2050, we will have to halve CO2 emissions by 2030. The energy mix needed to achieve these targets could require fossil fuel sources to drop to around 20-30% of supply rather than the current 80% level. Renewables should fill the gap by rising from the current 15% to 60-80% and nuclear could play an important role of between 5-10% of supply. Hydrogen and bioenergy are also thought to be increasingly important. Sustainable investors could have a vital role to play in building this green and secure energy future. There has been a significant shortfall in energy infrastructure investment in recent decades, particularly in Europe. The IRENA World Energy Transitions Outlook 2022 report highlighted that $5.7trn is needed in investment annually through to 2030. Allianz Global Investors and its parent company, Allianz, are committed to net zero and working with investors to facilitate the flow of capital into projects that promote climate goals and decarbonisation. Paradigm shift The potential investment opportunities available to sustainable investors can largely be categorised into three main groups. The first is supporting the transition from fossil fuels. This involves targeting companies and projects that commit to decarbonisation, demonstrate measurable changes in their operations and align with net-zero targets. The second is seeking renewable energy opportunities through investing in clean tech. Alongside traditional and emerging renewables, this approach could also involve investment in the sustainable development of raw materials that power the clean energy transition, such as rare earths. The third possibility for investors to consider is investment in climate solutions such as carbon capture utilisation and storage. The closing of the energy transition funding gap will likely need some important paradigm shifts and behavioural changes to ensure the greatest impact. Supportive governments must decouple energy consumption and gross domestic product growth so that economic growth does not have to rely on increasing energy consumption. If governments can separate the two then a greener future becomes more likely. Creative thinking is required to achieve this goal. Experts will need to come to a consensus on the most effective energy mix for the clean revolution. Policy will also need to be put in place to encourage behavioural changes that lead to lower energy consumption and greater energy efficiency. Economic growth must be possible without damaging increases in the use of fossil fuels. The energy transition cannot afford to stall. The future of the planet is dependent on momentum being increased. Energy security challenges are an additional stumbling block, but far-sighted investors may be considering what comes next. Supply shocks are rarely good for the supplier. The energy crunch may be causing pain, but ultimately it could diminish confidence in traditional energy sources pushing the world towards sustainable alternatives.
‘More sustainable and more secure sources of energy are the more reliable answer for tomorrow and beyond’
sponsored content | Allianz global investors
Top
Matt Christensen, global head of sustainable and impact investing, Allianz Global Investors
2
1
IPCC, April 2022 https://www.ipcc.ch/report/sixth-assessment-report-working-group-3/ IRENA, March 2022 https://irena.org/publications/2022/mar/world-energy-transitions-outlook-2022
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 | FIDELITY INTERNATIONAL
Jamie Harvey, portfolio manager of the Fidelity Sustainable Global Equity Fund, outlines how the UN’s SDGs provide a powerful framework for growth
As interest in sustainable investment has grown, there has also been an increased focus from investors looking to drive positive change by directing capital to address the world’s most pressing ESG issues. However, defining positive contribution is often difficult and involves a degree of subjectivity. It is also hard for sustainable investors to objectively measure the positive impact they are making through their stock selection. This is where the UN’s Sustainable Development Goals (SDGs) come in. Launched in 2015, the 17 SDGs each relate to an area where significant progress is required to deliver a sustainable and prosperous future for all people and the planet by 2030. These cover, for example, eliminating poverty and hunger, the shift to affordable, clean energy and climate action. In 2017, the UN added 169 underlying targets to the goals which include quantifiable measures to track progress. With this level of granularity, the SDGs provide a powerful lens through which to identify stocks benefiting from long-term structural growth trends, as well as measuring the positive impact a sustainable fund manager is achieving. They bring much-needed clarity and data-driven analysis to an otherwise qualitative endeavour. Improving the investment process We use the SDGs primarily to enhance our investment process. The goals help us identify the stocks with attractive growth outlooks. In our view, companies that directly address the targets and aims of the SDGs are more likely to see growing demand for their products and services and therefore benefit from attractive growth opportunities over the coming decades. The SDGs not only help us identify the best companies, they also help us to avoid the worst. By aligning to the SDGs, we are naturally drawn away from companies facing product obsolescence risk over the long-term, such as coal miners and fossil-fuel companies. Companies that adopt the SDGs are less likely to be caught in corporate misconduct issues such as discrimination, bribery and emissions scandals. As a direct consequence of investing in companies embracing the SDGs, we believe we minimise our exposure to such risks. With our extensive team of sector and ESG experts on the ground around the world, as well as our proprietary ESG ratings, Fidelity is uniquely positioned to pick the companies best placed to provide the solutions to help achieve the SDGs. At the same time, the focus is also on identifying companies with all the key financial attributes and valuation profile required to make a successful investment. Long-lasting change The UN estimates the annual cost for meeting the SDGs globally is in the US$5-7trn range. However, actual funding falls far short of that figure, equating to an annual gap of $2.5trn, with developing nations accounting for most of the deficit. For companies like ADS, Bank Rakyat and Sartorius Stedim, which are directly addressing the challenges encapsulated by the SDGs, this figure represents a large potential revenue opportunity, rather than an incremental cost. This gives us confidence that the growth opportunities ahead for companies aligned to the SDGs are stronger than ever. Private capital will be critical in addressing the funding shortfall. We believe the investment community has a vital role to play in allocating this capital toward companies that have the potential to make a positive difference, while also generating attractive financial returns. By embracing and integrating the SDG framework in the Fidelity Sustainable Global Equity Fund, we strongly believe that our investors are well positioned to enjoy capital growth over time, and help drive positive and enduring societal and environmental change. Learn more about the Fidelity Sustainable Global Equity Fund
‘The growth opportunities ahead for companies aligned to the SDGs are stronger than ever’
Jamie Harvey, portfolio manager, Fidelity Sustainable Global Equity Fund
Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and clients may not get back the amount invested. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. Changes in cur rency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The Fidelity Sustainable Global Equity Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It can also use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document (Key Information Document for Investment Trusts), current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1022/379990/SSO/NA
Investors and the Sustainable Development Goals | Thought leadership | PRI (unpri.org) Citing $2.5trn annual financing Gap during SDG Business Forum event, deputy secretary-general says poverty falling too slowly | UN Press
Source: United Nations, The Sustainable Development Agenda
Energy analyst David Maccarrone and utilities analyst Fred Barasi assess the impact on Europe’s energy and utilities sectors of diminished Russian gas flows
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. Copyright 2022 JPMorgan Chase & Co. All rights reserved. 09bf220111154449
Replacing Russian oil and gas is a challenge for European governments, but provided that this winter is mild, it is one that they are likely to be able to meet with imports of liquefied natural gas (LNG), increased oil-fired power generation, and cuts in both residential and industrial gas demand. In the longer term, energy supply should be further boosted as planned renewable energy projects start to come on stream. While the immediate threat of energy shortages may be manageable and gas prices have come off recent highs, energy costs remain very elevated relative to history. The link between electricity prices and gas prices is another problem. While renewables and nuclear power may currently be significantly cheaper, gas-fired power stations remain the marginal source of electricity generation in most European countries, and this fact is keeping electricity prices high. Breaking the link will not be easy, or quick. The electricity market is long established, and companies have made significant investments into new power stations with an assumption that the current model will continue. Nevertheless, some governments are attempting to renegotiate contracts with wind, solar and nuclear operators at a fixed price well below the prevailing forward price, in order to reduce wholesale energy costs. Many large renewable projects that are being built now, or are being planned, will also be contracted at fixed energy prices far below today’s prices. The attraction of windfall taxes The decoupling of electricity prices from gas prices should make a difference in the long term, especially if the crisis leads to a more rapid move to renewables, but it will take time for new lower-priced projects to come on stream. In the meantime, the unprecedented rise in energy costs continues to undermine business confidence, hit consumer spending and push many households into fuel poverty. Given the potential economic and social impact, we expect further (potentially co-ordinated) action from governments across Europe to help shield households and businesses from the worst of the energy price rise. At the same time, allowing utility companies to reap large windfall profits from electricity prices that are up to 10 times higher than the long-run average, or allowing oil and gas producers to rake in profits from soaring fossil fuel prices, is not socially acceptable in the midst of a cost-of-living crisis. Hence, the attractiveness of windfall taxes to governments looking to fund energy price caps for consumers. However, taxing Europe’s utility providers and energy companies may not provide all of the cash that governments need. With the cost of capping energy bills running to hundreds of billions of euros, governments will ultimately need to work out how much of the price increases they can allocate to consumers and how much they are prepared (or able) to absorb themselves. The recent market reaction to the UK government’s now scrapped spending plans highlights the risks posed by fiscal stimulus that is perceived as unsustainable. Utilities and renewables: a differentiated impact Most European electricity and gas suppliers hedge their power production up to two years in advance, so their earnings won’t fully reflect today’s prices until around 2024. While earnings therefore look likely to be capped in future by windfall taxes, cashflow is a more immediate concern, with several traditional power utilities tapping emergency credit lines in recent months to raise the cash collateral required to hedge against surging wholesale electricity and gas prices. The situation is more positive for utility providers with major renewables arms. While the profits made by renewable energy suppliers are also being kept in check by long-term fixed contracts that are based on electricity prices well below today’s level, contracted prices for wind and solar are likely to rise in the next round of auctions. Given governments want to encourage investment in renewables as part of the energy transition, the impact of windfall taxes on earnings from renewables should also be less than for traditional energy companies. As a result, we believe the outlook is positive for earnings across the renewables sector over the medium term. Oil and gas: diversified revenue streams Governments also have their eyes on the extra profits that are being earned by oil and gas producers as a result of surging gas prices. Further taxes on the energy sector are therefore to be expected. However, the oil and gas companies can only contribute so much more to government coffers, given already high marginal tax rates on oil and gas production in many European countries and that many earnings sources are generated outside of Europe. Furthermore, the risk to earnings posed by a fossil-fuel related windfall tax is mitigated to some degree by the fact that Europe’s integrated oil and gas companies have been diversifying their revenue streams away from fossil fuels and towards low-carbon energy production. While there has been a reluctance to invest in new oil and gas production because of expectations of a sharp drop in demand over the next 10 years, the oil majors have instead been shifting the balance of their energy production towards renewables. The broad strategy is to leverage their traditional strengths in oil and gas extraction by providing a gas backstop to deal with the intermittency of renewable power generation, complemented by new sources of revenue from battery storage and clean hydrogen solutions, and a commitment to low-carbon energy generation. Accelerated energy transition While oil and gas companies are embracing the energy transition, renewables are also at the core of the European Union’s response to the crisis, thanks to their ability to provide secure, cheap and low-carbon sources of energy. If planning processes can be expedited, governments have the opportunity to bring forward existing projects and kick-start new ones, significantly increasing the role of renewables in the energy mix. With the need to find cheap alternatives to gas accelerating the move to renewables, it’s the shift in Europe’s energy mix that may end up being the most significant long-term consequence of the current crisis for the European economy. For investors in utilities and energy stocks, while government price caps and windfall taxes may impact earnings, the energy transition tailwind should benefit companies in both sectors that have a high exposure to renewables and other low-carbon energy sources. Visit the J.P. Morgan Asset Management website for more sustainable investing insights.
‘Renewables are at the core of the European Union’s response to the crisis, thanks to their ability to provide secure, cheap and low-carbon sources of energy’
sponsored content | J.P. Morgan Asset Management
David Maccarrone, energy analyst, and Fred Barasi, utilities analyst, J.P. Morgan Asset Management
Despite today’s brutal economic headwinds, for investors focusing on innovations that make the world cleaner, safer, healthier and more inclusive, the long-term outlook is a positive one
For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. The views expressed are those of RLAM at the date of publication, which are subject to change, and is not investment advice. Telephone calls may be recorded. For further information please see the Privacy policy at www.rlam.com For more information on the funds or trusts 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.com Issued in November 2022 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.
We are living through a time of falling asset prices. It started with the most liquid assets – equity and fixed income – but may appear in less liquid assets, such as property and infrastructure, in the near future. This fall in asset prices has its origin in rising inflation, and therefore interest rate expectations. Interest rates, alongside future profits, are a core input into the value of assets and the higher they go, the less assets are worth. Given all the value of an asset is based on the future profits created from it, discounted back at an appropriate (interest rate-influenced) rate, it begs the question, what is the future worth? In recent decades, the future has been worth much more than in the past. If we go back to the early 1980s, it was a world of high inflation and double-digit interest rates. Over the next 40 years we saw a steady downtrend in inflation and therefore interest rates, as technology and globalisation, among other things, had a favourable influence. Equally there has been a sustained and material increase in the profitability of companies, as a combination of innovation and operational efficiency has allowed businesses to make much higher profits. Falling interest rates and rising profits have been a potent and positive influence on asset prices, one feeding on the other to result in a material increase in value. We are in a time of concern about the path of both these variables, which in turn is leading to lower asset prices. So, is the best time to own assets behind us? Yes and no. Interest rates matter There is little doubt the tailwind from falling interest rates is behind us. In a mathematical sense, it had to end. Falling from the 15% level of the early 1980s, we had reached levels close to zero. At best, interest rates would have remained flat, instead they have ratcheted higher as central banks seek to rein in inflation. The speed at which interest rate expectations have increased has been astounding. At one point, shortly after the UK government announced its new fiscal plan, fixed income markets were discounting 6% interest rates in the UK by the end of 2023! We doubt this will occur due to the economic damage it would inflict, but it is symptomatic of how unanchored expectations have become. Interestingly, interest rate expectations are now back to where they were in the 2000s, before the financial crisis and the first use of quantitative easing. Also, equity markets are strongly suggesting that interest rates in the range of 5-6% would be overtightening, as reflected by double-digit falls in September. It is possible that we have seen the worst of the adjustment in interest rates, and therefore fixed income, markets. Whichever way we cut it though, we will have to get used to a higher level of interest rates, at least for the foreseeable future, than in recent years. This has already lowered asset prices. Underlying factors remain in place More positive is the long-term outlook for the profit side of the equation. One of our favourite ways of thinking about the world is atoms, bytes and genes. Everything around us is made from one of them, so following trends in these areas is a great proxy for innovation and future profitability. In recent years we have seen the evolution of artificial intelligence (bytes), mRNA (genes) and semiconductors (atoms) in ways not predicted even a decade ago. Our sense from talking to the companies that we invest in is that we are only just getting started. We believe that innovation will continue apace, and sustainable investors who focus on innovations that make the world cleaner, safer, healthier and more inclusive will see the profitability of the companies they own increase in the coming years. In the short term this may be impacted by weaker economic conditions, but we suspect the trend towards decarbonisation, digitisation and improved healthcare – three of many areas sustainable investors focus on – will continue. Putting this all together, future returns may be lower than the past as only one of the two variables, profits, will be a tailwind in the coming years. That said this does not mean, provided the adjustment in interest rate expectations is behind us, that future returns for investors cannot be attractive. Indeed, fixed income looks much more attractive now after its correction, and equities have removed any overvaluation that may have been present at the end of last year. Amid all the recent pessimism may be a more favourable entry point for investors. In conclusion, we still think the future is worth more than the past, and that will be to the long-term benefit of sustainable investors.
‘The trend towards decarbonisation, digitisation and improved healthcare – three of many areas sustainable investors focus on – will continue’
George Crowdy, sustainable fund manager, Royal London Asset Management
sponsored content | royal london asset management
