September 2021
Roadmap to net zero
The interim milestones investment managers need to consider in the transition to a net-zero economy
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Investing for a positive future Artemis Investment Management
Positive change Baillie Gifford’s Kate Fox and Lee Qian
The tortoise and the hare Royal London Asset Management
2021 shapes as epic year for climate regulation T. Rowe Price
Putting private finance to work in Asia ThomasLloyd
We are delighted to unveil a brand-new look for the bi-monthly digital ESG Clarity magazine.
After launching in June 2020 and becoming extremely popular with readers, we wanted to make sure we continue to provide not only first-class analysis and commentary on the key topics of the ESG investment industry, but also bring it to you in an innovative multimedia format. We have moved away from the traditional ‘flip pages’ that mimic a print magazine and embraced an interactive platform that means users can read our industry-leading content alongside supporting animated images, video interviews and direct links to related content on our website. For our relaunched issue, and with so much talk about decarbonisation in the lead-up to UN climate change conference COP26, we have focused on the roadmap to a net-zero world and how the investment industry can play a part in getting us there. Scroll down to view this and more content covering climate, litigation, Japanese funds, ETFs and an exclusive comment from the UN Principles for Responsible Investment’s outgoing CEO Fiona Reynolds. While we have you, the editorial team are very excited to be heading to Glasgow to cover COP26 in November, and will be bringing you the key developments on a specialised website channel, as well as analysis and insights in the next magazine. Be sure to keep your eyes peeled for those.
Natalie Kenway Global head of ESG insights
Spotlight
COVER feature
Corporates, including financial services, have pledged net-zero carbon emissions by 2050 or sooner, but action shouldn’t be left until the last minute. Natalie Kenway explores the interim milestones that need to be considered – and fast
LGIM’s CEO Michelle Scrimgeour shares the group’s engagement successes, her role at COP26 and why she is so pleased to see the industry collaborating on climate
Engagement with consequences
Mercer’s Sarika Goel discusses greenwashing, the need for better stewardship and leaving the planet in a better state than we found it
‘Young people’s sustainable values are an inspiration’
Also in this issue ...
The outgoing CEO of the PRI reflects on her tenure before she steps down at the end of 2021
Evolution and the way ahead
As regulators increase their focus on ESG disclosure, corporates and their investors face being taken to court if they fail to deliver on their promises
Litigation risk
A look at the three funds in our Responsible Ratings Index that have the longest track record to find out if maturity breeds wisdom
On mature reflection
There are many types of ESG funds so it’s important to know exactly what your clients are looking for
The right path: How to choose an ESG ETF
Japan revises corporate governance code to help businesses develop their ESG and sustainability commitments
Japan’s medal contenders on sustainability
Throughout the UN General Assembly, the UNCDF will showcase its funding projects
Blended finance in action
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ESG Clarity INTELLIGENCE
Canaccord Genuity’s Patrick Thomas on the funds investing in plastics solutions and what the big consumer brands are doing to improve
Plastic problem
Baillie Gifford’s Kate Fox and Lee Qian explain how respons ibly deployed capital can be a powerful mechanism for change
Positive change
Craig Bonthron of Artemis describes what a positive future might be and how we can invest in it
Investing for a positive future
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ThomasLloyd on why investing in sustainable infrastructure in Asia will be critical
Putting private finance to work in Asia
Momentum on emissions targets builds ahead of COP26, reports Maria Elena Drew of T. Rowe Price
2021 is shaping as an epic year for climate regulation
RLAM’s Mike Fox makes the case for a period of market consolidation long enough to keep earnings and share price growth in line
The tortoise and the hare
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Craig Bonthron of Artemis’ impact equities team describes what a positive future might be and how we can invest in it
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The sustainability challenges the world faces are complex. Global warming, pollution and ecological damage, inequality in all of its forms, obesity, malnutrition and corruption all make structural change away from the 20th century consumer-industrial complex a necessity. Technological innovation gives us the opportunity to effect that transformational positive change. We are only at the beginning of this disruption and the opportunities for forward-thinking companies to capture economic value from this transition are immense. History teaches us that incumbent industries resist change, with the result that it takes place reluctantly and incrementally – if at all. Today, it is clear that systemic shifts are needed. So we invest in companies that can deliver transformational positive change and avoid those clinging to the past. ‘Responsible investing’ has been around for over 30 years in a variety of forms, but how much impact has it actually had on capital markets? Or on the world at large? We believe these traditional approaches have only achieved incremental change. To effect transformational change, a different, ‘positive-impact’ approach is needed. Positive impact investing is framed around three concepts: intentionality; materiality; and additionality. • Intentionality is about purpose. This means identifying companies that have built their culture around a bold purpose and a laser-like focus on their mission. • Materiality is about significance. The size of a sustainability challenge – and the scale of its solution – will determine the absolute impact a company can have. • Additionality is about transformation. This predominantly happens through disruptive innovation and not through incremental improvements to the status quo. Disruptive growth does not fit into a normal distribution pattern and nor do the financial returns it produces. We believe excess returns are primarily driven by the ‘long tail’ of extreme positive returns and that these returns are to be found amid the flux caused by disruptive innovation. To increase our chances of identifying outlier returns before the wider market, we position ourselves at the point where the biggest sustainability challenges are meeting the technologies that can solve them. We think this intersection is a fertile hunting ground for extreme positive returns. But how do we identify investment value in this world of fast-growing companies? The problem with hyper-growth companies is that they tend to look expensive on traditional valuation multiples. Yet evidence suggests the biggest winners in stock market history almost always look expensive just before they deliver their best returns. The power of compounding is consistently undervalued by the market. A company whose revenues are growing at 40% per year will see a tenfold increase in its revenues within just seven years; but a company growing revenues at 2% per year will take 116 years to deliver the same result. And what of companies delivering negative growth? For us, these low or negative growth companies are highly unattractive no matter how low their valuation multiples.
How to deliver real impact?
‘We invest in companies that can deliver transformational positive change’
Name Name, job title, Company name
What does disruption look like?
Valuing ‘hyper growth’
All data in the above chart is for illustration purposes only. The chart does not reflect any predictions of future revenue growth of investments made by the Artemis impact equity team.
Behavioural factors as a source of alpha
Investing in positive-sum outcomes
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FOR PROFESSIONAL AND/OR QUALIFIED INVESTORS ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. CAPITAL AT RISK. All financial investments involve taking risk which means investors may not get back the amount initially invested. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by: in the UK, Artemis Investment Management LLP which is authorised and regulated by the Financial Conduct Authority; in Switzerland, Artemis Investment Services (Switzerland) GmbH.
Investing successfully in exponential growth requires fundamental knowledge, patience and a willingness to be unorthodox. Moreover, determining the right price to pay for ‘exponential growth’ is extremely difficult for quantitative, passive and short-term traders – and is behaviourally challenging for fundamental investors to attempt. In fact, we believe the most consistent source of above-market investment returns are behavioural factors. Humans typically think in linear patterns and view the future with a significant bias towards the status quo. This results in investors missing significant investment opportunities because they look optically expensive or are too volatile (in the short-term). This is a source of investment opportunity for us. We believe in positive-impact investing; we also believe that genuine positive impact can only be delivered by active investors. Moreover, we are more likely to find positive impact where there is change – and we are most likely to find change where there is disruptive innovation. At the same time, we are conscious that appealing to virtue alone will not get us – or the world – very far. History shows that if a ‘virtuous’ product is to receive mass adoption it must be functionally better than the established alternatives. So if we are to succeed, it is essential that we deliver significant investment outperformance over the long term. We believe that viewing the strategic positioning and performance of our investments through a positive-impact lens dramatically increases our chances of doing precisely that. Find more about the team’s approach.
Organic revenue CAGR %
Extreme under-valuation often exists where high rates of growth are sustainable
Extreme over-valuation often exists where low or negative growth exists
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Baillie Gifford’s Kate Fox and Lee Qian explain how responsibly deployed capital can be a powerful mechanism for change
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RLAM’s head of sustainable investments Mike Fox makes the case for a period of market consolidation long enough to keep earnings and share price growth in line
For Professional Clients only, not suitable for Retail Clients. It is turning out to be another strong year in equity markets. As at 5 August, the MSCI World Index was up 14.7% and the S&P 500 17.2%, year to date. At RLAM we think this is largely justified, but there is a growing risk of a rapid ‘melt-up’, like that seen in the late 1990s. The big question is what happens next? For RLAM’s sustainable funds we would much prefer a period of market consolidation, or even a pullback, to keep valuations and earnings connected. But we are not convinced we are going to get it. We think a continued rise in equity markets is more likely than a healthy consolidation due to the near-perfect conditions. Bond yields are low, economic growth is strong and central banks are accommodative. Whether or not higher inflation proves to be transitory as bond markets appear to believe, or permanent, is the last point to prove. Generally, inflation has been on a downward trend on a multi-decade view. Should supply chains adjust to the stresses of reopening the global economy in recent months, it seems likely that inflation concerns will subside. At that point there will be nothing left to worry about, which typically is the point to start worrying. It would be the ‘crowning glory’ of an equity bull market that started in 2009, taking levels of optimism to new highs and could cause the many investors who have not participated in it to date, to become involved. Arguably, we are seeing this already in the US, with meme stocks. This optimism is not yet pervasive though, but it may soon become so. It seems counterintuitive to wish that our investments go up less, rather than more, in the coming months. Surely a melt-up is good for those already invested? Not necessarily. The most relevant comparison is the technology led market melt-up in the late 1990s – the dotcom bubble. The latter stages of equity bull markets are usually the highest-returning, as share prices detach from earnings and re-rate significantly. They are also often accompanied by a subsequent bust. The arrival of the internet in the 1990s was the driver back then. It allowed ‘blue sky’ thinking which quickly turned into dark clouds. Steady progress in investing is much better than boom and bust. For long-term investors, investment returns are created in holding rather than buying and selling shares. Therefore, high levels of market optimism can be very inconvenient if what is owned becomes overvalued, as it creates a dilemma on how to respond. To be clear, this is not the situation we believe we’re in currently, but would much prefer the share prices of the companies we invest in to move up in line with increases in their value, not because of excess optimism in markets. Were this to happen, however – if share prices become detached from their inherent value – we have an obligation to look for alternative investments to the ones we have. This is the inconvenient part, as we must sell what we know well and replace it with newer ideas that are more appropriately valued. Even this is difficult, as at the end of bull markets not much is ‘cheap’. In summary, our vote would be for market consolidation for a period long enough to keep earnings growth and share price growth connected. However, we are not convinced we will get it. 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.
We are (still) melting up
‘Steady progress in investing is much better than boom and bust’
Inconvenient optimism
• For further information, please visit rlam.co.uk/intermediaries • Find out more about our sustainable range at rlam.co.uk/sustainable • Browse our latest thought leadership articles here • View contact information
For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. Telephone calls may be recorded. For further information please see the Privacy policy at www.rlam.co.uk. The views expressed are those of RLAM 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 September 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.
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How 2021 is shaping as an epic year for climate regulation
Momentum on emissions targets builds ahead of COP26, reports Maria Elena Drew, director of research, responsible investing
Increasing momentum for action on carbon emissions
‘A focus of COP26 will be securing greater adoption of net zero targets’
How climate change affects company financial performance
Evaluating climate change in investments
Important Information This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction. DIFC – Prepared for use in Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only. EEA – Unless indicated otherwise this material is prepared by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only. Switzerland – Prepared for use in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only. UK – This material is prepared by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only. © 2021 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. 202109-1835872
For professional clients only. Not for further distribution. To be successful in limiting the adverse impacts of climate change, a fundamental shift is needed in the relationship between the economy and the environment. While financial markets are well positioned to play a leading role, ultimately they will only be effective if climate change regulation is in place. However, when it comes to climate change, a mismatch exists between policy and science. Over the past year, we have seen strong momentum to close that gap – a trend we expect to continue as we lead up to the 26th United Nations Climate Change Conference (COP26) in Glasgow in November. A focus of COP26 will be securing greater adoption of net-zero targets – more countries have signalled they will make announcements in the lead-up to the conference. Except for a handful of countries that were already advanced in implementing their climate agenda, direct legislation to underpin net-zero targets is largely absent. While we remain in the early stages in terms of implementation, it appears that the urgency of the situation is increasingly understood. Simply put, the odds of meaningful climate regulation coming into force is very high. Carbon dioxide (CO2) makes up about three-quarters of greenhouse gas emissions and is one of the more readily available environmental statistics. As such, it receives the most attention when it comes to climate change analysis. However, staying within a global temperature rise of 1.5C will require mitigating more than just CO2. In addition to regulation focused on power generation, energy efficiency and transportation, the task will require comprehensive regulation to mitigate methane (CH4), nitrous oxide (N2O), and fluorinated gases, as well as more sustainable land use and enhancement of carbon sinks. To date, most of the world’s climate regulation has focused on carbon – mostly within the power sector – but that is changing. To put the potential impact of forthcoming regulation into perspective, most estimates indicate that the world’s current climate change commitments put us on a path to 2.7-3.0C of global warming. This is based on climate commitments made through the nationally determined contributions (NDCs) submitted by signatories of the Paris Agreement in 2015. Using a statistically based probabilistic framework, the probability of staying below 2C warming is only 5% assuming a continuation of current trends. If all countries were to meet their NDCs, it rises to 26%. These low probabilities underpin the importance for net-zero commitments. While markets have anticipated some climate legislation coming into force, namely in select sectors directly impacted by energy transition, we do not see widespread evidence of dislocation in valuations across the broader economy. As new rules come into effect around the world, we expect that performance around climate issues will become increasingly more important to investment performance. Interestingly, we see a bifurcation in corporate approaches to climate change across all sectors of the economy. As legislative initiatives start to directly impact financial performance, we believe the differentiation between winners and losers will become evident (and potentially quite quickly). Of course, regulation is not the only factor moving the needle on how issuers are responding to climate change. Other important factors are innovation and consumer preferences. On the innovation front, new advances have driven down costs in renewable power, which has sped up deployment of renewable capacity. The International Renewable Energy Agency estimates that the 3.2 terawatts implied in current NDC power targets for 2030 should be met as soon as 2022. On the consumer preferences front, we see companies adding environmental labelling to products as well as increasing demand for more sustainable products such as meat alternatives. At T. Rowe Price our evaluation of climate change factors focuses on energy transition and physical risk, but we also believe that an issuer’s environmental footprint and track record are important indicators of how they may perform in a tightening regulatory environment. Climate change is increasingly a major concern for global communities, companies, our clients and our investment teams. The focus on how companies are working to mitigate the risks to their activities is only set to intensify, and COP26 and regulatory efforts will bring the issue further into the spotlight. Click here to read the full article.
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Liu & Raftery, Country-based rate of emissions reduction should increase by 80% beyond nationally determined contributions to meet the 2C target (Nature 2021).
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Investing in sustainable infrastructure in Asia will be critical in accelerating the transition to clean energy
The United Nations Intergovernmental Panel on Climate Change (IPCC) has delivered its comprehensive 2021 report on the state of global climate science. The numbers are staggering. The last decade was hotter than any period in 125,000 years, while atmospheric CO2 is now at a 2 million-year peak. The consumption of fossil fuels has combined with agriculture to push methane and nitrous oxide – also greenhouse gases – to the highest in at least the past 800,000 years. The IPCC’s Climate Report makes it clear that now is the time for action, not just talk. Within the next two decades, temperatures are likely to rise by more than 1.5C above pre-industrial levels, breaching the ambition of the 2015 Paris Climate Agreement. Only rapid and drastic reductions in carbon emissions in this decade, the 2020s, can prevent such climate breakdown. The OECD estimates that 60% of current global emissions are from infrastructure (current energy, transport, building and water infrastructure). Sustainable infrastructure will therefore play a major role in the fight to mitigate climate change and will determine our ability to meet the 2050 net-zero targets being announced ahead of COP26. What matters now, is a focus on actions and tangible solutions, and transforming the way asset allocators and investors think about investing in sustainable real assets will be critical to accelerate the transition to clean energy and supporting the global green transition to achieve net zero by 2025.
‘Good infrastructure is the backbone of any successful society and economy’
Background
For professional clients only, not suitable for retail clients. This is a financial promotion and is not investment advice. Telephone calls may be recorded. For further information please see the Privacy policy at www.rlam.co.uk. The views expressed are those of RLAM 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 September 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.
The opportunity: sustainable infrastructure in Asia
Emerging and developing countries’ increasing share of world output
Sustainable infrastructure: the growth opportunity
So why is there still a gap?
The way forward
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IPCC, AR6 Climate Change 2021: The Physical Science Basis OECD, Financing Climate Futures: Rethinking Infrastructure ThomasLloyd, The Carbon Cost of Economic Growth IMF World Economic Outlook Database, April 2021 United Nations Population Division, Department of Social & Economic Affairs IMF World Economic Outlook Database, April 2021 The Economist Intelligence Unit & UNOPS, The critical role of infrastructure for the SDGs UNCTAD, World Investment Report 2014 WEF, Supercharging public-private efforts in the race to net-zero and climate resilience Infrastructure Outlook, Forecasting infrastructure investment needs and gaps WEF, Supercharging public-private efforts in the race to net-zero and climate resilience WEF, Could infrastructure investment help tackle climate change? Refinitiv, Sustainable infrastructure: The green rush
Notes
Put simply, the financing gap for sustainable infrastructure is in large part the result of poor policies, institutional failures and lack of investor familiarity with greener technologies and projects. Given the rate at which governments need to build infrastructure, many will struggle to secure the financing to meet demand. Tight public sector budgets, particularly in developing countries, mean governments will need to tap into some of the trillions of dollars in global capital markets. The many challenges to infrastructure investments, from complex planning and potential construction delays to the often-large amount of time before assets generate cashflow and produce a return on investment, have historically deterred private investors who have stuck with traditional equities and fixed income. Of the more than US$120trn in assets under management by banks and institutional investors globally, infrastructure makes up only about 5%. The good news is that investors have finally begun to appreciate sustainable infrastructure as both a financial and an impact opportunity, as evidenced by record US$272bn in sustainable infrastructure projects across categories including wind, solar, waste and others that were announced in 2020. Investors have begun to see the benefits of exposure to sustainable infrastructure – backed by long-term, durable assets, infrastructure is highly resilient to economic or market volatility, and the level of demand is inelastic and does not tend to ebb and flow with market fluctuations. This brings true diversification benefits that are attractive to investors with a long-term investment horizon as real assets are mostly uncorrelated with other asset classes or listed markets. While capital constraints can make it challenging or impossible for governments to meet stated infrastructure development goals, there is now a growing demand from private investors seeking to align their capital allocation decisions specifically with the SDGs, with many adopting these as a reference point and using impact measuring tools to complement their existing methodologies. Investing though an ESG lens has recently been increasing, but we believe that greater good will come from a focus on impact – investing where money makes a real difference to the quality of life while still delivering market-driven returns. The alignment of interests between private investors and the infrastructure needs across emerging markets presents a clear opportunity to address the funding gap. It creates the ideal environment to attract investment in low carbon, climate-resilient, sustainable infrastructure projects. Supported by political will, effective institutions and ambitious regulation, the time is right to mobilise private finance for this urgent task.
Good infrastructure is the backbone of any successful society and economy. People need access to energy, transport, sanitation, hospitals and schools in order to thrive. Unfortunately, the way we have built much of this infrastructure over the last century has been extremely carbon intensive; both in construction and in operation. Europe reaped the benefits of its carbon-intensive industrial revolution in the middle of the 20th century and is now seeking to remedy its effects, but Asia’s own industrial revolution based on fossil fuels continues well into the 21st century. With 60% of the world’s population and a ‘carbon cost of GDP’ more than four times greater than the largest countries in Europe, the challenge of CO2 emissions in Asia is becoming ever more pressing. Economic growth and the rapidly increasing urbanised populations across the Asian continent have already boosted demand for energy and electricity across the region. Figures from the IMF show that while the G7 nations collectively grew by 40% over the last 20 years, the 30 countries which together comprise ‘emerging and developing Asia’ expanded by an astonishing 425%; more than quadrupling their GDP over the period.
Sustainable infrastructure plays a central role in meeting climate as well as wider environmental and development objectives, which is key to supporting the energy transition in developing countries. From a total of 3.74 billion people at the end of 2000, Asia has seen its population grow to 4.64 billion; a 25% increase in just two decades. Population growth has gone hand in hand with rising incomes. Indeed, emerging and developing economies today represent 59% of total global GDP in comparison with under 45% two decades ago (based on PPP-adjusted USD).
Economic growth creates considerable demand for the development of infrastructure in an environment where local governments and other funding sources are far from meeting it. The UN highlights the need for significant investment in infrastructure in the developing world to achieve the ambitious Sustainable Development Goals (SDGs) with emerging markets currently only receiving a fifth of global clean energy investment. There currently exists an annual investment gap (the difference between required and actual planned spending) of US$2.5trn in developing countries, which needs to be bridged to reach the UN SDGs by the target date of 2030. Around 75% of that gap is made up of critical infrastructure projects in the developing world. Clean energy investments in emerging markets need to grow by 700% by 2030 to meet rapidly growing demand. In total, investment required in India, Bangladesh, Vietnam, Sri Lanka, Indonesia, and the Philippines is estimated at US$7.9trn by 2040, with the great majority of funding needed from the private sector to meet the needs of their rapidly increasing urbanised populations.
Corporates, including financial services, have pledged net-zero carbon emissions by 2050 or sooner, but action shouldn’t be left until the last minute. Natalie Kenway explores the interim milestones that need to be considered – and quickly
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Introduction
The report from the Intergovernmental Panel on Climate Change drew a line in the sand in terms of the level of deterioration on Earth as we know it, and where it is heading. Scientific bodies tell us carbon dioxide emissions need to fall by about 45% by 2030 from 2010 levels, or the climate change repercussions will be devastating. In response, a number of companies have committed to reach ‘net zero’ by 2030, 2040 or 2050, and it has been pleasing to see so many of them recognise their role in this much-needed transition. However, there has been a lot of talk and little immediate action, prompting concerns these long-term targets will be forgotten and action will only be taken when it is too late. NN Investment Partners’ (NN IP) green bond analyst Isobel Edwards puts it plainly: “Too many companies and governments have been relying on green marketing. If companies had been focusing on implementing the advice that’s been given for years now, they could be in a good position to meet every target. “We have waited too long, and we are now in a tough spot where companies cannot gently transition but instead need to make deep investments in their full Scope 1,2 and 3 emissions net reduction.” Faced with the mammoth task of decarbonising the planet, it can be hard to fathom how financial services, in particular investment managers, can play their part in delivering on net-zero promises. This analysis aims to outline a roadmap for the investment industry to complete the net-zero transition and where pressure needs to be applied.
1. Initial steps
Net zero means reaching a point where the amount of carbon dioxide humanity is adding to the atmosphere is no more than the amount subtracted. This is no easy task, but there are some simple initial steps the investment industry can make. Simon Hallett, head of European endowment and foundation practice at Cambridge Associates, says: “The first milestone is collective agreement on the urgency of the situation. At a high level, the next indicator must be year-on-year emission declines without the benefit of a pandemic-induced lockdown. And that has to be seen within the next five years at the very latest.” NN IP’s Edwards adds there are some other key interim targets we need to meet, as highlighted in the recent report Net Zero by 2050, published by the International Energy Agency.
Net zero by 2050: A roadmap for the global energy sector
2. Government action
There have been extensive government announcements regarding emissions and the transition to a net-zero economy. The UK is targeting 68% reductions economy-wide by 2030, while in Europe government bodies are aiming for 55% by 2030, and many asset owners globally are looking at 50% by 2030. However, our track records in reducing emissions so far have been “abysmal”, according to Anastasia Guha, global head of sustainable investment at Redington. She says: “During a global pandemic, which saw most economies ground to a halt, we managed to reduce emissions by about 6.5%. We need to do this and more every year from now until 2030 to meet these targets. In the last decade (pre-pandemic) our emissions had been increasing every year – so unless we see serious policy interventions in the near term to meet national targets, it is difficult to imagine there will be a different result.” Industry commentators say there is a desperate need for greater clarity from governments. James Alexander, CEO of UK Sustainable Investment and Financial Association (UKSIF), claims there have been no clear signals from the UK government on what a net-zero economy looks like, and he urgently calls for more information on roadmaps, reporting frameworks and taxonomies. “There has not yet been a coherent signal that net zero is to be embedded in the DNA across financial services and government. There is an opportunity for the government to prove this year – COP26 is a good time to do so – that it thinks about net zero in everything it does.” Showing it is serious about the transition will likely propel corporates and consumers to follow suit. “The rule of the game is the government sets the rules, the tone and the objectives,” echoes Aegon’s responsible investment manager Gerrit Ledderhof. Specifically, industry representatives called for policies that put companies with brown assets and activities at greater transition risk, giving more power to regulatory bodies to penalise those who are not living up to their environmental promises, and clear net-zero targets that are calculated in terms of full Scope 1, 2 and 3 emissions. Neuberger Berman’s Sarah Peasey, director of European ESG investing, adds: “Governments must commit to more aggressive climate policies. Unlike previous shocks to the global economy, climate change offers no historical precedent, therefore this requires a co-ordinated approach to finance the decarbonisation of the economy.”
3. Regulatory activities
Last year, ESG Clarity reported how responsible investing is the first part of the industry where regulation has had to play catch-up. Now, after rapid developments, policymakers across the world have put in place legislation that requires companies and funds to improve – and prove – their ESG credentials. As part of its Green Deal, the European Commission has put in place a taxonomy for green products and the EU Ecolabel for retail financial products. The Sustainable Financial Disclosure Regulation (SFDR), launched in March, allows asset managers to categorise the level of ESG integrated into each fund, and MiFID II requirements mean advisers must consider clients’ sustainability preferences in portfolios. The UK has become the first G20 country to mandate the Taskforce for Climate-related Financial Disclosure (TCFD) and the Securities Exchange Commission in the US is preparing to adopt regulations that will help standardise the way companies disclose relevant ESG information.
Fiduciary duty The investment industry should be making sure the companies it allocates assets to have business models that are aligned with a net-zero future. Redington’s Guha explains: “It is incumbent upon investment managers to align their portfolios to Paris goals of limiting the planet warming to 1.5C. This means cutting carbon emissions and investing in technologies and processes for carbon removals over the next 30 years. Investment managers should look at where most of their emissions are coming from, and use engagement and portfolio allocations to reduce these emissions. They should also ensure all their other investments make a substantial contribution towards creating a low-carbon economy. This has to be a total portfolio and total economy approach.” Lombard Odier Investment Management’s (LOIM) Thomas Hohne-Sparborth, senior analyst in the sustainable investment research and strategy team, adds: “It is part of our fiduciary duty to understand how climate change will impact portfolios. The financial impact is going to be significant so investors should take it very seriously.” See LGIM’s CEO’s views on the asset management industry’s responsibility in the net-zero transition in this edition.
‘Investment managers should look at where most of their emissions are coming from, and use engagement and portfolio allocations to reduce these emissions’
Anastasia Guha, global head of sustainable investment, Redington
Funds and products
Funds and products The demand for responsibly invested products has been described as ‘exponential’ over the past few years (see table below). In response to this demand, asset managers have launched new products, transitioned existing products into ESG vehicles and sought to integrate ESG into all parts of investment frameworks. Aegon’s Ledderhof says: “We are seeing the full portfolio transitions and pension and mutual fund companies move billions from standard investments to those that are aligned with a sustainable future.” But the focus should now be on funds that are not considering whether their investments are responsible. NN IP’s Edwards adds: “It’s great if ESG and environmental funds are able to put strict thresholds and restrictions in place to ensure companies without true transition pathways and green assets are not receiving investment, but it’s even better if non-ESG and environmental funds are stepping up to the plate as well. Investment management needs to step up and demand more of non-ESG funds.” Another element that needs focus is portfolio reporting. Director of responsible investing at Square Mile John Fleetwood recommends asset managers report on the percentage a portfolio has in companies with net-zero targets, and then identify how much they would like to see this increased by. “It should lead to further engagement with companies and investors, and a better standard of reporting,” he says. Fleetwood predicts the majority of asset managers will be doing this within the next three to five years.
Global sustainable funds Q2 2021
Engagement
Fiduciary duty
Engagement Engagement with companies on their net-zero transitions is critical and asset managers are in a vital spot to encourage investee firms in the right direction. Christine Delivanis, vice-president at CRA Sustainability, recommends investment managers scrutinise business models by asking management about plans to get to net zero, question how credible that is, request science-based targets (see boxout 5), interim targets, costs involved, where the responsibility lies (is it with senior management?) as well as their investments. “It is a pretty intensive exercise, but it gives a sense of whether the plan is verifiable,” she notes. Of course, each sector will have its own unique roadmap and this must be considered in engagement exercises. LOIM’s group head of sustainable investment research and strategy Chris Kaminker says: “It is important to understand what the roadmap looks like for individual sectors, and then you can understand which companies are emerging as the climate leaders and how credible plans are.” However, he highlights a problem is parts of the asset management and financial services space are reducing their funding towards the highest emitters or excluding them from portfolios completely. While this may suit certain clients with the highest green preferences, it also slows down the transition. “We need to move away from this idea that we all need low-carbon strategies. We either have low carbon for a long time, or a rapid transition slide. The biggest emitters are where the biggest impact can be achieved.” For example, an ESG fund that holds a steel company may be criticised, but the fund manager is most likely engaging with the company to lead the transition. “We need to educate on what the transition will look like, taking the highest emitters with us,” Kaminker says.
Collaboration
Collaboration Many asset managers have formed investor groups to put pressure on listed companies regarding their climate and net-zero policies. ShareAction and ClimateAction 100+ have brought together shareholders, trillions of pounds of society’s savings and pensions pots to ensure a joined-up approach to the transition. Last year, the Net Zero Asset Managers Initiative was formed, where groups committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner, in line with efforts to limit global warming to 1.5C. This will be achieved by working with asset owners to set their own decarbonisation goals, setting targets for proportions of AUM to be aligned with net-zero emissions, put in place engagement strategies and create investment solutions that focus on climate change mitigation. As at 12 September 2021, 128 groups had signed up, representing $43trn in AUM – almost half of the entire asset management sector globally in terms of total funds managed. The full commitments can be viewed here. According to Robeco CEO Gilbert van Hassel, this kind of collaboration is at the heart of a push for sustainability: “Asset managers manage a lot of assets. Asset owners have tremendous pools of money. Money speaks. If we start investing this money more towards the longer term and towards sustainable solutions, things can go very, very quickly.”
4. Investment manager action
5. Science-based targets
The three defined scope emissions
Disclosing science-based targets was mentioned by nearly all those interviewed by ESG Clarity, for companies to demonstrate they are committed to a climate-secure world. The Science Based Targets initiative says these will provide companies with a clearly defined path to reduce emissions in line with the Paris Agreement goals, helping prevent the worst impacts of climate change and future-proof business growth. Aviva Investors’ Rick Stathers, senior GRI analyst and climate specialist, describes science-based targets as an “important tool” that allows fund managers to align engagement and reporting activities and is one thing that can be clearly asked for. They are also linked to Scope 1, 2 and 3 emissions enabling companies to assess their carbon impact, as well as those in their supply chain.
6. Offsetting
Carbon offsetting is controversial, but commentators agree it has a role to play particularly in hard-to-abate sectors. LOIM’s Hohne-Sparborth says offsets should be used in the context of “getting us across the line”, but Square Mile’s Fleetwood highlights they cannot be used to achieve science-based targets. “The right way is to do everything else to reduce carbon impact before turning to offsetting. Companies relying on these will need to change as they won’t be able to get away with just offsetting for much longer,” Fleetwood says. For investors, green fintech company Sugi recently launched an app that allows users to measure their portfolio’s carbon impact and offset individual segments or entire portfolios. Sugi CEO and founder Josh Gregory says: “There are a number of valid reasons for investors to have holdings in higher-carbon industries, which is why we’re enabling investors to rebalance their impact through our new offsetting feature. “Offsetting in any capacity doesn’t let companies off the hook. The pressure still remains on companies to decarbonise their operations and value chains.”
7. Investor pressure
Retail and asset owners have been making it clear ESG is a very important part of their decision-making criteria when choosing an asset manager, but ESG Clarity interviewees say this pressure should be elevated. UKSIF’s Alexander comments: “They need to be asking the hard questions – for proof of evidence. It’s incumbent on everyone to be demonstrating this is at the core of their values and being very critical when looking under the hood [of investment products].” He adds investors should be asking about key targets, progress towards them and how their money is having a real impact on the world and society. We are seeing changes in consumption habits: fossil fuels are being traded for renewable energy companies, meat is being swapped for more plant-based options and individuals are considering the necessity of travel. Alexander adds: “This is the first year where rich countries are starting to see the effects of climate change: fires, floods, droughts. It has been happening in emerging markets for years. Voters will no longer be ignoring these issues.” Again, Square Mile’s Fleetwood focuses on disclosure calling for asset managers to report on percentages of their portfolios to align with net zero, he says financial advisers should be putting the pressure on, too. “They need to be exhibiting preferences for companies that have those net-zero percentage of portfolios in place and demonstrate demand for reporting, pushing for groups to include Scope 3 emissions, as well as 1 and 2.” Nuveen’s head of responsible investing Amy O’Brien adds: “Investors have an important role to play in advocating for clear and consistent disclosure requirements for companies. The ability to steer clients’ assets into companies that are well positioned for the low-carbon transition is reliant on those companies disclosing clear and consistent climate risk data.”
‘It’s incumbent on everyone to be demonstrating ESG is at the core of their values’
James Alexander, CEO, UKSIF
Contributors
• James Alexander, CEO, UKSIF • Anastasia Guha, global head of sustainable investment, Redington • Christine Delivanis, vice-president, CRA Sustainability • Chris Kaminker, group head, sustainable investment research & strategy, Lombard Odier Investment Management • Thomas Hohne-Sparborth, senior analyst, sustainable investment research & strategy, Lombard Odier Investment Management • Rick Stathers, senior GRI analyst, climate specialist, Aviva Investors • John Fleetwood, director of responsible investing, Square Mile Investment Consulting and Research • Gerrit Ledderhof, responsible investment manager, Aegon • Rupert Krefting, head of corporate finance & stewardship, M&G • Isobel Edwards, green bond analyst, NN Investment Partners • Dominik Hatiar, regulatory advisor, EFAMA • Simon Hallett, head of European endowment & foundation practice, Cambridge Associates • Amy O’Brien, head of responsible investing, Nuveen • Sarah Peasey, director of European ESG investing, Neuberger Berman
Click on dates below to reveal milestones
The group’s overall engagement strategy consists of a number of elements. The firm created its Climate Impact Pledge in 2016, which was expanded to cover more than 1,000 global companies last year. It’s a dedicated programme focused on conversations with companies in 15 climate-critical sectors. A report is published each year on the outcome of engagement and the most recent revealed LGIM divested from four companies due to their lack of response on climate change. Scrimgeour is keen to add divestment, however, is the last resort. “We believe in active engagement, and engagement with consequences. This means with our Climate Impact Pledge we will look to raise the standard, and be very clear on what we're expecting companies to do in that transition to net zero. Although we prefer to stay engaged, we ultimately will divest if we think that's the right thing to do.” Overall, LGIM carried out more than 650 company engagements last year, many of which involved talking to stakeholders about surviving and thriving through Covid-19, the CEO says. Climate remains a key topic for engagement. “Asset managers have a pivotal role to play. We're working with our clients and asset owners on how they decarbonise their portfolios," says Scrimgeour. "We're engaging with companies, holding them to account and, ultimately, channelling capital towards the areas we think are going to be sustainable long term and generate returns.” She adds that looking beyond the ‘E’ into social and governance are equally important, and the group has started discussions on the living wage, health inequality and ethnicity on boards. “We've been talking to companies, governments and regulators around the world [about board diversity], and we are seeing change, particularly for gender diversity. The expectations are understood.” In September 2020, LGIM engaged with the 44 S&P 500 and 35 FTSE 100 companies whose board membership lacked ethnic diversity. It requested they have at least one director from a minority background on their board by the end of 2021. LGIM pledged to start voting against the chair of the board or of the nomination committee if there was no ethnic diversity at board level from 2022. This aligns with the Parker Review, which expects FTSE 100 companies to have at least one ethnically diverse board member by end of 2021. “We felt it was time to embark on efforts to improve ethnic diversity at board and executive level. This is one of our core beliefs and we have a responsibility, not just to our clients but to society as a whole. LGIM has come a long way already, but we know there is more we can do.” The proof will be in the pudding come end of 2022 when LGIM divulges its diversity engagement outcomes. Another key focus for Scrimgeour in the coming months is the UN Climate Change Conference COP26 in Glasgow, where she will play a prominent role. “I'm thrilled to be to be co-chairing the Business Leaders Group with [COP26 president] Alok Sharma,” she says. “It is a chance for companies to collaborate across industries and sectors. What we're trying to do with this group is accelerate the private sector commitment in the race to net zero. We're doing that through the individual companies we represent, but also by representing our sectors and trade bodies [Scrimgeour is also deputy chair of the UK’s Investment Association].” She also acknowledges her role means helping the countries that “are not quite there” in terms of understanding and tackling climate change. “I know that's one of the ambitions of COP26. It is a privilege to be part of this. It's giving me genuine insight into what some of the leading companies from other sectors are doing themselves.” She also notes the focus on financial services for this year’s summit and that there will be repercussions for the investment industry post-COP26. “Asset managers need to understand the role they play. It's time for action. There is a really significant investment opportunity to create sustainable economies and sustainable companies in which we can invest for our clients for the future.” She flags the UN-convened Net-Zero Asset Owner Alliance for creating the Glasgow Financial Alliance for Net Zero, uniting banks and financial institutions including LGIM, and urges more collaboration. “Pulling asset owners and managers together can raise standards and get policy impact,” she says. “This is not something single companies can do. In my career, I haven't seen this level of collaboration. It's good to see and is absolutely necessary.” On this point, Scrimgeour says the investment industry will transform as the need to collaborate becomes pivotal. ESG Clarity has reported on many investor groups and alliances that have been formed, namely the Net Zero Asset Managers Initiative and Finance for Biodiversity, both of which LGIM is a signatory. “Whatever the next 10 years will bring, it's going to feel very, very different to the past 10,” she says. She believes the trigger of Covid-19 “will be looked back on as a significant event in how the world thought about its existence”. “The next time anything like this happens it will be absolutely critical that the world is operating in a more sustainable way.” Scrimgeour adds: “It's not an option to delay action. To its credit the investment industry gets that, which is why there is a focus on collaboration. There is a real energy around seeing what the opportunities are to work together and set the path.”
By Natalie Kenway
‘Whatever the next 10 years will bring, it’s going to feel very, very different to the past 10’
Michelle Scrimgeour, CEO, Legal & General Investment Management
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COP26 for business
Active engagement
Click to read Michelle Scrimgeour’s biography
As the 12th largest fund firm in the world, Legal & General Investment Management (LGIM) certainly has influence when it comes to engaging on ESG issues and pushing for better industry standards, something CEO Michelle Scrimgeour says it puts to good use. A significant share of the firm’s $1.8trn (£1.3trn) in assets under management are held in index funds, which, according to Scrimgeour, puts the firm at an advantage when it comes to active engagement, as active and passive portfolio assets can be used together to implement real change. “The role of stewardship is to advocate for change and raise market standards,” she highlights. “Whether the style of investment is active, passive, real asset or private investment, ultimately it is the context that is important. Our core of active engagement is what really drives the success of LGIM.” Using its index fund business, the group can also encourage higher ESG integration at the benchmark level, she adds. “We create and customise benchmarks with ESG factors embedded in them to meet certain client criteria and needs, and I see that increasing over time.”
The next decade
‘In my career, I haven’t seen this level of collaboration. It is absolutely necessary’
Michelle Scrimgeour biography
Michelle Scrimgeour was appointed CEO of LGIM in July 2019. She has spent her career at major global firms and has extensive asset management experience across investments, distribution, product, operations, risk and control functions. Before joining LGIM, Michelle was chief executive officer, EMEA, at Columbia Threadneedle Investments. She is on the board of the Investment Association, a member of the FCA’s Practitioner Panel and is co-chair of the COP26 Business Leaders Group.
Sarika Goel joined Mercer in 2010 to lead the firm’s coverage of sustainable investment strategies within listed equities. In August this year, she was appointed global head of sustainable investment research. ESG Clarity caught up with Goel to find out how her new role has been going so far and what she expects from the ESG space. This newly created role expands Mercer’s focus on sustainability in manager research, where I’m providing direction and leadership for sustainable investment research across asset classes. This includes integration, research on new/emerging sustainable investment themes and strategic research focused on bringing these ideas into client portfolios. I moved to London at the peak of the market in 2007 and experienced the full crash in 2008. During this time I came across a handful of sustainability-oriented investment strategies (there weren’t many around back then), where the focus was so much broader than purely financial, and whose returns withstood the challenge. This kickstarted my interest and drive towards sustainable investing. On a more personal level, I have a large extended family with numerous nieces and nephews who have a much clearer understanding of sustainability than I did at their age. Their values and the way they’re making personal choices is a huge inspiration, especially given there is little separation between what they are learning in school and what they are doing in their daily lives when it comes to sustainability. Most importantly, I have a six-year-old child and so I think a lot about the world he will inherit. Seeing the direction we’re headed in, with the increasing scarcity of natural resources and the impact climate change is going to have, makes me determined to live up to the adage of leaving the planet in a better way than I found it. Not surprisingly, greenwashing is the biggest red flag, as we continue to see a plethora of sustainability-focused strategies being launched or relabelled. Similarly, the increasing focus by asset owners on the evidence and transparency of integration, and the potential lack of clarity of this in portfolios aimed to be ESG-integrated or sustainability-themed, is worrying. Another fed flag is reporting on impact versus impact investing, or identifying sustainability-themed strategies being masked as impact. There is a difference. All companies likely have some impact, but not all companies are focused on environmental or social impact as their business purpose. This is an area that continues to require improvement and transparency. The recently released set of signatories to the UK Stewardship Code demonstrates the dangers of greenwashing in stewardship as well, with a third of those seeking to be accepted missing the cut. Fixed income and liquid alternatives (hedge funds, other diversified macro strategies) continue to be areas of focus, with progress on how managers are embedding sustainability into their approach. All asset classes have areas that need improvement, be it through data availability and quality, understanding material ESG in asset classes that are wide-ranging in terms of investment style (fundamental versus macro liquid alternatives) or properly assessing the physical risks of climate change in real assets. Asset managers and owners will continue to coalesce and provide momentum to net-zero initiatives and frameworks. We can also expect better stewardship beyond listed equities and more sustainability solutions across all areas of the market, specifically around climate transition, biodiversity, circular economy and climate adaptation. There will be more socially-oriented strategies, such as those aligned to various UN Sustainable Development Goals, especially with the social taxonomy coming in 2022, and we might see growth in fixed income strategies. Finally, there will be more focus on measurement and incorporation of biodiversity and natural capital.
By Natasha Turner
‘Seeing the direction we’re headed in, makes me determined to live up to the adage of leaving the planet in a better way than I found it’
Sarika Goel, global head of sustainable investment research, Mercer
What are your personal drivers for being in this profession?
What does your new position involve?
What ESG red flags are you are seeing most during your research?
Which asset classes need to improve on ESG/sustainability?
What developments can we expect in the space in the next year or so?
Sarika Goel biography
• Mercer, Aug 2010 - present Goel spent 10 years at Mercer as a responsible investment research manager, leading on ESG research across the firm and across strategies. During that time she also co-authored The Pursuit of Sustainable Returns: Integrating ESG and Sustainability by Asset Class’and was co-chair on the Vine, Mercer’s network promoting gender diversity. She took on the role of global head of sustainable investment research in 2021. • RBC, 2007 - 2010 Prior to joining Mercer, Goel spent three years at RBC Wealth Management in London in the advice and discretionary business groups as a research analyst. • Scotia Capital, 2005 - 2007 Goel spent two years as an equity research associate at Scotia Capital in Toronto, Canada, covering the Canadian Banks and Diversified Financials sectors.
Click to read Sarika Goel’s biography
While for many the rise of ESG issues across the financial services landscape may seem meteoric, in fact it has been a much slower burn, spanning many decades. As it stands today, there is plenty to be optimistic about, particularly if the growth in the Principles for Responsible Investment’s (PRI) global signatory base over the past three to five years is anything to go by. An increase in numbers is one thing, of course, but importantly we are also seeing this translate into more widespread uptake of ESG principles, and a maturing of responsible investment philosophies and practices. More firms are implementing ESG considerations into their investment activity and their architecture to support this has drastically improved. It’s a timely change. By now, we are all familiar with the scale of the challenge of the climate crisis and the existential threat it presents to people, the planet and our way of life. The impetus to deliver on the Paris Agreement and the UN’s Sustainable Development Goals has never been stronger. With this, shareholders’ expectations are also shifting, driven by increased visibility and urgency around salient ESG issues. The widespread acceptance of how important these issues are also speaks to the significant changes we’re seeing in how responsible investment is viewed more broadly. Since the inception of the PRI, the challenge has been convincing the sector ESG issues are material, that they are investment issues and that acting on ESG issues does not constitute a breach of an investor’s fiduciary duty. The misplaced notion that ESG investing means sacrificing returns has been a persistent myth that many organisations and individuals believed. The PRI has worked hard to dispel this myth by undertaking extensive academic and legal research, and through countless presentations and engagements with both the investment and corporate world. Alongside this, to support the development of responsible investment, we have worked to build the practice that underpins the theory – manifesting in the creation of our six principles and the PRI as a responsible investment organisation. We are designed to bring the industry together and to develop practices and norms, including our reporting and assessment function, the production of our educational materials, engagement with policymakers and regulatory authorities, and establishment of collaborative engagements. As sentiment has shifted and responsible investment has entered the mainstream, we’ve continued to grow as an organisation. The PRI has seen its largest ever annual influx of asset owner signatories in 2020/21. It has taken less than one year for the most recent 1,000 signatories to join the PRI, compared with six years for our first 1,000. In June 2021, we welcomed our 4,000th signatory. The PRI’s priority has always been to promote responsible investment – to bring it to the mainstream, encourage its wider adoption, to promote best practice and, in turn, the development of infrastructure and frameworks to unify this best practice. The organisation will continue its vital work on all of these fronts and will increasingly play a role in ensuring signatories are upholding the six principles. This work is far from over and it is time to push many in the sector to move from commitment to action. Take climate change, for example, which is undoubtedly the number one issue our signatories are focused on. Despite this emphasis, only a few hundred have actually set net-zero targets. So, we need to provide a strong framework for these commitments to be made, and then support the sector in making the real changes that will shift the needle on climate change. Not only that, but we need to expand the scope of much existing responsible investment activity. We are also working hard to elevate the ‘S’ in ESG, which historically has been overlooked. Issues such as human rights, modern slavery, labour rights and living wages need to be moved up the list of investors’ engagements with companies. Human rights aren’t an optional extra for ESG. Put simply, it’s never acceptable to exploit others to make money, and investors need to make that point clear to their portfolio companies. As I look back over my tenure as CEO at the PRI, my overarching feeling is one of optimism for the future of the industry. The willingness to address responsible investment issues is undoubtedly present. There are smart, dedicated people throughout the industry who are working extremely hard to bring about this change. However, the sector and global government need to do more. It’s past time we move from commitment to action and make the difficult but necessary changes to the way we do business, to ensure a safe and prosperous future for ourselves and our planet.
Picture caption to go in here
Busting myths
Shift the needle
Plastics solutions funds over five years
‘The impetus to deliver on the Paris Agreement and the UN’s Sustainable Development Goals has never been stronger’
Fiona Reynolds, CEO, Principles for Responsible Investment
Fiona Reynolds biography
Fiona Reynolds was appointed CEO of the PRI in 2013 and has more than 25 years’ experience in financial services, particularly in the pension sector, where she has worked with the Australian government. Prior to joining PRI, she spent seven years as the CEO at the Australian Institute of Superannuation Trustees, an association for Australian asset owners, and has also formerly been a director of AUSfund, and been on the boards of Industry Funds Credit Control, Australia for the UN High Commissioner for Refugees and the National Network of Women in Super. In 2018, Reynolds was named by Barron’s magazine of one of the 20 most influential people in sustainability globally. She serves on the board of the UN Global Compact and is the chair of the Financial Services Commission into Modern Slavery and Human Trafficking. Additionally, Reynolds is a member of the International Integrated Reporting Council, the Global Advisory Council on Stranded Assets at Oxford University, the UN Business for Peace Steering Committee, the Global Steering Committee for the investor agenda on climate action and the Steering Committee for Climate Action 100+. She has been a member of the UK Government Green Finance Taskforce and the advisory board for the Green Finance Institute. She steps down from her role as CEO of the PRI at the end of 2021 to return to family in Australia. It has been announced she will become CEO at Conexes Financial in 2022 and is to be a founding member of the PwC Australia ESG Advisory Group.
Click to read Fiona Reynolds’ biography
As worldwide regulators increase their focus on ESG disclosure, corporates and their investors face being taken to court if they fail to deliver on their promises
As countries around the world move from voluntary to compulsory ESG disclosure regimes and stricter ESG regulation, thoughts are turning to the legal questions evolving within this fast-developing area of the investment space. This is happening in the context of rapid developments in environmental policy and higher expectations in terms of companies’ ESG disclosures in the lead-up to this November’s UN climate change conference COP26, as well as increased scrutiny on business practices and portfolio holdings, and the harm these can cause. Litigation will increasingly become something to be added to investors’ toolkits, but fund groups should also be aware of how it can be used against them. Square Mile Investment Consulting and Research’s chief operations officer Jock Glover says some asset managers are being cautious in choosing Sustainable Finance Disclosure Regulation (SFDR) (click here to see a roundup of global regulation) categories for their funds amid concerns of getting it wrong and then needing to downgrade or, worse, face litigation. He says: “When it comes to classifying funds as SFDR Article 9-compliant – in effect having sustainable investment as the fund objective – some groups are taking their time for fear of making an error in haste and ending up subject to legal action for misrepresentation.” In July this year, fund groups won a second reprieve for the date the regulatory technical standards (RTS) are applied under SFDR. The RTS will now apply from July 2022 instead of January 2022. Bloomberg Intelligence’s senior government analyst Sarah Jane Mahmud says this may seem like a win for fund groups operating in Europe but, in fact, amounts to greater legal risk for them. “First, we believe the delay raises legal risk – highlighted by regulatory probes into DWS’ sustainability disclosures – because managers are operating in a vacuum as to how they should categorise their funds,” she explains. “Second, the delay suggests the new standards will be highly complex and compliance will take more time.” The case Mahmud refers to is the recent report that DWS Group is being investigated by the US Securities and Exchange Commission (SEC) over greenwashing. It is based on claims by the former head of sustainability at DWS, who alleged in an interview with the Wall Street Journal that the asset manager overstates how the firm uses sustainable investing criteria to manage its investments. Lorraine Johnston, partner at Ashurst, explains one way in which litigation could be carried out by pointing to the Financial Conduct Authority (FCA)’s recent consultation paper, A new Consumer Duty, which puts an obligation on UK financial services firms to consider consumer duty through all products and services, and any harm that may be caused to consumers. “Towards the end of that consultation paper,” says Johnston, “it also allowed an extension of a private right of action to individuals. It would grant individuals a private right of action against regulated firms for breaches by those regulated firms, not just of specific rules but of principles that would include this consumer duty.” According to Ashurst barrister Anna Varga, this has caught the attention of claims management firms. “There are two principles that do lend themselves well to that type of litigation, which are to do with fair, clear and sufficiently detailed information – that is principle six and seven [of the FCA’s Principles for Businesses handbook],” she says. “This area is rife for class action and if that private right is turned on, you can see how the same bit of information put out to lots of retail clients gives rise to a possibility of a class action. This may be of some interest to claims management firms that may be seeking out class actions in the climate litigation space.” Johnston adds all communications about a fund must be thoroughly backed up: “There has to be substance to everything you are doing, disclosing and saying, and that’s about going through your governance and operations frameworks, ensuring this all accords with that classification or with those disclosures you are making. It’s not just about sticking a label on the fund and shipping it off.” Varga agrees, saying you can expect aspirational statements to be “poked and prodded” by more and more people interested in checking they match what is happening on the ground. She highlights financial institutions are aware of the increasingly litigiously sophisticated NGOs bringing cases against corporations and governments. Institutions, therefore, appreciate the risk of aspirational statements coming back to bite them, and this could lead to a raising of standards rather than a diluting of the statements. When asked by ESG Clarity, the FCA said it would not speculate on the risk of litigation, but did offer this for any firms who are concerned the UK’s sustainability disclosure regime may bring with it additional risk of legal action: “We are currently consulting on our proposals and are interested in hearing from a wide range of stakeholders. We would urge asset managers who have concerns to raise them with us as part of these consultation exercises.”
By Christine Dawson
‘There has to be substance to everything you are doing, disclosing and saying. It’s not just about sticking a label on the fund and shipping it off’
Lorraine Johnston, partner, Ashurst
‘The global climate movement sees the courts as an essential tool to hold companies and government to account for their climate record’
Gemma Woodward, director of responsible investment, Quilter Cheviot
Fund groups under scrutiny
Investors bite back
Global mandate
• The SEC in the US is pushing for listed companies to make mandatory annual ESG disclosures. • The SFDR came into effect in Europe in March. This was designed to categorise funds and give investors a clearer idea of the level of ESG integration a product has through its disclosures. • Japan’s Financial Services Agency (FSA) and the UK’s FCA have both announced plans to crack down on greenwashing with new disclosure frameworks. Japan’s FSA commissioner Junichi Nakajima says the country is looking at an ESG verification system that would align with international standards, while the FCA announced in July 2021 it is consulting on new Task Force on Climate-Related Financial Disclosures-aligned disclosures and will continue to prioritise greenwashing concerns.
Although the prospect of litigation is largely viewed as the stuff of nightmares for many corporates, it could be used as an ESG tool by investors. Quilter Cheviot’s director of responsible investment Gemma Woodward says: “Rather than being seen as a barrier, the global climate movement sees the courts as an essential tool to hold both companies and government to account for their climate record.” She cites the rising number of climate-related cases going through the courts – 1,000 in the past six years alone: “Considering the risks of climate litigation is an essential component of ESG due diligence. Climate change is a major legal and reputational risk, and while legal challenges used to be the preserve of the oil majors in the US, they are now going mainstream with more and more companies exposed.” Investors are beginning to use litigation against companies on climate-related grounds. “For many years it has been really important that fund managers can be trusted by investee companies so there can be open and frank exchanges – as far as legally as possible,” says SRI Services director, founder of Fund EcoMarket and ESG Clarity editorial panellist Julia Dreblow. “This has meant lots of conversations have gone on behind closed doors and often this has worked well. “We are now getting to a point where well-informed investors recognise that multiple environmental crises are closing in on us. The need for stronger responses, such as litigation, will increasingly be seen as a legitimate option where company behaviours may trigger significant financial losses to investors.” Last year, for example, investors filed a class-action claim against the Australian government for not disclosing the material climate risks associated with its government bonds. Pension asset owners are also not afraid to use litigation as an engagement tool. The Swedish pension fund AP7 lists legal action as one of four engagement methods, alongside actions at general meetings, engagement dialogue and public blacklisting. In 2019, the fund used the courts to take on the social and governance failings of Alphabet, parent company of Google, suing it for sexual misconduct. The case included an investigation of how the board handled the situation. More recently, non-profit ClientEarth reported takeaway app JustEat and cruise company Carnival to the FCA in the UK for failing to disclose material risks around climate change to investors. It claimed the companies were not meeting their legal obligations, by saying they were taking action to reduce their carbon footprints but neglecting to include any details of this in their 2020 reporting. Some of the world’s biggest polluters are also under scrutiny, with oil companies dragged into court. In May this year, Royal Dutch Shell was ordered to cut its global carbon emissions by 45%, compared with 2019 levels, by the end of 2030. The case was brought by Friends of the Earth and more than 17,000 co-plaintiffs. According to corporate law firm Travers Smith, we are seeing a trend where climate change litigation is now regularly being pushed to new limits. A note written by Heather Gagen, partner in the dispute resolution department, head of risk and operational regulatory Doug Bryden and senior associate in the dispute resolution department James Danaher, explains: “Many recent claims are attempts to push the law to new limits. Claimants are asking courts effectively to create new law to combat the climate crisis.” We are seeing a rapidly changing market and regulatory environment in sustainable finance and all eyes are on whether the players involved can bring the major transformations needed to avoid the worst of climate, ecological and societal breakdown. Some legal fallout seems inevitable, but perhaps the threat of it itself is useful for those steering a path through the chaos.
We take a look at the three funds in our Responsible Ratings Index that have the longest track record to check how they are performing – and to find out if maturity breeds wisdom
ESG product launches and rebrands have been all the rage in recent years, with the pace showing no signs of slowing. For new funds it will be a while until their track records show whether or not their strategies are really working. So for this issue, we have taken a look at the three oldest funds in the RRI.
‘Experts have predicted that, by 2050, there will be more plastic in the sea than fish, by weight’
Allianz Continental European
Jupiter European
Sarasin IE Multi Asset Dynamic
Click here for the full Responsible Ratings Index
The oldest fund in our RRI, Allianz Continental European, has been running for almost 50 years. Managed by Thorsten Winkelmann and Marcus Morris-Eyton, it has produced good returns and low volatility over the 10-year period, and it is ranked seventh in the peer group of 82 European funds over that timeframe. Its top holding, Dutch semiconductor company ASML Holding, which currently comprises 7.49% of the portfolio, comes with low ESG risks and has been voted a very good employer on Glassdoor. Click for fund details and performance graph
Two rankings below Allianz Continental European in the peer group is Jupiter European, run by Mark Heslop and Mark Nichols. Launched in 1987, this fund scores top marks across the board in our RRI ratings. Consistently outperforming its benchmark over 10 years, like the Allianz fund it is benefitting from more ESG-friendly European businesses. It is not surprising to see two European funds among the longest-running top-ESG scorers, showing the jumpstart the continent has on responsibile investing. This fund is also the largest of the three, at £4.6bn. Click for fund details and performance graph
The third longest-running fund in the RRI is Sarasin IE Multi Asset Dynamic, which launched in 1988. Its 10-year performance is more modest than the other two funds, and it ranks 333rd out of 352 funds in the Aggressive GBP sector. Nonetheless, it has shown steady returns and top ESG ratings. It also has a top holding, 2.4%, in ASML, as well as several big technology names such as Amazon and Microsoft. The fund is run by Sarasin’s head of multi-asset Phil Collins and portfolio manager Henning Meyer. Click for fund details and performance graph
Allianz Continental Europe
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
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
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
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.
allianz continental european
Jupiter european
Click for the full Responsible Ratings Index
Selecting an ESG exchange-traded fund (ETF) requires careful consideration. Investors are spoiled for choice, and choosing the right ETF can entail trade-offs in terms of the ESG improvement an investor is looking to achieve and the risk characteristics of the fund they ultimately invest in. There are many different ways to screen companies depending on the ESG framework employed. Looking at ESG scores can be a catch-all for a large swathe of considerations. Investors can also drill down into these scores in their research, looking at their propensity to pollute, their health and safety procedures or how they treat their employees, for instance. What should investors consider when selecting a fund with an ESG filter embedded within it? To answer that question, investors first need to define their philosophy by addressing the following:
‘ETF providers can attempt to incentivise companies to change their behaviour’
Better by design
Carefully calibrated
ESG filters aside, there exist ESG products that provide exposure to specific themes. These are defined as individual issues that can potentially be solved with funding – clean water and clean energy, for example. What’s more, ESG funds can be designed to embed certain regulatory criteria into their methodologies, such as a decarbonisation trajectory aligned to the Paris Agreement, which is aimed at ensuring global warming is limited to below 2°C over the coming decades. In short, there are many ways to embed ESG criteria into a fund and numerous approaches exist in the market. By employing a calibrated combination of exclusions and tilts, ETF providers can attempt to incentivise companies to change their behaviour. If they fail to do so this could impact their funding, as investors shy away from companies with weaker ESG credentials, and indeed the worst offenders may be excluded altogether. This sends a strong signal to companies with poor ESG attributes, while at the same time giving them the opportunity to improve their practices and be rewarded for their efforts. ETF providers can also choose to engage where possible.
Sefian Kasem Senior ETF investment strategist, HSBC Global Asset Management
Do I invest in a fund that targets all of the most important ESG considerations in one go?
Do you want specific ESG factors?
No
Consider a number of smaller building blocks which target granular E, S or G considerations.
If investors want a bit of both, a screening process based upon ESG scores with other more granular filters can be designed.
Yes
Investors should focus on funds that capture ESG considerations in a holistic manner such as through an aggregated ‘ESG score’.
Japan’s medal contenders
The Olympics and Paralympics in Japan took centre stage over the summer, but as we look away from the sporting arena and ahead to 2022, the country’s corporate governance code for stock market listings is shaping up for some material changes. Key areas in focus are board independence, diversity and sustainability. At least a third of board members will be required to be independent directors, and the membership of the nomination and remuneration committees must comprise a majority of independent directors, who will review material transactions and conflicts of interest. Regarding sustainability, the revised code calls for companies to collect and analyse data on the impact of climate change-related risks, as well as improve their climate-related disclosure. There are currently few dedicated Japanese equity funds with an ESG or sustainability mandate, but with the government pension fund allocating to ESG investments since 2017, domestic companies are starting to up their game on disclosures. With the corporate governance code helping on ‘G’ aspects, further information on environmental and social factors can only be a good thing to allow investors to make deeper, more rounded assessments. Check out the three contenders below.
Jonathan Miller Director, manager research ratings, Morningstar UK
‘There are currently few dedicated Japanese equity funds with an ESG or sustainability mandate’
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JP Morgan Japan benefits from dedicated ESG research resources and its Ucits vehicle’s Sustainable Finance Disclosure Regulation classification is Article 8. That said, ESG considerations currently have limited impact on investment decisions and portfolio construction. The strategy has access to two proprietary ESG toolsets along with multiple external ESG data sources. The investment team uses a 98-question checklist to assess each company’s risk profile, within which a subset of 40 questions focus on ESG. At least 51% of the portfolio must be within the top 80th percentile, according to the team’s ESG checklist. Beyond these rules, ESG considerations do not exert a strong influence on the investment decision-making for the strategy, with lead manager Nicholas Weindling having full discretion to invest in companies with lesser ESG standings. The firm has a central sustainable investment team of 17 members, including Japan head of investment stewardship Shizuko Ohmi. This relatively new team is led by London-based global head of sustainable investing Jennifer Wu. It is responsible for the implementation of ESG-related initiatives across the firm, though it is not directly involved in the management of the strategy.
One to watch: JP Morgan Japan Fund
Comgest has made good strides with its responsible investment practices in the past decade, and this strategy has benefited from these efforts. Integrating ESG criteria has been a natural extension of the fund’s quality growth approach. The firm does not believe in negative screening and sector exclusions are limited to controversial weapons and tobacco. That said, the quality checks performed by the team before adding a stock to their investment universe systematically incorporate an ESG angle. At a later stage of the process, ESG factors are used to identify growth opportunities for companies and assess risks that might threaten their long-term earnings power. However, ESG considerations are not dominant in decision making and the investment team can hold a stock with a sub-par ESG profile. Engagements come into play in such cases, and in 2019 the Japan team engaged with half the companies in the portfolio. The only dedicated ESG analyst for Japan also covers emerging markets, so much of the responsibility falls on Comgest’s four-person Japan equity team who, while not specialists, do actively participate in the ESG research and are at the forefront of the proxy voting and engagement activities.
Room for improvement: Comgest Growth Japan Fund
The strict ESG inclusion criteria employed by this ETF means this is one of the most ESG-focused funds across the Japanese equity fund universe. The portfolio replicates a fossil fuel-screened variant of the MSCI JPN SRI Index, which selects the top-quartile stocks from the MSCI Japan Index with the strongest ESG characteristics relative to their sector peers. This screen is powered by MSCI’s ESG ratings. For example, it might look at data security for banks, and product packaging and water management for consumer products companies. Furthermore, how firms operate often has a bigger impact on these ratings than the goods and services they produce. In addition to picking the most compliant stocks by sector, the fund also applies several hard screens, excluding holdings based on their involvement in the extraction, production or ownership of fossil fuels and on other values-based issues such as firearms, tobacco, nuclear power, gambling and alcohol. Anything that violates the UN Global Compact is excluded from the get-go. By focusing on the highest-scoring holdings in the universe, the fund demonstrates the strength of its ESG commitment over other less-discerning peers.
Podium finish: iShares MSCI Japan SRI ETF
JPM Japan
Comgest Growth Japan
iShares MSCI Japan SRI ETF
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3. Podium finish: iShares MSCI Japan SRI ETF
1. One to watch: JP Morgan Japan Fund
2. Room for improvement: Comgest Growth Japan Fund
The strict ESG inclusion criteria employed by this ETF means it is one of the most ESG-focused funds across the Japanese equity fund universe. The portfolio replicates a fossil fuel-screened variant of the MSCI JPN SRI Index, which selects the top-quartile stocks from MSCI Japan with the strongest ESG characteristics relative to their sector peers. This screen is powered by MSCI’s ESG ratings. For example, it might look at data security for banks, and packaging and water management for consumer products companies. Furthermore, how firms operate often has a bigger impact on these ratings than the goods and services they produce. In addition to picking the most compliant stocks by sector, the fund also applies several hard screens, excluding holdings based on their involvement in the extraction, production or ownership of fossil fuels and on other values-based issues such as firearms, tobacco, nuclear power, gambling and alcohol. Anything that violates the UN Global Compact is excluded from the get-go. By focusing on the highest-scoring holdings in the universe, the fund demonstrates the strength of its ESG commitment over other less-discerning peers.
For finance professionals who follow the movements surrounding official development assistance (ODA), last year provided a ray of hope despite the Covid-19 pandemic. According to the Organisation for Economic Co-operation and Development (OECD), ODA reached an all-time high in 2020 of just over $16bn (£11.6bn), an increase of 3.5% from the previous year, triggered largely by the global response to Covid-19. “The next few years will be tough and the finance we provide must work harder than ever. If we are going to build forward better and greener, we must focus on the most vulnerable countries and the most vulnerable people in them, especially women and girls,” says Susanna Moorehead, chair of the OECD Development Assistance Committee. The urgency of Moorehead’s point is evidenced by several factors: that continued growth of ODA should not be expected in light of future budget constraints; that Sub-Saharan Africa only received $31bn while the world’s least developed countries received just $34bn; and that the financing gap to achieve the Sustainable Development Goals (SDGs) in developing countries generally is calculated to be as high as $4.5trn annually to the year 2030. ODA will have to work harder than ever to deliver sustainable development to the people, communities and countries where the needs are greatest. This speaks precisely to the importance of blended finance – the strategic use of development finance to mobilise commercial capital towards the SDGs. While there are still sceptics of blended finance, the critical question given the importance of achieving the SDG agenda is not whether or not it is an essential tool, but rather how we can best leverage blended finance to achieve these goals in the next 10 years, particularly for last-mile markets. The Joint SDG Fund is a multi-partner trust fund established by a UN resolution. The fund’s mission is to activate integrated policy and financing levers as accelerators for the achievement of the SDGs. The UN Capital Development Fund is using the platform of the UN General Assembly to showcase two examples of blended finance in action. These examples show how the UN is looking to make ODA and concessional finance work harder to catalyse commercial finance in support of SDG-positive projects. One example on display will be the Build Malawi Fund, a structured blended finance vehicle designed to mobilise $35m for investment into 50 businesses in Malawi. The fund will invest patient capital in promising businesses to increase their production capacity, serve a broader customer base, as well as become more efficient and effective. The fund has vast impact potential and aims to support 37,500 households, integrate 75,000 small-scale producers into investee supply chains, increase SME income by 30%, and create 6,000 sustainable jobs, including 3,000 (30% minimum) for women and youth. The Joint SDG Fund is contributing with half of the first loss tranche that absorbs early losses. This offers traditional donors and impact-first investors an opportunity to use their contribution ($6.8m) beyond grant-making to support their development objectives. The balance will be a mezzanine or convertible, which offers much greater leverage potential than through grant-funding alone. The fund is managed by Bamboo Capital Partners with UNCDF serving as the investment adviser and main source of project pipeline. The other example on display will be the Global Fund for Coral Reefs (GFCR), a six-year fund that aims to leverage $50m in investment capital by 2030. The GFCR will create blended-finance facilities and a future pipeline of bankable projects by combining technical assistance, performance-based grants and concessional loans. The GFCR features unique public-private partnerships that bring together a local investment manager and conservation actors, financial institutions, the local government and the UN system. During the UN General Assembly, we will focus on ‘blue economy’ developments for Fijian coral reefs and local communities. Together, the Joint SDG Fund and GFCR are providing $3.5m in capital investment to mobilise commercial investments, promote financial sustainability of coral reef conservation and accelerate reef-positive livelihoods. This initial funding will seed the facility, bringing a mature pipeline and signed partnerships, including the investment manager. The facility will seek private sector investment and contribution from individual donors and foundations. Making ODA work harder to support the SDGs is not a hope or an aspiration; it is a necessity that requires innovative financial tools that will unlock concessional finance’s catalytic power to attract critical commercial financing. The Joint SDG Fund and UNCDF are looking to take a leadership role in this essential effort.
‘The financing gap to achieve the SDGs in developing countries is as high as $4.5trn annually to the year 2030’
Mobilising capital
Joined-up thinking
The funds investing in plastics solutions and what the big consumer brands are doing to improve
When the message really took hold the world was facing environmental disaster in the early noughties, the principle story was around carbon. At the outset, it got more column inches and, as a result, more fund launches related to solving the carbon problem. But in the past six or seven years, the narrative has focused on the plastic issue, specifically single-use plastic. The statistics around plastic are shocking. Research from groups such as the Ellen MacArthur Foundation, Surfers Against Sewage and Ocean Crusaders has shown that 8m pieces of plastic pollution find their way into our oceans every day. Experts have predicted that, by 2050, there will be more plastic in the sea than fish, by weight. The most pressing requirement is for greater reuse of plastic and an improvement in recycling. Theoretically, all plastic can be recycled, but the cost and environmental impact – heat, pressure, chemicals etc – makes it prohibitively expensive. There remains a decreasing economic incentive to recycle, as front-end costs such as collecting and processing exceed the sale price of recycled materials. The European and US markets are totally unbalanced as the quantity of sorted materials is much higher than the capacity of industry to incorporate those recycled raw materials into production lines. Most materials won’t even get to the point of sortation, as it currently costs more to collect and process than it does to send them to landfill or the incinerator. Another problem is that recycled plastic is ‘ugly’ and not deemed palatable to consumers. Reusable plastic is an alternative. It avoids some of the problems of recycling but brings others, not least the inconvenience of consumers needing to carry empty containers. Take the abundance of drinkable tap water in developed markets – and the carbon and plastic footprint of polyethylene terephthalate (PET) – as a threat to the bottled water industry. Free water refilling stations are on the rise and now you can see large beverage companies with water brands working on alternatives. A year ago, for example, PepsiCo acquired SodaStream for $3.2bn (£2.3bn) to allow consumers to carbonate their own water at home. One cartridge makes around 60 litres of carbonated water. Coca-Cola has its Dasani PureFill vending machine, which provides free filtered water (consumers need their own bottle) with the option of adding flavours or carbonation for a small fee. Fund managers investing in this space include Fundsmith, Lindsell Train, Investec Consumer Franchises, Morgan Stanley Global Brands and Evenlode. All these tend to focus on large companies with significant spend on innovative approaches to packaging and waste Fundsmith, Lindsell Train and Ninety One Global Franchise all provide ways of targeting the consumer goods sectors. While the first two have a diverse range of sectors, the consumer staples market has consistently been the biggest weighting. Lindsell Train has recently added a dedicated ESG analyst to its team and there is focus on plastic usage as an investment risk. Fundsmith tends to view plastic usage more as a risk to the resiliency of a business and ESG analysis has always been a key part of its process. Ninety One is more of a pure play on consumer brands and engaging with companies on environmental issues is prioritised. For investors looking for a more solutions-oriented way of thinking about the plastics problem, RobecoSAM Smart Materials Equities focuses on companies in the materials, industrials and technology sectors producing substitute materials that are more sustainable and resilient. All of these funds have a strong five-year track record. Newer strategies have also emerged in the past few years, such as BlackRock Circular Economy, which partners with the Ellen MacArthur Foundation. The track record here is too short to make a definitive comment on performance yet, but it does have a diverse range of sectors and companies.
Recycling and reusing
Patrick Thomas Head of ESG investing, Canaccord Genuity Wealth Management
Searching for solutions
What consumer brands are doing
Click to listen to the ESG Clarity podcast on the materials sector
Colgate has created the first recyclable toothpaste tube under the Tom’s of Maine brand. It combines different grades and thicknesses of HDPE laminate to meet the demands of high-speed production while remaining squeezable. After five years of development, Colgate will make its proprietary technology widely available. Procter & Gamble (P&G)’s Head & Shoulders brand has a beach-recycled plastic bottle. P&G is also licensor of a proprietary technology that can remove colour, odour and other contaminants from recycled material to produce ‘clean’ polypropylene. Licensee, PureCycle Technologies, having quickly reached capacity with its first plant, has signed up P&G’s competitor L’Oréal to be the first customer of its planned European works. Coca-Cola has just changed from using green to clear plastic for its Sprite bottles. This makes them more attractive for recycling as demand currently outstrips supply for clear, recycled PET. The company is the largest purchaser of PET in the world and targets 100% collection and recycling by 2030. It’s already at 56%. Big brands, and their investors, can no longer avoid dealing with the issue head on
