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Sustainable Investing
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Net zero commitments must have a strong social component. ~Fiona Reynolds, CEO, Principles for Responsible Investment
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What does a net zero financial services industry look like? ~James Alexander, Chief Executive, UK Sustainable Investment and Finance Association
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IN THIS ISSUE
SME’s need sustainable finance to reach net zero ~Miriam Koreen Senior Counsellor for SMEs, OECD
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Net zero commitments must have a strong social component In the wake of COP26, as we work towards a net zero economy industries will be altered and so we must ensure we do not leave workers in affected areas behind.
Why Europe’s ‘climate moon-shot’ needs the private sector as co-pilot ~Mirek Dusek Head of Europe and Head of the Centre for Geopolitical and Regional Affairs, World Economic Forum
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n the investment community, we spend a lot of time discussing stranded assets, such as the coal that will be left in the ground as we transition to low-carbon economies. However, if poorly managed, the transition to a net zero future could result not only in stranded assets in a physical sense, but also in other assets, such as stranded workers and communities - contributing to increasing inequalities and economic stagnation.
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The just transition The just transition is an integral aspect of the Paris Agreement that asks investors, corporates and governments to anticipate, manage and mitigate the social implications of the transition to a low carbon economy on workers, communities, consumers and society more broadly. Investors and businesses must ensure that net zero commitments have a strong social component from the get-go, encouraging the creation of high-quality jobs and fair wages. If we do not take people with us on the journey to a green economy, we simply will not get there in time.
Putting regeneration at the centre - going beyond net zero commitments
The ‘S’ in ESG Historically, the climate crisis and human rights issues have been considered separately by investors. With social issues, including human rights, often dismissed as immaterial or a lesser priority. However, COVID-19 has shown investors the interconnectedness of systems and demonstrated the materiality of social issues. In particular, the pandemic has magnified existing labour rights challenges that underpin the systematic inequalities that are painfully evident today. Investors have seen first-hand that the systems they operate in – work, financial and environmental systems – are all inextricably interconnected and that we cannot have a healthy economy without a resilient workforce and communities.
~Amit Bouri CEO & Co-Founder, Global Impact Investing Network
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However, COVID-19 has shown investors the interconnectedness of systems and demonstrated the materiality of social issues. As a result, we have never seen our global signatories so engaged with social issues. At COP26, we were pleased to witness the formal launch of the Investors for Just Transition coalition organised by Finance for Tomorrow, the first global coalition of engagement around the just transition. In addition, over 30 countries signed the Just Transition Declaration developed by the COP26 Energy Transition Council. While this progress is promising, we need to see more ambition and action from investors on the climate crisis and human rights as we continue to grapple with the decarbonisation of our economy and work to ensure a fair and inclusive future for all.
WRITTEN BY
Fiona Reynolds CEO, Principles for Responsible Investment
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Asset managers have a crucial role to play in engaging retail investors and helping them to understand the huge amount of information that is published around sustainable finance.
Why sustainable investing offers long-term growth opportunities Many people want to do the right thing for the planet, but when it comes to sustainable investing there is still a battle to be won to change perception.
A INTERVIEW WITH Ana Rivero Fernandez Global Head of ESG and Investment Content, Santander Asset Management WRITTEN BY Steve Hemsley
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s Europe transitions to a low carbon economy, retail investors need to know they can embrace sustainable investing without increasing their costs or sacrificing returns. This is the message from Ana Rivero Fernandez, Santander Asset Management’s Global Head of ESG (environmental, social and governance), who says many investors still need to be convinced of the benefits of using their money to help fight the climate crisis and reach net zero targets. Many investors are still concerned that the sustainable investment sector is not transparent enough, while others fear they could lose out financially if they chose ESG portfolios. “There may be more costs to the asset manager but not to the retail investor,” says Rivero. “For them, this is a market that will deliver quality growth over the long-term because the global economy is moving in this direction. Green bonds, for example, will provide more solid and stable returns over the next three to five years.” Increased regulation She also welcomes the Sustainable Finance Disclosure Regulation (SFDR) introduced by the European Commission and which came into force in March 2021. It imposes new transparency and sustainabilityrelated disclosure requirements on the financial services sector. The Regulation should create a level playing field across the continent when it comes to sustainable finance. It is also designed to provide investors with more information on how their money is making a positive social or green impact. Rivero believes that over the next few years SFDR will make it easier for investors to measure the ESG commitments of companies of all sizes so they can make better decisions about where to put their money. “There remain different definitions of what actually sustainable investing is,” she says. “Santander looks at how companies are integrating ESG factors into their investment decisions. How do their ESG targets work alongside financial targets, for example, and how are they measured? Also, how transparent are their ESG claims?”
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Asset manager support Asset managers have a crucial role to play in engaging retail investors and helping them to understand the huge amount of information that is published around sustainable finance. A new set of skills is needed within asset management because the industry requires people who can perform ESG research. Santander Asset Management has its own ESG team so it can classify products using environmental criteria. The bank finances more renewable energy projects than any other bank and has set its own targets to align with the 2030 goals outlined in the Paris Agreement. The company’s private banking advisory service is also adopting ESG criteria to complement its different sustainable funds, green bonds and alternative products. Mutual funds One important area for growth will be the use of mutual funds to channel capital into sustainabilityfocused initiatives. “Mutual funds are made up of retail money and show how we can all make a difference,” says Rivero. “If you have £100 you may think there is little you can do to change the world. But when you bring together lots of £100s in a mutual fund you create an institutional vehicle that can decide to invest the money responsibly.” Proactive approach to investment Rivero feels that the financial services sector must work harder in 2022 to encourage retail investors to be proactive when it comes to making sustainable investments. “We are still at the stage where people do not initially ask about it, so there is an education process,” she says. “When you start to explain that investing in this way does not mean you reduce your financial returns, they start to listen. They hear about the research and the quality growth opportunities over time and they say, okay why not? I want to be part of it.”
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What does a net zero financial services industry look like? The net zero pledges announced at COP26 by countries and businesses mean that 90% of the world’s economy is covered according to the UK’s Prime Minister, triple the figure from when the UK was announced as COP President.
The financial path to a sustainable world To be able to move towards a sustainable future, investment managers need to focus on three key components: data, standards and skills.
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ith so many investment managers around the world looking to deploy capital, it is their role to efficiently allocate that capital into the projects that provide the greatest return for investors, taking into consideration the various risks involved. Climate action ranks as one such risk, one that is increasingly growing in significance and materiality. Investment managers must not ignore it.
investments without a clear statement of objectives, a description of the investment process or an outline of stewardship activities. We aim to eliminate this ‘greenwashing’ with our recently-released Global ESG Disclosure Standards for Investment Products. They stand as the first voluntary standards designed to enable investors, consultants, advisors and distributors to better understand, compare and evaluate ESG investment products.
Assessing risks with data As we’ve seen at the recent COP26 summit in Glasgow, the global momentum towards addressing the climate crisis seems stronger than it has ever been. Regulators are forcing action, the private sector is displaying the will to play a role and perhaps most importantly for financial services, the end investors are demanding action. However, the financial infrastructure must exist to allow asset managers to allocate capital effectively. This requires clear, comparable, quality data in order to properly assess the risk that environmental factors present alongside social and governance issues however, this data remains vague. The work of TCFD (Taskforce on Climaterelated Financial Disclosures), IFRS (International Financial Reporting Standards) and SASB (Sustainable Accounting Standards Board) to enable this data to become available across the board and the newly-launched International Sustainability Standards Board (ISSB) is certainly a step in the right direction.
The importance of practical skills In addition to standards, investment professionals need practical skills to understand corporate ESG disclosures, effectively evaluate them and communicate them to their clients. Our research has shown that while seven out of every 10 investment professionals now use ESG data, only 11% are confident that they are equipped to understand it. What is needed is a critical mass of investment professionals fluent in the language of ESG Investing and who are not only able to understand disclosures, but also to ask the right questions to corporate issuers and correctly advise investors. With these three key aspects coming together, alongside commitments from both business leaders and governments, we can incentivise, enable and scale the role that finance can play in the transition to a more sustainable world.
The need for standards In addition to data, we see two other gaps in the market. Investment products often get touted as ‘green’ 04
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WRITTEN BY Margaret Franklin President & CEO, CFA Institute
WRITTEN BY James Alexander Chief Executive, UK Sustainable Investment and Finance Association
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hile net zero commitments stand as one of COP’s key successes, the lack of clarity of whether they will reduce emissions in line with keeping global warming to 1.5 degrees and how they will be delivered, could seriously threaten progress towards the Paris goals. This is an equally pressing challenge for the financial services sector which delivered a series of its own pledges at COP. For example, over 450 firms representing over USD 130 trillion of assets committed to align with the Paris goals through the Glasgow Financial Alliance for Net Zero (GFANZ). Delivering on commitments To ensure our sector can deliver on initiatives such as GFANZ and reassure the wider public on the positive role it can play, we need to collectively consider how we define and build a better holistic picture of a net zero finance sector. With our collective understanding nascent, UKSIF will be looking to actively contribute to this debate in the UK in the months ahead, considering those areas that will be critical in moving industry to net zero.
Over 450 firms representing over USD 130 trillion of assets committed to align with the Paris goals through the Glasgow Financial Alliance for Net Zero (GFANZ). Enhancing role of investors’ stewardship Further enhancing investors’ stewardship role will be one area of focus. Stewardship encompasses the activities undertaken by investors to promote companies’ long-term success, including voting at a company’s Annual General Meeting. Active stewardship, over an exclusive focus on divestment, will be very important and industry and policymakers should consider developing more specific approaches to ‘net zero stewardship,’ while avoiding simply passing stocks onto other actors in private markets. Public investment in the ‘green economy’ Clarity on the levels of public investment in the ‘green economy’ is another component. Far higher government investment here can encourage the flow of private finance to sustainable investments and help signal to the sector where it can plug the funding gaps required for the UK to reach its emissions targets. Finally, world-leading regulation should be at the heart of defining net zero finance. This means building on the UK’s leadership on climate disclosure (we are the first G20 country to introduce mandatory climate disclosure for businesses) and implementing a robust ‘green taxonomy’ to effectively track the ‘greening’ of financial flows and tackle ‘greenwashing.’ These initial steps should be seriously considered by policymakers, regulators and others in the UK as it decides what a net zero finance sector should look like. READ MORE AT BUSINESSANDINDUSTRY.CO.UK
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How impact investing can help drive positive change for the world Impact investing is becoming increasingly popular. It could play a part in helping the world meet the UN Sustainable Development Goals — while aiming to deliver good financial returns.
INTERVIEW WITH Ben Constable-Maxwell Head of Sustainable and Impact Investing, M&G
WRITTEN BY Tony Greenway
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mpact investing used to be something of a niche The SDGs also highlight the importance of protecting financial activity, but it’s become increasingly nature and stopping biodiversity loss. Yet this is a relatively popular in recent years, notes Ben Constableearly-stage area for many impact investors — so which Maxwell, Head of Sustainable and Impact Investing assets should they be focusing on here? Constable-Maxwell at M&G. In fact, these days, the question isn’t: ‘Why has various suggestions including sustainable forestry, would I become an impact investor?’ It’s: ‘Why sustainable food and agriculture, and firms working on wouldn’t I?’ technology to make agricultural processes more efficient “People realise they can drive positive change — and hope to and less wasteful. generate good financial returns — by investing in companies and projects that are tackling the world’s most pressing social, The shift towards impact investing is a reason for optimism environmental and economic challenges,” Climate adaptation and resilience can says Constable-Maxwell. be difficult terrain for impact investors That’s just as well, because — as COP26 in a listed market context. But in private reminded us — there are worryingly huge markets there are potential opportunities issues to solve. In 2015, the UN outlined to invest in, say, regenerative and Impact investing does 17 Sustainable Development Goals (SDGs) sustainable agriculture, the insurance have its limitations. which it described as “a blueprint to achieve industry (which has a big role to play in a better and more sustainable future for all.” insuring companies, industries, homes and It’s not always easy to However, a 2020 M&G report, called The SDG against the effects of the climate measure the impact that people Reckoning, makes sobering reading because crisis) and even those producing early this type of investment it stresses that much more needs to be done warning systems for floods and weather can have, although if the world is to meet the SDGs and their events. underlying targets. Impact investing does have its limitations. better analysis tools and It’s not always easy to measure the impact tech are being produced. that this type of investment can have, Investment opportunities offered by the circular economy although better analysis tools and tech In this regard, there are many areas where impact investors are being produced. “Also, the environmental and social could help, says Constable-Maxwell. Take the circular domain shouldn’t become purely the responsibility of economy, which is the idea of designing out waste in the investors,” says Constable-Maxwell. “Governments and production process by using it as a resource. “This offers lots civil society also need to play their part. Even so, it’s been of potential opportunities for investors,” he reveals. We’ve gratifying to see a huge shift towards impact investing, and recently made an investment in a firm which takes mixed that it’s proving its worth. In my opinion, that’s a big reason plastic and recycles it into food grade plastic. The principles for optimism.” of the circular economy can be applied across all sectors.”
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The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
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WRITTEN BY Miriam Koreen, Senior Counsellor on SMEs, OECD
SMEs need sustainable finance to reach net zero
Small and medium-sized enterprises (SMEs) are important drivers of green innovation, but also leave a significant environmental footprint. On the heels of COP26, we need to develop better solutions to finance their green transition.
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n Europe, SMEs account for just over 50% of GDP but are responsible for 60-70% of industrial pollution.1 They face many obstacles to greening, including low awareness, lack of skills and – critically – insufficient financial resources. Raising awareness, offering operational solutions Most SMEs are still at the early stages of their green transition. While awareness is increasing, most have yet to take concrete actions to increase knowledge and capabilities. In the UK, 53% are not ready to prioritise decarbonisation.2 Many SMEs implement basic solutions, such as installing light sensors, but fewer undertake more advanced measures, like eco-design or zero waste business models.3 We must strengthen the SME business case for greening and step up operational guidance. Sustainable finance to unlock SME greening Access to finance ranks high among the challenges entrepreneurs face in the journey to net zero. They are less able than larger firms to absorb up-front costs of developing green products or investments, where benefits take time to materialise. With less than 3% of funds currently devoted to SME greening,
national recovery packages won’t address the gaps in financing SMEs for sustainability.4A range of instruments5 and incentives – including grants, debt, equity and tax incentives – is needed for SMEs in different sectors and contexts. We also need to build knowledge and skills for SME compliance with environmental, social and governance (ESG) requirements. Mobilising international co-operation Governments, public and private financial institutions can learn from each other about designing and implementing financial and non-financial services for SME sustainability. International knowledge sharing initiatives like the OECD Platform on Financing SMEs for Sustainability can help catalyse good practices. Without the full engagement of smaller businesses, climate commitments will not be met. Together, we can unleash their potential to drive action locally, nationally and globally.
References 1. OECD (2021), "No net zero without SMEs: Exploring the key issues for greening SMEs and green entrepreneurship", https://doi.org/10.1787/ bab63915-en. 2. British Business Bank (2021), Smaller businesses and the transition to net zero. 3. Business Development Bank of Canada (2021), A transformation in progress: How Canadian entrepreneurs are taking on the environmental challenge. 4. OECD (forthcoming), Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard, OECD Publishing, Paris. 5. G20/OECD High-Level Principles on SME Financing, https://www.oecd. org/finance/G20-OECD-High-Level-Principles-on-SME-Financing.pdf.
Why Europe’s ‘climate moon-shot’ needs the private sector as co-pilot The European Central Bank (ECB) reported that failing to address the climate crisis could reduce Europe’s GDP by 10%, and that the likelihood of default for climatevulnerable portfolios could increase 30% by 2050.
WRITTEN BY Mirek Dusek Head of Europe and Head of the Centre for Geopolitical and Regional Affairs, World Economic Forum
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he European Union is facing an important test. A few months after the launch of the Fit for 55 package – a set of policies to achieve a 55% reduction in carbon emissions by 2030 – a gas supply crisis is putting under pressure the European energy system, prompting member states to rethink their energy mix. The private sector has a central role to play in co-piloting the EU’s moon-shot of becoming the first climate-neutral continent by 2050. While the European Commission and national governments are laying down the foundations for a successful green transition via climate-positive policies, the private sector is poised to be the real enabler that can redirect the EU onto a greener recovery path. Scaling green investing With yearly investments of almost 500 billion euros needed to meet the 2030 carbon emissions targets, capital markets would be particularly valuable in redirecting funds towards greener sectors. Additionally, in the past few years, the EU has enjoyed unprecedented growth in demand for sustainable investments, which is also leading to structural change in capital markets. In 2020, 60% of green bonds were issued in Europe and the green bonds market is forecasted to exceed the EUR 1 trillion mark by 2025. Such a strong demand for ESG-driven investments is driving companies to revisit their business models and fostering increased adoption of sustainable practices. It is a key component of stakeholder capitalism coming to light. Climate innovation To achieve the European Green Deal’s objective of economic growth decoupled from natural resources depletion, innovation and technology are vital enablers. Some examples already in the works include collaborations between Eni, the Italian Energy company, and the Massachusetts Institute of Technology, working towards a fusion power plant to generate safe carbon-free energy; and Swiss Re and Climeworks, an innovative start-up that created the first plant for carbon capture from the air. Through investing in employees and in innovative business models, companies can create new long-term value. The stakeholder capitalism model puts people and the planet at the centre of business activity. If we are to provide secure futures for the next generation, the private sector has a key role to play.
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Transforming infrastructure for a better tomorrow For example, when we’re making decisions about land use, we have to think about commitments to the local communities, which involves a broader appreciation of sustainability.” The entire global economy will have to sit up to take notice, Actis’ sector focus is on energy, real estate and digital. “For energy, we will invest in renewables and transition technology,” says Shami. “In real estate we are looking at green buildings and increasing efficiency measures from the planning stage onwards.” An example of this approach is in Latin America, where the company has trained 800 women in local communities to work on solar panel installations. “Their job prospects are improved and it gives them an opportunity to connect with the wider picture,” says Shami.
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The era of self-certified achievements is coming to an end. From now on there will be much more credible third party valuations, involving disclosure, scrutiny and monitoring.
Sustainability is increasingly mission critical for investors - how does this translate into action?
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INTERVIEW WITH Shami Nissan Head of Sustainability, Actis WRITTEN BY Virginia Blackburn
OP26 was an important milestone, in a way that previous conferences did not quite manage. It highlighted the need for urgent action from businesses on the climate crisis, particularly when it comes to energy transition. Of course, this entails costs and so businesses are now turning their mind to how to finance this: leading the field is Actis, a leading global investor in sustainable infrastructure, which recently raised USD 6 billion of investable capital for energy transition opportunities. Investing in energy transition “We are really delighted that we have mobilised that capital,” says Shami Nissan, Head of Sustainability at Actis. “It’s about investing behind the need for energy transition. This means building long term businesses that will make power generation and electricity distribution more efficient and accessible, especially in growing economies in South America, Africa and India. COP has offered an
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unprecedented level of understanding behind climate crisis.” Sustainable investing is mission critical which is why it is at the forefront of our investee companies’ strategies. So, what does the next generation of action look like? “Sustainability is woven through strategies in a more fundamental way than before,” says Shami. “There will be more transparency and accountability as there has been an explosion of net zero commitments. The era of self-certified achievements is coming to an end. From now on there will be much more credible third party valuations, involving disclosure, scrutiny and monitoring.” Thinking holistically about goals The focus is even wider than the environment. “It is not just about decarbonisation,” says Shami. “We also have to think about the people aspect of it. When it comes to ESG [environmental, social and corporate governance] we have to focus on the S and the G. We need to connect all the areas and think holistically.
Monitoring and measuring investments To monitor its work in this area, in 2019 the company established AIS – Action Impact ScoreTM. “We apply it to every investment we make,” says Shami. “We set a benchmark at the beginning of an investment and define and measure the impact. The difference is the impact multiple. It is not just qualitative; it is a specific measurement which sits alongside the financial performance when we report to investors. “The key is intentionality: what can we do to deliberately increase our impact? It could be job creation or associated key performance indicators such as the number of women employed, the ratio of expats to locals, or whether these are permanent or temporary jobs. We measure them as we go along. There may be other frameworks. It is an open-source methodology: there is no black box or smoke and mirrors.” A key principle is that value drives value. “We are marrying our sustainable investment to financial value,” says Shami. “Our approach means we will attract and keep the best talent and there will be a lower cost of capital. It is a more strategic relationship: our mission is that each company becomes the sustainability leader in its own market.”
Find out more at www.act.is
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We cannot win the climate fight if we don’t stand up for the poor
Building on decades of experience IDA is focused on supporting the poorest countries in fighting the impacts of the climate crisis and adapting to a new global economy. We are putting to work decades of lessons and experience to help poor countries reduce emissions, adapt to the climate crisis and mitigate the impacts of disasters.
In meeting the global challenge of climate, we must stand up boldly for the poorest.
The impact of the climate crisis on people’s lives is indisputable. It is also terribly unfair: those who are most affected contribute the least to causing it.
I WRITTEN BY Mr Akihiko Nishio Vice President for Development Finance, The World Bank
Find out more at ida.worldbank.org #IDAworks @WBG_IDA
f unchecked, the climate crisis will push up to 130 million people into poverty over the next 10 years, unravelling hard-won development gains. In meeting the global challenge of climate, we must stand up boldly for the poorest. In fact, the 74 countries served by the International Development Association (IDA)—the part of the World Bank that helps the poorest countries —account for less than one tenth of global greenhouse gas emissions. People living in these countries are also hardest hit by the impacts of the climate crisis. As they fight to overcome the COVID-19 pandemic, IDA countries are in the race to become competitive in a rapidly changing global economy
that increasingly values green growth, green jobs and green sectors. It’s a tall order: recovering from the impact of COVID-19 on people and economies, dealing with the increasing impacts of climate, strengthening resilience against future shocks and creating better opportunities for people to thrive in a post-pandemic world. Supporting those most in need The climate crisis is certainly the most complex challenge, far-reaching global crisis we’ve faced so far. This crisis cannot be overcome by any sector, country, or organisation on its own. There is no vaccine to help the climate. Just like the pandemic, the climate crisis is truly global and requires global solutions.
Finance to address new challenges I am sharing this with you now because financing needs of IDA countries are immense and the climate crisis is aggravating the situation. We will need help to continue our work. We have been grateful for the support of donors over the years, but we will need continued support to give the most vulnerable people a fair chance at recovery and resilience. This month, our donors and partners will come together to pledge their continued financial support, and we hope that they help us rise to the unprecedented challenges. We cannot win over the climate crisis if we do not stand up for the poor.
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Reducing our carbon emissions to net zero may be our biggest challenge yet. There’s no single action that will lead us to carbon neutrality. But there is a single source of essential sustainability intelligence providing unparalleled data and insight to accelerate your journey. Accelerate to zero with us. spglobal.com/esg/perspectives/accelerate-to-zero
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