When Larry Fink, BlackRock’s CEO and the world’s largest fund manager, says "we are on the edge of a fundamental reshaping of finance" due to risks from changes in the climate, investors listen. The evidence surrounding the long-term impacts of climate change is increasing, and investors are beginning to recognise that climate risks are investment risks. For example, if lenders can’t model economic growth of the food production because productivity is declining due to extreme heat and other climate impacts, what happens to inflation and interest rates?
So, what does sustainable investment really mean for investors, businesses, consumers, or even global financial institutions as we know them? The 2020s are fast becoming known as the “decade of change” or the “decade of delivery”, and the demand for sustainable investments is poised to accelerate; however, there are a number of unknown challenges to overcome first before any dramatic shifts in investment and lending are seen.
Sound confusing? It does to me too. To help, I’ve answered three key questions below to simplify the perplexing sustainable investment landscape:
What is sustainable investment?
Sustainable investment is a broad term for investment that considers environmental, social and governance (ESG) factors and their impact on society. Traditionally, sustainable investment was viewed as a trade-off between financial returns and “doing the right thing”. Yet in today’s modern world, where consumers have a more sophisticated understanding of the risks posed by a changing climate, they are demanding investments are made in sustainable portfolios and strategies that do not compromise financial returns.
Investors have had to quickly reassess the way they approach investments and how ESG factors can be tied into reducing risk and enhancing long-term growth.
Why are investments not already sustainable?
Asset managers, pension schemes and even universities have all traditionally invested in companies that provide healthy financial returns, with no thought as to how these companies operate or to their impact on society and the environment. This includes huge investments in the oil and gas, manufacturing and transport industries, which are all carbon intensive and large contributors to climate change.
However, the winds of change have begun to blow, with over half of UK universities committed to divest all of their investments away from fossil fuels in 2020, which campaigners say is a significant blow to the “social licence” of big oil and gas firms.
In addition, so-called shareholder activism is also being used to pressure big energy firms to adopt greener policies and to increase their own investment in a low carbon future. One of the most successful activist groups is Climate Action 100+, a group of 370 asset owners and managers, including BlackRock and Aberdeen Standard, that advocates for environmentally-friendly, shareholder proposals and pushes companies to align their business with the Paris climate agreement.
In March 2019, for example, the group forced the oil giant, Shell to make a legally binding commitment to use a broader definition of greenhouse gas emissions in its carbon reduction targets.
What does the future of sustainable investment look like?
Sustainable investing has experienced phenomenal growth in recent years and sustainable investing assets stood at $30.7 trillion at the start of 2018, a 34% increase in two years according to the Global Sustainable Investment Review. Whilst the push from private sustainable investments is set to outperform traditional investments in the future, there are still a number of challenges to overcome in the market.
This is where regulators have their part to play; the UK Government, for example, has already taken big steps to encourage sustainable investment by publishing its Green Finance Strategy in July 2019. The strategy sets out what action is needed to accelerate the growth of green finance, from greening the financial system and catalysing the investment needed for green projects, to driving innovation in financial products and building skills across the financial sector.
Time to act
The spotlight on sustainability and sustainable investment has been highlighted in Davos this week at the World Economic Forum, and the message is clear – the time to act is now!
“Asset owners have to engage with businesses to ensure their target-setting is compliant with the 1.5˚C target of the IPCC” - Günther Thallinger, Allianz Board Member
The UK Prime Minister, Boris Johnson has led the way recently, by appointing Mark Carney, the ex-Governor for the Bank of England as his Finance Advisor for the upcoming Glasgow COP26 climate summit in November 2020. The PM tweeted that Carney would “help reshape finance for a sustainable world”.
Mark Carney has been championing sustainable investments for many years, and he is one of the co-authors of the Task Force on Climate-related Financial Disclosures (TCFD), a valuable tool for evaluating and reporting climate-related risks and for companies to thoroughly understand the potential financial implications of a changing climate.
Does your business need advice on the implications of these upcoming regulatory changes? Or help with aligning your reporting with the TCFD recommendations? Please contact danielle.bistacchi@design-portfolio.co.uk.