Implementing a just transition, achieving social justice, promoting biodiversity and delivering change in sustainable debt were the key topics on the agenda at portfolio institutional’s ESG Club Conference, held on 6th of July at the Shard in London.
The conference was kicked off by portfolio institutional editor Mark Dunne, who highlighted that investing to make the world a better place had now become a mainstream strategy.
A just transition
But there is still a big gap between theory and reality. This was evident from the perspective presented by Chandra Gopinathan, senior investment manager sustainable ownership at Railpen, who stressed this in the first session, which covered a just transition.
“Companies are saying yes to a just transition but that doesn’t mean much. It is at a pretty weak stage at the moment. Companies are willing to engage but it is at the early stages: evidence is needed. When we have the right arguments, we are in a much better place to push this forward,” Gopinathan said.
There may be opportunities for change in unlikely places. For John Mulligan, market relations and climate change lead at the World Gold Council, including the mining industry in a just transition to a low carbon economy can potentially have a significant multiplier effect, especially in emerging markets.
“We are very aware of the emissions that come from mining, but that means the opportunity to transition is major, and it could have an impact way beyond the asset,” he said. “Gold will be the main driver of energy transition in countries such as the Democratic Republic of Congo or Ghana because it is such an important driver of socio-economic development overall,” he predicted.
Bella Landymore, policy director at the Impact Investing Institute, emphasised the importance of including community voices when making the transition to a low carbon economy. Furthermore, she added: “Inequality is a systemic risk that is inextricably linked to climate risk and tackling climate change is the biggest opportunity of our generation.”
She also criticised the lack of inclusiveness in the financial industry. “There is no culture in the financial services to include community voices. That is not to say that it is not possible and that it shouldn’t happen. It is an area that is underdeveloped.”
The S in ESG
The second part of the morning session focused on the social element of ESG investing, an area which has gained growing prominence in recent years, according to Jessica Attard, programme director at ShareAction: “Social issues have historically been less well defined and been less well reported on. So it has been difficult to make the link between social issues and financial materiality,” she said.
Although she did point to change already taking place. “The pandemic has changed that. Recent examples such as Boohoo and Kelloggs show that social issues play out in financial materiality.”
Landymore expanded on the social theme. “We need to understand inequality as a systemic risk,” she said. How many investors actually consider such a scenario?
Thembeka Stemela Dagbo a fund manager at M&G Investments, provided an insight into some myths when it came to social impact investing. “There is this misconception that when we think of social impact investing as having to wait for a long time to get returns or that it is philanthropic. But the social impact could be the moat in itself. There are plenty of companies that offer good opportunities – for short-term investors as well.”
Maria Ortino, global ESG manager at Legal & General Investment Management, also highlighted the impact of health issues. “Nutrition and anti-microbial resistance are key topics on the agenda for LGIM: with nearly a third of all UK adults classed as obese.”
Expanding on this issue, Attard noted: “How do investors do more? Number one, encouraging asset managers to prioritise health and wellbeing in their stewardship work. Two, asset owners have a real important voice to be bold on social and health issues in the way they are allocating capital and using their proxy voting.”
With fixed income accounting for a growing share of the average institutional portfolio, making debt investments sustainable was another key topic on the agenda.
Speakers acknowledged that the investable universe in green bonds had increased dramatically.
Julien Halfon, head of pension and corporate solutions at BNP Paribas Asset Management, said: “The universe is expanding and that is something like a candy shop for someone like me who offers investment solutions. You want to play in multiple dimensions in terms of liquidity ranges and maturity.”
Sindhu Krishna, head of sustainable investments at Phoenix Group, added: “Risk adjusted return is key on the listed and on the private side, where we are seeing real opportunities. There is a huge pipeline which has come through, but are asset managers able to tap into those opportunities?”
While the universe of green bonds has expanded, Peter Mennie, chief sustainable investment officer public markets at Manulife, said that while it was easy to market a strategy as green by purely focusing on green labelled bonds, investors should not exclude unlabelled funds. He stressed the importance of shareholder engagement and due diligence to ensure the sustainability of the portfolio.
Claire Curtin, head of ESG at the Pension Protection Fund, highlighted the importance, and challenges, of the Task Force on Climate-related Financial Disclosures. “We have been looking at the alignment in relation to scope one, two and three. As soon as you bring in scope three the entire assessment completely changes. All those banks which were previously seen as nonmaterial, are now all misaligned.”
Another increasingly pressing aspect of the E in ESG is the detrimental impact of climate change on biodiversity. Marion Maloney, head of responsible investment and governance in the Environment Agency Pension Fund, said: “Pre-COP 26, I was surprised how few asset managers had a biodiversity policy.” She emphasises that COP26 has helped to tackle this shortcoming.
Mark Hill, climate and sustainability lead at The Pensions Regulator (TPR), highlighted the importance of reporting and the purpose of disclosures within the context of the Taskforce on Climate-related Financial Disclosures (TCFD), with a line of sight to the Taskforce on Nature-related Financial Disclosures (TNFD). He emphasised the need “to focus on the intent, namely understanding the risks, impacts and opportunities and taking informed decisions on how to manage, mitigate and exploit them rather than just viewing it as an exercise in compliance with the reports being an end in themselves”. Mark also highlighted the need to take an holistic view and not treat TCFD and TNFD as separate ‘stovepipes’ moving forward, as both ‘climate change and biodiversity are highly interdependent and the disclosures are designed to be integrated’. He finished by emphasising the benefit of engagement with regulators, data providers and asset managers in moving to sustainable disclosure requirements.
Hannah Skeates, co-head of sustainable investing at Allspring Global Investments, gave an outlook on biodiversity as issue for the investment industry. She said: “There is a hope that we will get to an understanding of what the targets and goals for biodiversity are: the idea of a transition becomes context specific with a question about which companies are going to be best positioned relative to their direction of travel. And then being able to identify the risks appropriately.”
Niamh Boyle, associate consultant and biodiversity specialist at Aon, said that the key thing asset owners could do is to raise this issue with fund managers: “It is important to engage with all of your underlying fund managers to find out where they are at and if they have a policy on biodiversity in place,” she added.
If, by the end of the event, there was any doubt on the urgency of tackling sustainability challenges left, an audience member summed it up aptly: “There is an asset owner responsibility in ensuring biodiversity. We need to make sure that we pay out today’s pension just as well as pensions in 50 years’ time and climate change and a decline in biodiversity will have a real material impact,” he said.