In 20 years’ time, when we look back over the last year or so, it is likely to be remembered as the first time that the world of investment was made to grasp its responsibility to the planet and its people. This period has seen the confluence of real political will, regulatory enforcement and investor-driven capital allocation that even an industry as entrenched in its ways as investment management has had to respond.
The showpiece COP27 in Egypt was a clear disappointment as once again due to selfish interests and lobby groups, no clear resolutions were agreed to substantially reduce GHG emissions in line with the scientifically required target. The single celebrated outcome was the financial agreement to assist poorer countries to deal with the consequences of climate change known as the Loss and Damages Fund. For all its importance, without commitment to reduce emissions, this is the equivalent of a boxer offering to contribute towards your hospital bills as long as you let them continue to punch you.
Despite this, we did see some successful moves at a political level with the US leading the way with the landmark, Inflation Reduction Act, committing over $400bn to slashing carbon emissions. The pressure clearly is now on other developed economies, especially Europe and the UK to follow suit. The electoral victory for Luiz Inácio Lula da Silva in Brazil also provides much needed optimism for the sustainability of the Amazon rainforest. COP15 on biodiversity was much more successful with the Kunming-Montreal Global Biodiversity Framework (GBF) being adopted by 188 governments committing to conservation of 30% of the world’s ecosystem by 2030.
The regulatory environment has also evolved to identify a clear separation between values-driven ESG investing and ESG as a pure risk management tool. Whether it’s the EU based SFDR regulations or the prospective SDR regulations in the UK, it is clear that funds have
to now make a choice about their intentionality and communicate this clearly and transparently to the marketplace. The focus has moved from what is said about a fund or investment to an actual analysis of the underlying stocks to see if they are consistent with the promises made. A key aspect of this new legislation is drawing a line between ESG and impact thereby closing down the ambiguity that’s allowed so called “greenwashing” to thrive over the recent years.
This heightened focus on the fund manager’s values and intentionality is critical for investors to be sure that when faced with the moral dilemmas that ESG investing inevitably presents, the choices made, will be aligned with their interests and objectives, rather than the fund manager’s commercial priorities.
Investors both individual and institutional are clearer about their role in society and how their capital allocation shapes the future. They are therefore demanding approaches that deliver returns whilst either solving issues previous capital allocation has created or at the very least not making things worse. Driven by political will and regulatory clarity, opportunities are being created within the transformation of existing sectors, such as transportation, and in new sectors, such as battery storage and protein production that are leading the climate transition.
For 2023 to be seen as the pivotal year when we altered the path of ecological destruction, we need to see fundamental cultural and strategic change at the heart of the investment industry. It will require courage from industry leaders to not only launch new and innovative investment vehicles, but also and more importantly stop or significantly reduce existing investments in companies and sectors that are detrimental to the climate transition.
These products continue to remain the cash cows for many fund managers who hide behind new products to avoid scrutiny of their core businesses. Increasingly these conflicts are being exposed by activist groups, such as ShareAction, as well as asset owner collaborations such as the Net Zero Asset Owners Initiative.
As investors look across their entire asset allocations and not just ESG or impact sleeves, it will require asset managers to proactively alter fund mandates to truly reflect their espoused values or asset owners will seek alternative investments.
It is in this respect we need a reimagining of the asset management model. Where conflicts of interest are replaced by reinforcing feedback loops between the returns and impact desires of investors and the social and ecological needs of people and the planet. Taking an uncompromising values-based approach to ESG investing alongside a tangible commitment to deploy our own capital in accordance with our values, provides a blueprint for other asset managers to build upon. We measure our success through not just our own achievements, but those of others we have helped influence on our journey.