Sustainability and financial stability can go hand in hand, but investment managers want an explicit mandate if they are to see green investment as their primary task
Private funding:
Most of the funding needed to help European countries meet their international climate goals will have to come from the private sector
Gaps:
Good quality data is vital for investment managers to manage risks, including climate change
Leader:
France has introduced the world’s first law obliging investors and asset managers to report on climate risks
Key quote:
“If you are a pension fund, the financial and non-financial risks [such as climate change] coincide because you have a very long-term view.”
Europe will need an extra €180 billion of investment a year until 2030 to meet its climate goals, the European Commission, the EU executive, estimates. Most of that will have to come from the private sector. A serious effort is underway to reorient capital flows towards more sustainable investments. The idea is that finance can contribute more to sustainability, while a greater focus on sustainability will improve long-term financial stability. “If you are a pension fund, the financial and non-financial risks [such as climate change] coincide because you have a very long-term view,” explained Steven Keuning from the European Central Bank (ECB) Pension Funds at an annual conference of the non-profit environmental disclosure platform CDP in Brussels, Belgium in February 2019. The main problem, he continued, is that: “High likelihood, very high impact but long-term risks are not appropriately reflected in current market prices.” Investors like to point out that the best way of stimulating green investment would be for policy makers to impose a hefty carbon price on all economic activity. “It is unfair of public authorities and NGOs to put all the burden on investors,” complained Olivier Rousseau, executive director of the Fonds de Réserve pour les Retraites, at the same event. He is far from alone. Many investment managers argue that unless they have an explicit mandate to do otherwise, their first job is to maximise returns, not invest only in climate-friendly projects. Win-wins are possible, but not a given.
Better risk management
Where they see a real opportunity is in better risk management. Investors have to manage risks and climate change is one of them. What they need is good data. CDP aims to fill this gap, launching its second report on European corporate environmental performance and handing out awards for climate-friendly investment funds at its event in Brussels. Basic data collection should ultimately become a task for public authorities, argued Keuning. That would leave organisations like CDP free to focus on analysis and metrics, and the financial sector free to turn this data into customer offers. Investors want more information, but they do not want governments deciding what is green and what is not. “It is not about green or greener,” said Kuening, tellingly. Yet this is exactly where the Commission is heading. The most controversial of three new laws it has proposed in the context of a sustainable finance action plan is one to create a “green taxonomy” for investments. As Members of the European Parliament (MEPs) and EU member states struggle to take a stance on this, a technical expert group created by the Commission is already preparing a first draft of the taxonomy.
Disclosure requirements
A noteworthy precedent was set at the end of February 2019 when MEPs and member states reached a deal on another of the proposals. On the face of it, this was aimed at introducing low-carbon benchmarks for investment portfolios. More significantly it brings in rules for the mandatory disclosure of the climate impact of investments. The major step forward is that benchmark providers [such as Standard and Poor’s, MSCI, Bloomberg and FTSE] will be required to disclose their degree of alignment with the Paris climate agreement, says Sebastien Godinot, economist with the NGO WWF. The crucial change compared with the Commission’s original proposal is that disclosure will be required for all benchmarks, not just a tiny niche (\<1%) of benchmarks dedicated to green funds, explains Godinot. The same logic applied to the other two files would mean a green taxonomy and rules on investor disclosure for all kinds of investments. This could have far-reaching effects. France has the world’s first law obliging investors and asset managers to report on climate risks. France also made up a third of the CDP’s European climate “A-list” in 2018 and was home to seven out of the ten most climate-friendly investment funds in Europe. There was pretty much universal agreement at the CDP event that environmental, social and governance (ESG) criteria are becoming part and parcel of investment decisions. For the first time last year, CDP data became the basis for an index and an investment fund. The point of the CPR Climate Action Fund “is to let our investors choose companies that have done a great job”, explained Valerie Baudson, CEO for the fund at Amundi, Europe’s largest asset manager.
Big challenges
Great challenges lie ahead, however. All of these efforts are starting with climate data — carbon emissions are easiest to measure — but other aspects of the environment, social and governance criteria are slated for inclusion too. CDP has already started requesting data on water and forests, but the information coming in lacks the completeness and granularity of the climate data. Even on the climate front, challenges remain. No companies from Eastern Europe made it onto the CDP’s climate “A-list” last year. Nor is it easy to decide how far down the supply chain to hold a company accountable for its impacts. And so far, this remains first and foremost a European initiative. The EU is seeking to maintain its global leadership on climate change. It needs to shift trillions towards climate action and financial regulation offers an additional lever to do so. Investors prefer to keep it simple: “We are continuing our search for good, profitable, green projects,” concluded Rousseau.
Writer: Sonja van Renssen