This summer, residents of European cities could not help but be affected by calls from protesters for action on climate change. However, short of supergluing ourselves to a building or holding a mock trial outside the Bank of England, what can the alternatives industry do to tackle the climate emergency that has been declared by many of our governments, cities and universities? Has the time come for regulators to give alternatives investors the tools to effect impact?
Some large asset managers have long operated ethical screening and divestment strategies, whether through internal policies, industry guidance or as imposed on them by influential clients. A strategy of screening and divestment is well and good, but, as Bill Gates put it recently, “Divestment, to date, probably has reduced about zero tonnes of emissions.”
To make a difference over the timescales required to meet EU governments’ net-zero targets, more needs to be done than merely shifting the same holding to someone else. The alternatives industry seems a natural place to effect change and facilitate capital being deployed in an impactful way.
In June, the EU Commission published a series of legislative proposals furthering its 2018 Sustainable Finance Action Plan. As part of this, the EU sustainability taxonomy includes a framework for managers to disclose ESG risks and to disclose how they integrate ESG into their investment processes.
Similarly, the recently published Institutional Limited Partners Association (ILPA) 3.0 principles recommend that managers consider maintaining an ESG policy, disclose how ESG is factored into due diligence and, to the extent a manager holds itself out as an impact investor, should adopt a framework to measure, audit and report on the impact actually achieved.
These developments focus primarily on reporting and make reference to measuring the difference made. There has been little guidance on what constitutes a green or impact fund to give asset owners the confidence in allocating positively to those strategies, which many are being pressed to do by their beneficiaries. Further, and as importantly, there is little progress with investors’ negotiating rights if a manager does not implement the relevant ESG strategy or fails to meet its impact targets.
A notable exception is development finance investors, who have long led the way on negotiating levers to effect change if their ESG or impact objectives are not met.
If the growing appetite for green and impact investing is to be met, it is vital that the alternatives industry adopts a consistent framework to give investors the confidence to make meaningful allocations. Building on the EU sustainability taxonomy, the EU Commission has proposed the development of further green standards, including a ‘Green Finance Mark’ for achieving the highest standards in the sustainable taxonomy.
Provided they are workable across a varied asset class such as alternative funds, marks such as this should be developed to mitigate ‘greenwashing’ and simplify the allocation process for investors. Regulators should be brave, however, and attach rights for investors that go beyond simple reporting. If measureable targets are not met, performance fees should be adjusted accordingly and investors should be handed a stick to bring about their goals in deploying capital to those strategies.
By Oliver Crowley, Senior Associate, Pinsent Masons
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