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Supplements » ESG Report October 2021

ESG roundtable: Darker shades of green

As COP26 draws near, ESG experts discuss how momentum is set to increase for responsible investing on the back of the summit, as well as issues surrounding greenwashing and labour rights. Chaired by Alex Rolandi.

ESG_roundtable_Oct_2021

Jag Alexeyev (Head of ESG insights, Broadridge)
Stephen Barrie (Deputy director of ethics and engagement, Church of England Pensions Board)
Jane Firth (Head of responsible investment, Border to Coast Pensions Partnership)
James Gloak (iShares EMEA sustainable investing strategist, BlackRock)
Rumi Mahmood (Senior associate, ESG research, MSCI)

Funds Europe – Where do you see the main risks and opportunities in the ESG space over the next year or two?

Rumi Mahmood, MSCI – From a product perspective, the main risks lie in not moving fast enough – fast enough with investor demands for more transparency, for more total portfolio solutions, and ESG data sets that effectively enable informed portfolio construction. There are still parts of the market that ESG hasn’t yet fully penetrated, so there’s room for improvement in parts of fixed income, private assets, alongside other areas such as commodities.

The intersection of thematic investing with ESG is also becoming more pronounced. Areas such as cleantech or circular economy were previously niche investment areas but are now increasingly overlapping with the ESG space. These untapped assets, alongside climate investing, are where the main opportunities lie. Investors have become accustomed to ESG investing, but now the next darker shade of green is climate investing and aligning portfolios to climate and temperature goals.

James Gloak, BlackRock – There are two trends that will be prevalent for the next couple of years. One is the transition from traditional to sustainable portfolios. The market has done well so far with the sustainable strategies currently available. However, it is incumbent on us to provide strategies for the market as a whole to help clients transition to sustainable portfolios.

This sustainable wave has been building over the last couple of years: if we look at data up to the end of August, 46% of all flows into ETFs went into sustainable ETFs; if we go back to the end of 2019, the figure was just 15%, according to BlackRock’s research at August 2021.

With the UN’s COP26 taking place in Glasgow in November, it’s a great time to discuss with clients how they want to incorporate climate into their portfolios.

The other prevailing trend will be the need for transparency. Greenwashing is a potential risk to investors and we strongly support regulatory initiatives to set universal, consistent standards and increase transparency for sustainable portfolios.

Jag Alexeyev, Broadridge – The transition to a low-carbon economy will generate substantial wealth over the coming decades and that’s something that asset managers can help deliver on behalf of their shareholders. However, there are risks to certain assets related to this transition – climate and stranded-assets risk could grow to become more systemic issues which financial market participants will need to carefully navigate.

Last year more than €300 billion went into ESG funds worldwide, and that momentum has continued into 2021, with over €340 billion so far through to July. By the end of the year, we may well see around €700 billion of inflows into ESG funds. On the flipside, there is a risk that comes with gathering all these assets. A temporary cloud may be cast over the industry, as well as accusations of greenwashing if firms can’t articulate how they add value through ESG in an environment of general scepticism surrounding ESG investing in the media. Any more high-profile cases of greenwashing will add to the confusion but, overall, the opportunities largely outweigh the risks on a long-term basis.

Stephen Barrie, Church of England Pensions Board – Scrutiny and rigour is likely to step up over the next couple of years, as well as the differentiation between different sustainable strategies.

While many asset owners and managers are making good ambitious commitments to climate transition, and have timelines in place to achieve net zero, I believe we will start to see more movement at the portfolio level, improved fund offerings, and increased use of tools that investors can use to identify companies that are transitioning. We might even see wider adoption of approaches that go beyond the relatively crude measure of carbon intensity.

I believe there will also be an increased interest in systemic approaches to stewardship, not just on a company-by-company basis but thinking broadly about market beta. How can we as long-term institutional investors address systemic risks through engagement? Climate is a good example, but we have also been working hard on supply chain risks around mining, where a group of investors have been engaging to address the risk of tailings dam failure – large structures created to store mine waste.

Diversity, something that the finance industry has struggled with, is still very much on the agenda, and the Asset Owner Diversity Charter is a new initiative that I expect will increase the scrutiny and decision-making around this issue.

Jane Firth, Border to Coast Pensions Partnership – The energy transition will be one of the key drivers of future investment opportunity around the world and there are clear opportunities for investors in areas such as renewable energy expansion, the upgrading of utilities and electricity networks to accommodate renewables, and the railroads as a lower-carbon freight alternative.

The decarbonisation of global energy generation also opens up less obvious opportunities in overlooked sectors, such as cement and steel, which are high emitters of greenhouse gases today, but which will be essential in helping drive the development needed for the energy transition. These sectors still need continued investment, but as a responsible investor, we also need to actively engage with companies to ensure that investment is effectively deployed to make improvements, reduce emissions, and become part of the climate solution, not remain part of the problem.

The pandemic has also highlighted the role ESG plays in bringing to light issues that were not previously considered to be material financial risks. An increase in flexible and remote working has led to issues on social and financial inclusion, as well as data and cyber security, for individuals and companies that investors should be aware of when assessing assets. The transition towards online commerce places an increasing focus on supply chain management, both in terms of supply of goods and the safety of workers in distribution centres, and governance issues will continue to be a focus, with remuneration of executives in the spotlight.