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Supplements » ESG Report October 2021

ESG roundtable: Darker shades of green


Funds Europe – It is estimated that around $1-2 trillion of investment is needed to achieve carbon neutrality by 2050. With this in mind, how can fund managers justify having high-polluting sectors such as agriculture and oil in their portfolios? The pace of change in these industries is notoriously slow – is engagement enough to drive the transition?

Barrie – It is reasonable to have high-emitting companies in a portfolio so long as they have a credible story to tell on transition, including the governance arrangements they have in place to monitor, assess and drive their own transition plans. They need to have a credible forward-looking transition plan that can be interpreted by outside stakeholders.

Although the pace of change in some sectors is notoriously slow, we’ve seen some significant progress recently, but engagement is not enough. Regulators have to come to the table.

Financial markets can lead, especially with ambitious net-zero commitments, but we can’t get too far ahead of regulators. There needs to be a level playing field and regulators have a very important role to play here by making sure that transition measures apply right across the board. We can have voluntary commitments, we can have companies that want to be seen and recognised as leaders in climate change – even in high-emitting sectors. But if regulators don’t come to the table too, we will lose the progress made so far on net zero.

That said, regulation alone is not enough either; we need leadership and creative solutions.

Firth – We believe these sectors will play a vital role in the transition to a low-carbon economy. A company which has higher carbon emissions today may in fact have strong, feasible plans in place for the future and offer vital materials or skills needed for the energy transition. So, it is about digging deeper into a company’s plans to ensure it is focused on reducing pollution and supporting the transition, and that often requires a long-term outlook. Climate change is a systemic risk, therefore we are concerned primarily with real-world emission reductions. We believe engagement is the way to achieve this, we can have greater impact working from the inside as an active investor to try and accelerate the pace of change.

Simply divesting from high-polluting sectors does little to solve the underlying issue of societal demand and can have unintended consequences. Where there is a seller, there is almost always a buyer, and there no is guarantee that the investor that steps in to fill the void left by divestment would act as a responsible, active investor and continue to hold these companies to account.

Mahmood – Everyone’s aware that many businesses and governments have steadily moved towards making climate change higher up in their agendas, hundreds of companies have set science-based targets in line with the Paris Agreement and publicly committed to using 100% renewable energy or made other various climate pledges, but despite that, as measured by declining emissions, thus far the progress hasn’t been exceptional, even considering a year of Covid lockdowns.

Part of the problem lies in how many organisations have the tendency to approach the climate challenge through a lens focused narrowly on the single business or industry. The typical sustainability roadmap looks almost exclusively inward, taking stock of existing emissions footprints, setting mitigation targets and then developing a plan to achieve them, so current leading commitments may pledge to influence suppliers or reduce Scope 3 emissions, and these approaches need to address an overarching point – the transition to a low-carbon economy demands the synchronised transformation of multiple interdependent systems.

As an example, an electrified vehicle fleet significantly addresses climate change only if it’s charged with clean, renewable electricity and manufactured with circular, low-waste processes using sustainably extracted raw materials. It’s only by adopting a more comprehensive systems view of the emerging low-carbon economy that we can begin visualising the various connection points and contingencies, which then better allows organisations to work more collaboratively for the most impactful climate solutions. Overall, the process isn’t just reliant on engagement; engagement’s part of the solution but, as mentioned, governments, regulators, investors, consumers and non-market participants all have a role to play in the total systems shift.

Alexeyev – We’ve seen significant activity on the engagement front that’s perhaps unexpected. Earlier this year a relatively new, small, unknown activist investor, Engine No. 1, managed to turn over several board seats at Exxon with the support of large asset managers who voted along. The oil industry and other high-polluting industries know that they need to transition to survive, and the International Energy Agency has a roadmap towards net zero. Asset managers need to be careful about how they articulate their net-zero credentials; earlier this year, there was a ruckus over whether a portfolio can be net zero because the avoided emissions from its renewable energy investments offset their high-polluting portfolio.

Gloak – There are still simple issues that we need to deal with – for example, making sure that all companies disclose their Scope 1 and Scope 2 emissions. Getting this data from a reported rather than an estimated perspective will allow for the creation of better indexes that can help drive momentum.

In time, we believe the companies that are successful in responding to climate threats by developing climate-oriented solutions and implementing better practices in their supply chains may be poised to capture additional market share. For investors, until recently divestment was the predominant way to express climate-oriented objectives. But this is rapidly changing. Index-based ETFs are bringing transparency and accessibility to this emerging segment.

There are now nearly 600 ESG ETFs globally, up from around 30 a decade ago, and a growing number include climate-oriented considerations, according to BlackRock analysis of Morningstar global data at December 31, 2020.

The increasing number of sustainable ETFs, including climate-oriented ETFs, offer new and convenient ways for investors to access innovative strategies. We believe passive ESG strategies are going to play a key role in the transition to a low-carbon economy by providing investors with the transparency they need to pursue their specific financial.