Moving beyond ESG to real world impact in a new era of scrutiny for investors

edie’s inaugural Sustainable Investing Digital Conference, which took place this week, also heard that the extraordinary growth in sustainable or ESG investment has not been held back by the worldwide economic downturn.

Indeed, the reverse. 

Latest figures from investment research company Morningstar, show sustainable funds have raised just over +€97bn year-to-date, against outflows of -€27.9bn for non-sustainable funds. 

The rush towards ESG has also seen an important bulwark for action against the rise of passive investment.

Chief executive of Swedish pensions investor Alecta, Magnus Billing, emphasised the importance of in-house knowledge and of “knowing in who you’re investing”.

In the patchwork of specialist sustainability research firms, indices and rating agencies, with their often contradictory results about the very same companies, Billing called for methodologies to be shared. “We need the cooperation of issuers, to make the changes we want to see,” he said. 

But what dominated this week’s debates was not simply integrating ESG (Environmental, Social, Governance) factors into investment analysis and decision-making, but going “beyond ESG”, with a new focus on impact investment. 

The case to still work hard on integration was put by Cathrine de Coninck-Lopez, Global Head of ESG at US-based asset manager Invesco, who described the label ‘negative ESG momentum’ which they ascribe to companies. “It is about seeking control not exclusion,” she said, in response to concerns that that screening out ‘dirty’ companies and sectors, led to the problem being shifted through divestment rather than being addressed. 

The call to enable the transition of ‘brown‘ investments rather than simply focus on promoting specialist green investments, was repeated many times over the two days of the conference.

However, the separate call to move beyond ESG to impact investment was made clearly by Seb Beloe, Partner and Head of Research at WHEB Group: “All investing is impact investing because every investment has impact – it’s only whether investors know the impact we’re making.” 

Important initiatives to develop accounting to promote a true understanding of impact including the Impact Management Project, the Partnership for Carbon Accounting Financials and the Impact-Weighted Accounts Initiative, were listed by Tribe Impact Capital’s Co-founder & Chief Impact Officer, Amy Clarke.

Aaron Pinnock, impact investment analyst for the Church Commissioners for England, neatly described the difference as “ESG is about internalising externalities, whereas impact is about enhancing real-world outcomes.” Wolfgang Kuhn, Director of Financial Sector Strategies at shareholder activism pressure group ShareAction, said the difference was between “expanding what is considered to be a financially material risk from ESG factors, as against strategic objectives for what the investment will achieve.” 

The global gathering attracted many new ESG investors as well as mainstream investors undertaking their own engagement in ESG.

Presentations left the audience in no doubt about the challenges which remain. Only 5% of current corporate reporting on the Task Force for Climate-related Disclosure recommendations, states impacts in financial terms. Only 3% of companies have set credible targets for the UN’s Sustainable Development Goals.

The implied temperature rise amongst companies quoted on the London Stock Exchange alone is 3.8 degrees – double the Paris goal. 

The ‘S’ in ESG remains under-developed, reflected by Federated Hermes International’s Head of Responsibility, Leon Kamhi, when he reminded investors of the simple need to promote ‘human dignity’. 

Meanwhile, impacts are reported by fewer than one-in-six large companies; with Scope 3 (indirect, value chain) carbon emissions, by only a minority in business. These echo the findings I helped produce earlier this year, as part of the ‘Alliance for Corporate Transparency’ research project.

Despite all the talk on ESG in recent years, speakers were insistent that the reporting still falls short, and that the real aim must not just be reporting but action.  

The most evocative call of the week came on the issue of improving ESG data quality, from Mark Lewis, Global Head of Sustainability Research at BNP Paribas. “It is not difficult to report, in an era of Big Data…If anyone says it’s too difficult, it’s by no means as difficult as the challenges of climate change itself.”

Everyone participating this week was left in no doubt that external demands make action on ESG imperative for all in the investment community.

Europe’s Sustainable Finance and Disclosure Regulation (SFDR) will require reporting of 34 new quantitative impact performance indicators, from as soon as March next year. The European Union’s Climate Transition Benchmark already requires decarbonisation through yearly 7% reductions in greenhouse gas emissions. 

Two members of the EU’s Technical Expert Group explained how elements of its new green taxonomy were also already implemented, with an intention to add social to the remaining environmental objectives in the future.

Attempts at standardising ESG metrics to create a much more coherent landscape for both investors and corporates are being pursued both in Europe and by major global bodies including the World Economic Forum, the International Organisation of Securities Commissions and amongst existing voluntary standard-setters and frameworks. 

BlackRock’s Vice-President for investment stewardship, Jessica McDougall, explained how they and other major investors have made a step-change in using proxy voting for ESG objectives, with transparency in ‘near real time’ for their voting record.

Aviva Global Investors’ Chief Responsible Investment Officer, Steve Waygood, called for every investor to have their own capital-raising plan to meet the Paris Goals, and invited all participants to join a new International Platform for Climate Finance, for investors to press public policy-makers to require this. 

Change is happening. Investors are themselves subject to far greater scrutiny for their ESG performance. This will only intensify. 

All of this was summed up in the analogy of the week from Peter Munro, Head of Investor Relations, Sustainable Finance, at the European Investment Bank, all of whose lending will be Paris-aligned, starting from next year.

“We’re sky-diving – starting high, but coming down very quickly,” he said.

This week proved that despite the winds swirling around us, there is still a soft landing to be made.