Finance and policy: The external drivers forcing businesses to take climate action

Sustainability professionals have often found frustration when trying to embed CSR across an entire organisation, but the mainstreaming of Environmental, Social, and Governance (ESG) investing looks set to create new momentum behind the green recovery.

A host of green finance experts met virtually on day one of the Sustainability Leaders Forum

A host of green finance experts met virtually on day one of the Sustainability Leaders Forum

The tragic impacts of the coronavirus pandemic have derailed the global economy after it slumped past the financial crash of 2008/2009. The FTSE 100 suffered its worst performance since 1987 and the UN projects that foreign direct investment flows could fall between 5% and 15%.

From the metaphorical ashes of this financial collapse, a phoenix has emerged in the form of a green recovery. More than 100 environmental NGOs and one million European citizens have joined the calls from the likes of the European Corporate Leaders Group (CLG Europe) and the Climate Change Committee in pursuing a green recovery of the economy that assists with the ongoing fight against the climate crisis. This, in turn, has seen the likes of the UK Government and the EU pledge to drive investment into green markets as part of the “build back better” mantra.

One of the strongest voices in the chorus of green recovery calls has been that of investors, many of which are seeking to de-risk portfolios from future economic shocks. The coronavirus pandemic has confirmed that disruptions can emerge quickly by failing to heed scientific advice – scientists have been warning society about disease pandemics for decades – and the economic and societal damage seen over the past year could be replicated and amplified by the climate crisis.

On day one of edie’s Sustainability Leaders Forum (2 February) green finance experts from across the investing spectrum offered their thoughts on what would be the future drivers of capital markets. During the discussion, it became abundantly clear investors are focusing on ESG risks, which poses a huge financial risk for corporates failing to act accordingly on a range of climate and social issues.

The issuance of ESG bonds increased by 272% year-on-year during parts of 2020 as investors and insurance firms take proactive steps to respond to the coronavirus pandemic. But as Edward Vaughan Dixon, head of ESG at Aviva Investors Real Assets highlights, this doesn’t mean that the economy is aligned to a low-carbon and socially resilient future.

“There are about $90trn of assets out there that are managed, these are people’s savings and pensions. About half of that money – although this changes from week to week – is managed by an organisation with some sort ESG criteria applied to it. Unfortunately, that is not achieving the sort of change that we need. Emissions are still going up annually, so we need to rethink the problem,” Vaughan Dixon says.

“If you work for a listed company then most of the ownership of that company is made up of asset managers who are managing this money. It's important to know that individually we’re all involved, so we all have an onus to get involved in this challenge. We need financial products that will create change in the world. Asset managers can invest in companies that are making a difference, they can invest in low-carbon solutions, but we all have a voice to take more action.”

Policy push

Historically, fossil fuels have been a moneymaker for investors. In the UK, for example, the oil and gas sector generated 24% of dividends from the FTSE Index in 2019, and last year, it was revealed that the world's largest investment banks had funnelled more than £2.2tn ($2.66tn) into fossil fuels since the Paris Agreement.

But change is swiftly sweeping its way across financial markets, to the point where it is now apparent that ESG investing has become mainstream.

BNP Paribas Asset Management’s chief sustainability strategist Mark Lewis claims that excluding and divesting from companies that are failing to improve environmental performances has been a strong method to align financial markets with the low-carbon trajectory, but that increased uptake in net-zero policies will also send signals to businesses.

“There’s never been a more exciting time to be in sustainability and that should give us hope that we can accelerate and further the cause of net-zero,” Lewis says. “There are limits on what the asset management industry can do, however, we’ve done tremendously well to focus the minds of corporate leaders on the importance of net-zero, but we need alignment with the actual economy.

“We’re seeing policymakers set net-zero targets, which will force companies to align one way or another, whether they like it or not. Excluding companies from portfolios becomes less necessary if policymakers are putting in place net-zero frameworks. Then it is a decision for the company of whether they want to align with that and if they don’t, they’re going to go out of business.”

Indeed, as the low-carbon markets rise the global market value of fossil fuels is set to collapse by almost two-thirds, creating heightened economic risk for companies, financial markets and countries failing to embrace new low-carbon technology.

Fossil fuel growth was already measuring at below 1% annually, as clean technology falls in price and improvements in efficiency to provide power across the world. However, the fossil fuel sector has been impacted by the coronavirus, with the International Energy Agency warning that demand is set to fall 9% in 2020.

Carbon Tracker warns that any oil or gas producers attempting to revert to “business as usual” could be risking in excess of $100trn in potential profits. The impact will be felt at multiple levels. Companies across the fossil fuel system are worth $18trn in listed equity, which accounts for a quarter of the global equity market value. They also account for $8trn of corporate bonds, which is more than 50% of the non-financial corporate bond market.

Lewis notes that one of the biggest benefits of the low-carbon markets is that “you don’t have to dig for wind”, meaning that the cost of renewables is on infrastructure allow – a cost that has plummeted in recent years.

Engagement complex

Investing in low-carbon businesses remains a more complex issue for investors, however. Investors like BlackRock and Aviva have warned that they will divest from companies that refuse to align with climate science, but what constitutes as sustainable in the corporate world is more nuanced than decarbonisation alone.

Currently, a key barrier to investor and corporate engagement is confusion over what is considered sustainable, and therefore investable. A survey of 650 institutional investors with more than $25.9trn in assets under management globally has found that investor-corporate engagement on environmental issues is growing - but so is frustration over greenwash.

Much like the financial sector, current corporate sustainability efforts are rife with greenwash. As such, investors are asking for more ESG data through thorough benchmarks and frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD).

David Harris, the group head of sustainable business for London Stock Exchange Group, believes that another issue is that companies don’t have the “whole picture” as to how the investment community is changing and why it is of paramount importance that corporates disclose stronger and more relevant data.

“The level of change in financial markets and investments is incredible, but there is real lack of understanding and a misunderstanding between the different sides,” Harris says. “This has moved from being a very niche issue to being the main reason why pension funds have changed benchmarks. Climate is a colossal issue and most companies have got very little visibility on the level of change in these markets.

“The companies don’t really have an idea of how their sustainability data is being collected and fed into different methodologies and how it is leading to investment allocation shifts. It is really important that we start to engage, and there is a need for the industry to better engage with corporates to help them understand how priorities are shifting and better engagement with investors.”

From 2023, all publicly listed UK companies with a premium listing will be required to “comply or explain” with the TCFD’s requirements. Rules will then be tightened and extended further in 2025, subject to consultation. Vast swathes of the UK’s finance industry will be subject to these new requirements, including major pension schemes, life insurance providers and asset managers, Sunak said.

On a global scale, the TCFD updated status report revealed that verbal commitments to support its recommendations have skyrocketed by 85% within a year. Some 1,500 organisations, including banks, pension funds, reinsurers, end-user businesses and government departments have vowed to implement the framework. However, the gap between talk and action remains - the quality of reporting has increased by an average of just 6% since 2017.

Corporate financing

Frameworks like the TCFD help overcome cases of corporate greenwash while also ensuring that investor portfolios are truly green. But alongside ensuring that data is disclosed and showcases ambitious climate strategies, what else can corporates do to help fast-track the transition to a green economy?

In an earlier discussion at the Forum, the World Business Council for Sustainable Development’s (WBCSD) managing director for climate and energy and former UK energy minister Claire O’Neill emphasised the importance of corporates following up net-zero targets and other lofty, long-term goals with regular and transparent reporting on progress. However, an often overlooked aspect of corporate reporting is the financial make-up of the stakeholders supporting the company.

Late last year, Pensions provider Scottish Widows outlined plans to divest at least £440m from companies that have failed to meet its ESG standards, in what is claims is the most far-reaching exclusions process in the sector.

The insurer’s new exclusions policy will help it to divest from companies which derive more than 10% of their revenues from thermal coal and tar sands – two of the most aggressive, high-carbon forms of fossil fuel extraction. Arms manufacturers and companies which have previously been proven to flout the UN’s requirements on human rights and the environment will also be dropped.

Scottish Widows has said it will only keep investing in companies with historically poor performance on ESG if it believes it can “influence positive change to their business models”.

According to the company’s head of pension investments Maria Nazarova-Doyle, one aspect of business model modification that can be explored is looking at finances with more scrutiny.

“The research shows that even if you recycle, if you swap out car journeys, you shower for shorter periods of time and cut down to one piece of meat a week - all of these everyday activities we can do to have less impact on the environment are not as valuable as moving our money and pensions into sustainable funds,” Nazarova-Doyle says. “The difference is 27 times greater in terms of positive impact. It’s important that everybody has this in mind when making everyday changes.”

While Nazarova-Doyle was commenting on the actions of individuals, it holds true for businesses as well. Many are rolling out low-carbon products and services yet financial support and indeed the lobbying of groups it is associated with are often blind spots of what is an otherwise holistic sustainability strategy.

Seb Beloe, partner and head of research of WHEB Asset Management summarises what this means for the sustainability professional, noting that internal engagement will be key to ensuring that relevant information is relayed to financial institutions and vice versa.

“One thing that sustainability practitioners should think about more, moving forward, is how they engage with their investor relations team in the business,” Beloe says. “If you’re a sustainability practitioner, these teams need your help to answer investor questions on this topic, because they are under much more pressure from investors.”

Businesses championing sustainability and renewed purposes are rising by the week, but it seems it will be how companies engage with the investor community through transparent and honest data that will prove which are worthy or reaping the financial benefits of the green recovery.

There's still time to join the conversation at edie's Sustainability Leaders Forum 

From Tuesday 2 to Thursday 4 February 2021, edie's award-winning Sustainability Leaders Forum event is returning in a brand new virtual format. This year, we are delighted to bring you speakers including former Energy Minister Claire O'Neill and World Green Building Council CEO Christina Gamboa. 

This event will allow you to be connected with peers via face-to-face via video chats; be inspired by high-level keynote talks from industry leaders; be involved in a series of interactive panel discussions and live audience polls; and be co-creative in our interactive workshops, whilst also meeting leading technical experts in our dedicated virtual exhibition zone. Rooms, expo booths, private chats, bespoke stages and backstage passes – it’s all possible. 

For a full agenda and to register now, visit: https://event.edie.net/forum/ 

Matt Mace



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