Asian institutions urged to move beyond picking green assets for impact
Asian institutional investors are failing in their sustainability obligations and ability to make a real-world impact, according to the head of the UK body charged with formalising standards for investors’ emission reductions.
Asset owners in the Asia Pacific have to move beyond selecting companies according to how green they were and consider asset-, region- and country-specific transition planning at the level of asset allocation, Ben Caldecott, co-head of the Transition Plan Taskforce (TPT), told AsianInvestor.
TPT is the UK government-backed initiative formed to align UK climate transition planning with global regulatory standards.
TPT
“The current assumption is that if you own a green thing, you’re making the world a better place [is wrong].
"I don’t think if you’ve invested in some companies and some of them are green that you get to claim all their green activities and put that in your annual report. That’s not how we achieve change in the real world," he noted.
STRATEGIC ALLOCATION
However, it is rarely addressed systematically by asset owners, leading these issues to be primarily considered only at the asset manager selection stage, noted Caldecott.
“This needs to change. Different asset classes and regions will experience varied impacts from climate change, depending on the trajectory of future climate pathways, and the potential for positive impact also varies significantly by geography and asset class," Caldecott said.
Overlooking this at the allocation stage is a substantial missed opportunity to enhance both risk-adjusted returns and sustainability impact, he noted.
Institutional investors in Asia Pacific need to move away from passive measurement of emissions in their portfolio towards more specific, measurable sustainability targets that they must report against, he said.
"As an asset owner, you need to define a strategy for achieving the real-world outcome you want – which could be a climate outcome, related to the just transition or to achieving [other goals like] water access," he added.
That means figuring it out via stakeholders and beneficiaries they need to engage with. Once they are clear about the issue, they need to define how they go about achieving the desired outcomes.
"It’s about a robust set of theories for change, creating strategy for execution, then measuring progress towards execution. That [approach] is at an early stage,” Caldecott noted.
APAC INTEREST
Caldecott, who is also a member of the UK Climate Change Committee, the UK statutory body that advises UK government on emissions targets, pointed to investors’ growing allocations to Asia Pacific.
He noted these had included “a huge amount of interest in infrastructure”, as reflected by growing levels of M&A activity and acquisitions across the asset management industry.
One example, he said is the $12.5 billion acquisition by BlackRock of Global Infrastructure Partners (GIP), the $106 billion private infrastructure group with offices in Sydney, Melbourne, Brisbane, Mumbai, Delhi, Singapore and Hong Kong.
In May, Caldecott, who is also founding director of the Sustainable Finance Group at Oxford University, was lead author on an academic paper questioning whether conventional practice of aligning financial portfolios with given sustainable targets by buying and holding green assets, and selling brown assets, in fact, achieved any impact.
EU ASSUMPTIONS
This assumption underpins the European Union Sustainable Finance Taxonomy and Sustainable Finance Action Plan, a cornerstone of the EU's sustainable finance framework and an important market transparency tool.
“It is not yet clear whether, how, and to what extent, this assumption is justified. At the very least, there is insufficient evidence to support the claim that a portfolio alignment approach to sustainability necessarily generates any real economy impact, and the two should not be conflated,” Caldecott and his co-authors noted in the paper, titled How sustainable finance creates impact: transmission mechanisms to the real economy.
Caldecott called for investors to drive the wider adoption and use of transition plans, which was an essential part of more sustainable investing.
“Asset owners should really be pushing the adoption and use of transition plans,” he said.
The International Sustainability Standards Board (ISSB) in June announced it would absorb the TPT’s disclosure and implementation plans into IFRS S2, its guidelines for climate-related disclosures.
Following the move, the TPT was disbanded at the end of October.
Caldecott said the ISSB is now a “significant resource for asset owners, to tell asset managers and [investee] companies to help them become more sustainable over time.”