Market Views: How will COP26 enhance ESG investing?
Five days into the 26th United Nations Climate Change Conference, also known as COP26 or the Glasgow Conference, and already several strides in the battle against the climate crisis have been made.
India pledged a net-zero commitment by 2070, and over 100 world leaders representing 85% of the world’s forests promised to stop deforestation by 2030. A little closer to home, the Hong Kong Exchanges and Clearing (HKEX) agreed to join the Glasgow Financial Alliance for Net Zero and the Net Zero Financial Service Providers Alliance as part of its commitment to develop sustainable financial markets.
Within the investment world, institutions have been under pressure to commit to challenging decarbonisation timelines and develop plans that turn commitments into reality. To date, 128 asset managers responsible for $43 trillion in assets have pledged to achieve a carbon neutral investment strategy by 2050 or sooner under the banner of the Net Zero Asset Managers initiative, according to a Morningstar report released on November 1.
According to the latest report by Global SWF, global asset owners have placed increasing emphasis on sustainable investing. In the past month alone, Dutch pension fund ABP pledged to divest $14.7 billion in fossil fuels, New Zealand Super joined the UN-convened Net Zero Commitment, and Abu Dhabi’s ADQ announced its first environmental, social and governance (ESG) policy.
Against this backdrop, AsianInvestor invited experts from asset management, academia, consultancies and law firms to discuss how COP26 will shape ESG investing; which areas need more work from market participants; and which sectors present the most ESG-friendly investment opportunities.
The following responses have been edited for brevity and clarity.
Murray Collis, deputy chief investment officer, fixed income, Asia (ex Japan)
Manulife Investment Management
The COP26 goals around mobilising finance are about advanced economies providing incremental capital to emerging economies. It’s hard to overstate how important this is because Asia is expected to drive more than two-thirds of new global energy demand over the next 20 years.
We think one of the most practical and realistic solutions is for asset owners in OECD countries to invest in sustainable bond funds in Asia.
It’s potentially mutually beneficial because of the higher economic growth rates and investment opportunities in the region. These bonds have been gaining traction because of their sustainability attributes, yield and robust investor demand.
We’ve seen a pickup in ESG bond issuance across Asia while focusing on our credit selection, recognising that not all bonds are of equal quality.
Mervyn Tang, head of sustainability strategy, Asia Pacific
Schroders
Sectors or companies involved in the transition to clean and renewable energy are likely to be one of the recipients of further support in the near term, as governments strive to achieve their climate goals. The energy transition value chain or universe is massive, and new technologies are at the very heart of this, from clean mobility, to transmission and distribution to clean energy generation.
Another area would be natural capital for reasons explained above. Direct investment in sustainable forestry and land management through to businesses that are supporting the shift away from a linear and wasteful economy, and to one that emphasises circularity is a key component of alleviating pressure on forestry, biodiversity, and ecosystems.
Shelley Zhou, APAC ESG lead
Capco
To put into practice the COP26 affirmation of the commitment to reduce and reverse deforestation, local government, investors and private companies will need to work together to make this happen. Many previous agreements made have not achieved their goals – partly due to a lack of unity across market participants. In fact, deforestation has actually increased since a similar pledge was launched in 2014, called the New York Declaration on Forests.
When attempting to put ESG investing into practice, data is also a serious problem. The data currently available on deforestation as an ESG subset is not consistent, reliable, accurate or timely. It is therefore unfortunately propped up by estimation. This example demonstrates how difficult it is to assess the current climate impacts of portfolios at a total asset owner level and showcases why there are such levels of hesitancy from market participants to make meaningful changes.
Although we do see a growing appetite to enact change, investors also recognise they will require support to kickstart these much-needed re-strategized investment plans.
Thibaud Clisson, senior ESG analyst
BNP Paribas Asset Management
Reaching climate goals will need massive and much efforts from every stakeholder. We need more clarity, visibility and leadership for governments with clear, predictable and effective regulations that will bring the world towards net-zero emissions.
We need more and credible commitment and actions from investors to reorient financial inflows towards the energy transition and to push companies towards the right direction. We need more and better data to assess companies and government alignment towards net zero.
We need concrete and ambitious climate actions from corporates to really transition away from fossil fuels. We need more R&D to find solutions for sectors for which net zero seems quite challenging based on current technologies (cement, steel and aviation for example). And finally we need a change in consumption patterns and habits from everybody to be more energy efficient and emit less carbon.
Julie Moret, global head of sustainability and stewardship
Northern Trust
Transitioning to alternative energy sources will lead to long-term growth in the sector and 9 million net new jobs globally, the International Energy Agency estimates. However, that includes a loss of five million jobs related to fossil fuel production and there will need to be ways to lessen the impact of job loss and train workers for new skills, similar to the European Union’s €19.3 billion Just Transition Fund.
Correspondingly, we expect to see a greater focus from investor engagement with corporations on social issues related to growing inequality.
Kaoru Umino, partner, finance, projects & restructuring, Japan
DLA Piper
From asset managers and investors in Asia, we hope to see more stewardship and long-term engagement with their portfolio companies on climate issues, similar to what European asset managers and investors have been doing, so that they can have a clearer understanding of what these companies are doing to transition to a more sustainable business model and hold these companies to account in adhering to net zero commitments and avoiding greenwashing.
At COP26, we hope to see progress on Article 6 of the Paris Agreement resulting in a framework for global standards for a carbon market. Meaningful carbon price is necessary to incentivise companies to transition to a sustainable and net zero aligned business model, and a truly global carbon market would provide net zero incentives at a scale necessary to shift capital at speed to finance rapid transition.
Thomas Hohne-Sparborth, head of sustainability research
Lombard Odier
Traditional sustainable investment approaches, such as ESG criteria, tend to be based on historical data, focusing on companies’ business practices, rather than their business models.
The adoption of standardised measures would also help address charges of “greenwashing” against investment firms. With 50% of all first-half 2021 flows into European exchange-traded funds going into ESG products, a lack of transparency and common standards leaves the door wide open to critique. COP26 is an opportunity for the investment industry to start making a real impact.