FinExtra, Jamie Crawley, Reporter, 21 September 2020
Several assertions are made about sustainable investing – how reliable returns are, how complicated it is, how viable it is in a challenging economic environment and so on.
Richard Peers, founder of Responsible Risk and Finextra Research contributing editor, has been discussing these claims with industry experts, to tackle some of the oft-heard complaints surrounding sustainable investing.
This series of articles will combine these insights and opinions of experts in this space to separate the myths from reality.
6) Claim: “ESG is for small companies: multinationals/groups are too hard to track”
“On the contrary” says Watts. “The main companies that are driving the reporting and action are the multinationals and large corporates. They are also addressing the scope 1,2,3 emissions that is affecting change in the SME supplier market”.
“These are the companies with the greatest visibility and so there is nowhere to hide. Additionally, they do not have the excuse of prioritising year-to-year survival at the expense of longer-term vision”
There is little doubt that Sainsbury’s will still be around in 20 years so there is nothing stopping it from making commitments to meet environmental and humanitarian goals.
Sainsbury’s is, for example, looking at water use and healthy diets and is aiming to reduce its plastic use by 50% and food waste by a half by 2025. Unilever is another company doing a lot of work in this area.
Reality: Wrong it is very much aimed at larger companies. Multinationals and groups must meet a higher bar in terms of transparency and long-term vision than small companies but we need both.
7) Claim: “The customer (consumer and business) doesn’t care about sustainability in these difficult times”
This depends largely who is meant by “the customer”. The younger generation are increasingly drawn to companies with higher purpose and mission. They want to know not just what companies are doing but why they are doing it. “look at the rise of B Corps” says Watts.
A study conducted by the UN in conjunction with Accenture from 2019 found that companies believe that consumers are tied with employees as the key driver of sustainability over the next five years.
Fifty-three per cent ranked the consumer in their top three drivers, compared to 43% naming governments and regulators, 20% the investment community and only 12% the media.
Reality: With the image of “the consumer” undergoing transition into one more concerned with values and purpose, it is likely that sustainability will come to the fore irrespective of economic conditions.
8) Claim: “It’s too hard for the consumer to make an informed choice”
This claim can emanate from the huge scope of ESG performance. Companies’ environmental performance may be very good but show up poorly when it comes to social and corporate governance.
This can be addressed with a tiered level of accreditation, along the lines of ‘Gold’, ’Silver’ and Bronze.
The BSI on behalf of the UK Green Finance strategy are currently refining the requirements for the assessment, governance, labelling and communication of funds presented as having sustainable credentials.
The risk of ESG arbitrage would remain though, so consumer tools would still be required to inform, nudge, and empower the consumer. Campaigns such as Make My Money Matter in the pensions arena will drive demand and supply.
Accessible tools will be needed such as digital wallets that allow consumers to see the effect of their actions and make gamified investment choices that invest in for example, government backed securities.
Reality: True: it is hard for the consumer and there is work to be done to make Sustainable Finance more accessible and transparent to the consumer. We need to look beyond ‘ESG’ as broad set of criteria and adopt a more varied and nuanced approach to accreditation that can be filtered into personalised choices of consumers.
9) Claim: “ESG is Politicizing banks that have a fiduciary responsibility to shareholders”
There is a belief that such laser-focused concentration on ESG turns banks into political lobbyists when their sole duty is to the shareholder.
However, the Business Roundtable “Principles of Corporate Governance” statement from August 2019 attempted to redefine the purpose of a corporation, stating that it should “move away from shareholder primacy”.
“This new statement better reflects the way corporations can and should operate today,” Alex Gorsky, CEO of Johnson & Johnson and chair of the Business Roundtable Corporate governance committee, says.
“It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”
Reality: The fiduciary responsibility of banks is not what it once was and in truth they banks always been closely aligned to Governmental policy, for instance through the Federal Reserve Board the government of the United States appoints one-third of the directors of each of the Federal Reserve banks, and it thus has an indirect share in the management of these institutions. But the bigger point is that we can no longer ignore modern economicsthat prices in externalities that reflects planetary and societal boundaries. Banks need to manage these changes into their risk models.
10) Claim: “Banks should not be targeted with sustainability goals; it should be down to corporates”
The idea that banks are disconnected from the real world was disproved by in 2008 when the world was rocked by the worst economic downturn in living memory (at the time), driven by the irresponsible lending practices of the banking sector.
“The 2008 financial crisis was based on the collateralised debit obligations that drove the crisis,” Watts says.
“Banks need to know who and what they are investing in, in both the primary and secondary market through active management or better chain of custody of the data that is reported from the active manager.”
As the WWF highlights in its recent report Banks do have the tools at their disposal to radically improve their risk models: The Climate & Nature Sovereign Index (CNSI) incorporates real-time data and forward-looking projections to the extent possible. Thanks to ongoing work in geospatial modelling and remote sensing, these are now obtainable and set to improve rapidly over time.
Reality: Banks should be acting as stewards and partners with corporates to achieve sustainable goals. The 2008 financial crisis demonstrated the responsibility banks have for the activity of other entities they work with and lend to. As Rachael Lord Head of EMEA Blackrock says “climate risk is investment risk”.
