It started as little more than a compliance exercise, but now ESG dominates the agenda.
It’s reshaping adviser-client conversations, as investors demand information on just how their investments are bringing wider benefits.
But it’s a vast subject which can be tackled from various points of view, from the thematic, such as climate change, to the more holistic. The real question is, how do you not only action ESG, but make the most of it?
A dedicated stream at FundForum International in Berlin took the question in hand, with a focus on green finance and climate change.
First, we heard about gains that could be made through public/private collaboration from those involved in the UK’s groundbreaking Green Investment Bank.
The role of government
The Green Investment Bank is probably the best example of how policy and private sector can come together.
It was the first institution of its type in the world, created and initially capitalised by the UK Government.
It focused on investment in offshore wind waste, bio energy and energy efficiency, to the tune of 98 green infrastructure projects worth £3.4 billion (US$ 4.5 billion), and put the UK back on track to meet its targets around renewable energy generation and landfill avoidance.
Once their objectives had been met, the government then stepped back, making a £170 million ($230 million) profit from their investment.
It’s now being used as an example to other countries of how they can tackle climate change.
Gavin Templeton, from the now renamed Green Investment Group, said that the local knowledge and capacity of institutions in a country is critical to making such a project a success.
“The whole ecosystem and how the UK managed to build that knowledge was instrumental. We were able to build that ecosystem very quickly, because we had the intelligent knowledge and the ability and knowhow to get it done,” he said.
James Samworth of Foresight, an independent infrastructure and private equity investment manager, said that the commitment from government had given an important signal and leadership for private markets, which was critical for getting them involved.
“It’s really important to work really closely with industry. They have a great role in upskilling policy makers to a level of detail they won’t necessarily have thought of,” he explained. “Policy makers have have a top-down view,” he added. “But as an investor we try and solve micro problems and the two things need to meet in the middle.”
Similarly, the Green Task Force was set up by the UK government to bring together senior leaders from finance, academia and civil society, to look at how to accelerate green finance.
“We’ve become quite blasé in the UK about how good that collaboration is,” said Templeton. “And how well competing companies work together on such initiatives. The outcomes are extremely positive, but what happens next? We need follow through, and take recommendations and turn them into actions.
“The Global Investment Bank is only one particular building block on the road to success, it’s not a panacea,” he added. “It brings with it measurable targets across party consensus, but we mustn’t underestimate the importance of that political consensus.”
Innovation in green finance
While green bonds are undoubtedly the poster child of green finance, anyone that dismissed green finance as only being about green bonds or a fad isn’t paying attention, said Rhian-Mari Thomas of Barclays.
“Innovations in financial products that are green and sustainable is the future,” she stated. “That’s not naive idealism, it’s a logical and observable consequence of the transition to a lower carbon economy.”
But to stay relevant we need to innovate, she said. For instance, Barclays had been involved in a new type of residential mortgage, as she went on to explain. “Housing in the UK is responsible for 25% of the UK’s greenhouse gases,” she said. “Decarbonising that housing stock is a core tenant of the government’s industrial strategy, and it’s a long term political signalling that is providing a backdrop for innovation.
“We launched a suite of green mortgage products to buyers of new build homes where the property is rated A or B, at 10 bps cheaper than an equivalent mortgage on a non-efficient home. The reason we can do that is because of a smart use of data and an ability to mobilise funds from green capital markets.
“Looking at the data, we found that there was a correlation between more efficient homes and probability of default. We’re likely to see more innovation of this type across different asset classes as we get clearer taxonomies and clearer definitions, and more opportunities for pooling of green assets. Not only is the future of financial services green, it’s really exciting,” she concluded.
Naming and faming
Meanwhile, Sacha Sadan of LGIM explained how they were “naming and faming” those companies that were taking great strides in the fight against climate change, but singling out those that weren’t for possible divestment.
“These are the biggest companies in the world and some are doing nothing in the face of climate change and not explaining themselves to investors. What we have done has got us in the press, which means that we can have a debate about the great companies who are doing a fantastic job of trying to transition. My clients want the opportunity to be invested in those in their mainstream assets.
“It’s amazing to see new products,” he added, “but it does need to go mainstream, we need to think of this in all of our processes and products.”
Patrick Arber of AVIVA said that they had been looking at the climate change issue for quite a long time. “2017 was the most expensive year for weather-related events on record, with over $300 billion dollars of damage. For a general insurer these are not insignificant numbers, and we are only at the beginning of what we are going to see in climate change.
“We have modeled events, and if they continue at this rate, it doesn’t look good for the insurance industry or indeed for the human race.”
He agreed with Sacha Sadan, saying that, “It's not about providing niche products, it’s about looking at a mainstream portfolio and how you are using your influence as an investor through voting, divestment and engagement.”
He also agreed that policy makers and regulators had an important role to play, pointing out a key role to play in improving data: “There is a massive role for government here for climate-related financial disclosure, because without a consistency of the disclosures and compatibility of the data you can’t use it.”
In addition, he said, organisations like the Green Investment Group and the kind of regulation that could come as a result of the work of the Green Task Force was what was driving the market. “Now is not the time to be taking the foot off the accelerator for policy makers in terms of quality,” he said.
Ultimately, perhaps the most important role that ESG had to play was in rebuilding the trust of the entire industry. “There is a massive deficit of trust, and sensible regulations could help to improve this.”