Rachel Whittaker, head of sustainable investment research at Robeco, argues that all would not be lost without global agreement, as local action and grassroots movements can achieve a lot. But realistically, we need global consensus to effect meaningful change otherwise the emphasis in future years will have to shift entirely to adaptation because we’ve missed out on our chance to prevent and mitigate.
“I’m hopeful that change will happen, but the timeframe is going to be critical,” Whittaker (pictured) says.
David Czupryna, head of ESG development at Candriam takes a similar line.
“Grassroot can achieve a lot in creating pressure for governments and economic actors to take the right steps to decarbonise. In that sense, yes, they can play an important role.”
With regards to ‘adapting’ he adds: “We already have to adapt, because we now have greater than 1°C of warming and severe consequences, such as more coastal flooding, heatwaves, droughts, wildfires and torrential rains. It is not adaptation or mitigation – but adaptation and mitigation. Mitigation is key because there are many consequences of climate change to which we will not be able to adapt, such as decreasing yields in agriculture.”
But Catherine Crozat, head of ESG projects at CPR Asset Management, sees things slightly differently. She believes there is still some time ahead to mitigate climate change as close as we can to the Paris Agreement goals, even if the room for manoeuvre is rapidly diminishing.
“To be left with nothing but adaptation because a global consensus could not be found, would be dramatic. I believe this consensus is getting very clear within the financial sphere, to pursue carbon-neutral investment strategies and to finance green technologies.”
European sustainability regulation will really start to bite in 2022
Whittaker believes policy and regulation can bring big changes for sustainable investing. But her biggest concern is the danger that increased regulation could stifle innovation and detract from focusing on real-life outcomes. Essentially, ESG becomes a box-ticking exercise focused solely on reporting on backward-looking metrics or on having the right statements in place.
“The need for investor protection must be balanced with the goal of directing capital to areas where it’s going to make a real difference to achieving the SDGs. I think next year is going to be critical here, as the European regulation really starts to bite and other parts of the world develop their own frameworks,” she suggests.
Adrie Heinsbroek, NN Investment Partners’ chief sustainability officer, believes the first signs will indeed be visible next year on how market players might change their investment allocations. “This will happen slowly but surely. As long as the exact technical standards of the regulations are not known, the influence will be limited. Not only environmental parameters but also the social dimension within the regulatory standards will need to be elaborated upon.”
He adds: “Once this becomes clear, we expect the shift to accelerate. Taking a forward-looking and innovative approach is important, even when not all details of the regulation are known.”
Czupryna also picks up on the lack of clarity in the regulation. “It is true that 2022 will witness several EU regulations coming together, notably the Taxonomy and SFDR. And it remains to be seen to what extent they will contribute to shifting capital towards sustainable activities (their stated goal).”
He adds: “The Taxonomy in particular, taken on its own, does not prescribe anything. It is a catalogue of criteria with an obligation of disclosure attached to it. So SFDR, the Ecolabel, the Green Bond standards, etc will play a key role in bringing it to life and cause capital to flow towards those companies that provide the green solutions we need.”
What ESG integration means in practice
Whittaker stresses the importance of having sector specialists in an SI research team and not just rely on a standardised ESG assessment framework.
“Many of our peers still treat SI research as a support function, but our SI research team contains both sustainability and sectoral specialists. It has become common practice for traditional equity and credit analysts or portfolio managers to say that they integrate ESG, but in practice, no-one’s an expert on everything and the idea that one person can know everything they need to know about every sector, every asset class or every ESG topic is unrealistic.”
Crozat’s view echoes this, stressing that each sector has its specificities, particularly with regard to the levers for reducing greenhouse gas emissions. “A sector specialist will be able to have a better-informed analysis of the carbon trajectories companies take, and of the effectiveness of the GHG emission reduction measures they implement,” she says.
Sandra Crowl, stewardship director at Carmignac, explains that responsible investing requires both a risk approach as well as identifying investment opportunities. ESG indicators and corporate practices can be seen generically, albeit with differing levels of materiality for each sector, geography and company size.
She explains that understanding companies within specific sectors, their supply chains, suppliers, clients, employees – in other words all stakeholders – require a granular understanding of the sustainable growth and long-term value a company can provide.
“We develop a thematic approach to sustainable investing in themes such as climate change solutions, technological transformation, societal development. To understand these secular trends requires a strong sector expertise,” she adds.
Heinsbroek at NNIP draws a similar conclusion: “In our view it is extremely important to ensure an integral approach to assessing an investment case on both their financial and ESG credentials, and to take a value chain approach on the business model, products, services and stakeholders in a sector.”
He adds: “We believe that it’s important to not blindly draw conclusions from ESG data, but to interpret this data in the context of the company, the sector and the value chain it is in. By doing so we can combine risk-return characteristics with resilience and ensure we combine values.”
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