Asset Managers – Plenary Practitioner Session @ FINEXUS Conference
Summary. An increasing number of asset managers have started to be vocal in demanding better disclosure of climate risk and decarbonisation from companies in which they hold shares, specifically in the fossil fuel and utilities sector. Others have moved substantial portions of their funds towards climate friendly investments as part of a broader ESG strategy. Such decisions entail profound organisational processes and changes. This session discusses the incentives for investors to demand better disclosure of climate related financial information and potential barriers in terms of metrics and processes. Climate disclosure will be discussed in the context of the necessary capital allocation to meet the international climate goal and the Sustainable Development Goals.
Panel – click here for speaker biographies:
|Maximilian Horster (Managing Director and Head of ISS-Ethix Climate Solutions)
|Antoinette Hunziker-Ebneter (CEO, Forma Futura)
|Rachel Whittaker (UBS, Sustainable Investment Strategist)
|Max Martin (Lombard Odier, Global Head of Philanthropy)
|Roland Hengerer (Senior Analyst, Robeco SAM)
|Alexander El Alaoui (Portfoliomanager, Salm-Salm)
Background and policy context.
Historically, the criteria for how and where to invest financial assets have been varying across time, institution and person. Financial return and risk (adjusted) are the predominant criteria, but not the only ones. Today, increasing portions of assets under management are classified under criteria related to the notion of sustainability. In relative terms, the portfolio share of such sustainable investments is sometimes quite substantial. For instance, according to the Global Sustainable Investment Review 2016, responsible investments represent 26% of all professionally managed assets globally, with peaks around 50% in Europe and Australia. However, responsible investments are defined as investments made under one of several categories: Negative/exclusionary screening, Positive/best-in-class ESG screening, Norms-based screening, ESG integration, Sustainability themed investing, Impact/community investing, corporate engagement and shareholder action: e.g. while the percentages are substantial, the exact integration of sustainability and its rigour cannot be as easily ascertained.
Figure from the Global Sustainable Investment Review 2016
At the same time, there is ample evidence that the current economic system is intrinsically unsustainable along various dimensions. For instance, estimates of the current level of circularity of the economy are on average across sectors about 12% for the EU and 6% globally. Statistics about the dispersion of pollutants in the environment or about climate change are also not very encouraging e.g. despite the parties at COP21 agreeing to a 2°C limit, when aggregated the NDCs produce emissions closer to a 2.6°C – 3.7°C scenario.
This contrast is interesting and leads to a range of more differentiated observations:
- Many investors who are considered to invest sustainably do so for risk considerations, not from an impact perspective
- A lot of ESG strategies have very little impact on the real economy but a real impact on the portfolio risk profile
- Political, societal and client expectations for investment impact might not be met by sustainable investment strategies.
It becomes very important to identify the individual business case for investors to engage in sustainability, different implementation strategies and their limitations as well as potential barriers.
In the context of climate change, the following questions arise:
- What are the incentives for investors, in particular, asset managers to demand for instance better disclosure by companies of climate-related financial risk information? Is it performance, client demand, reputation, (expected) regulation or fiduciary duty?
- What are the barriers to do more in terms of allocating funds to foster sustainability? What role does the perception of profitability and risk play?
- Are there barriers related to the lack of standardized methods to measure the risk and impact of sustainable investments?
- Are there barriers related to governance or to a lack of stable policies/regulations on the matter e.g. of climate?
Overall, moving assets towards sustainability is a decision that requires a deep understanding not only of the topics that are being addressed but also of potential strategies and their effects. It typically carries profound organizational restructuring and changes in the decision-making process. How are asset managers affected by such a transition, what does best practice look like and how can research help?
The session will discuss some of these aspects with leading experts from the asset manager industry.
The SIMPOL Project is currently funded by the H2020 European grant DOLFINS (no. 640772) in the Global Systems Science area of the Future Emerging Technologies program.