By David Harris, group head of sustainable business
Last week’s PRI in Person event in Paris was huge on a number of levels. Here are five take-aways.
Sustainable Investment is now well established
With over 2300 signatories today with combined assets under management of over $80T, the conference was the largest ESG investment event ever held globally with a huge range of asset owners and managers, regulators and policymakers rigorously debating and challenging the market’s thinking on complex sustainable investment challenges. We took part, as FTSE, in the workshops in 2005 that led to the launch of PRI in 2006 where we were one of just 100 founding signatories. It’s come a long way since then.
Climate risk is a central theme
Climate change inexorably rises up the agenda not only in public sentiment and protests but on the global financial agenda through regulators such as the Bank of England and FCA convened Climate Risk Forum, and the Financial Stability Board’s task force on climate related financial disclosure (TCFD). On the first full day of the conference, Nathan Fabian, the PRIs’ director of policy, set out their new “Inevitable Policy Response” workstream led by Mark Fulton, formerly of Deutsche Bank. This projects a likely “base case” expectation of forceful, abrupt and disorderly government responses to climate change in a 5-10 year period that will cause massive disruptions to investors and capital markets. This work-steam will consider how investors can prepare themselves for this eventuality.
In a neat follow up to this session, Royal Dutch Shell CEO Ben van Beurden took the stage alongside Sylvia van Waveren of Robeco and Adam Mathews of Church of England and the Transition Pathway Initiative (TPI). Through the TPI and its sister investor collaboration platform, Climate Action 100+, there has been very effective investor engagement with Shell on climate, leading to them take five important steps:
1. setting short and long-term climate targets, including reducing the carbon footprint of their reserves and product portfolio
2. building this into executive remuneration
3. annual reviews of progress
4. reporting alignment with TCFD
5. review of corporate lobbying which has led them to exit one industry association and working to shift the climate policy position of others.
FTSE Russell continues to be a proud supporter and partner of TPI, and we are delighted with their progress. Expect much more to come here.
Shifting focus from equity to fixed income, and growing appreciation of index investing
In the early days of ESG investing, equities were at the forefront of the debate, while fixed income was less frequently discussed, and innovation was less commonplace. This is despite the fact that, globally speaking, fixed income markets are three times the size of stock markets. This imbalance is changing, as investors start to demand more choice in ESG solutions in fixed income (and other asset classes). This was also evident in the PRI agenda, where fixed income and credit risk sessions are becoming more prevalent. One area particularly underserved has been sovereign bond markets, which is an area Beyond Ratings (now part of FTSE Russell/LSEG) has much to offer, and whose expertise drove the creation of the recently launched FTSE Climate Risk-Adjusted World Government Bond Index (Climate WGBI).
Given the growing focus on climate risk and ESG integration into passive investing, there was also a consultative session looking at the challenges and opportunities around integration into index design and stewardship. We contributed alongside the French pension fund FRR and the finance focused NGO ShareAction, and asked the attendees to help the PRI consider its role in this part of the market as it grows and evolves rapidly.
Academic research no longer just for academics
PRI also has an Academic Network that usually holds a one-day conference just ahead of the main event. The academic research has been improving steadily year-on-year both in quality and in relevance to the investment industry. This year we attended the aligned Global Research Alliance for Sustainable Finance and Investment, or GRASFI conference at Oxford University just the week before the Academic Network event. (GRASFI is a coalition of 25 universities specializing in these fields.) The research presented was impressive; to provide just a few examples of research on sovereign climate credit risk modeling, the application of machine learning to ESG data, measuring the effectiveness of collaborative investor engagement and the stock return implications, and the impact of climate disclosure regulations. Clearly, the importance of applying academic rigor and validation is becoming increasingly important as the sophistication of sustainable investing grows along with the variety of tools, data, analytics and approaches.
Asset owner collaboration and Universal Investor theory
It is not a new concept that many of the largest asset owners are invested so broadly that they need to take a holistic view around enabling and supporting global sustainable economic growth rather than only chasing returns at micro-fund level. But the number of asset owners who are talking about this concept is growing, and there is increasingly cross learning, collaboration and action between asset owners, including through the prism of PRI. This is driving a more global and shared agenda of action, covering everything from designing mandates to incentivize more long-termism by asset managers, approaches to passive, collaborative corporate engagement and regulator/policy maker engagement. The largest pension fund in the world is the $1.3T GPIF in Japan, and their, CIO Hiro Mizuno, set out their ambitions here as well as announcing an intention to select more global ESG index funds across equities and fixed income. As the world’s biggest asset owners get serious at re-allocating their investments, the market has to deliver the solutions to enable them to act.
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