The growing interest in Environmental, Social and Governance (ESG) issues will have a significant impact in accelerating the energy transition, with ESG investing becoming ever more conventional to the asset management industry. Portfolio Institute’s ESG Club Conference on the 6th July covered several hot topics at the forefront of the ESG agenda, with four expert panels dedicated to ‘A just transition’, ‘The S in ESG’, ‘Sustainable Debt’, and ‘Biodiversity: Nature’s dividend’. Our thoughts and key takeaways on each of the panel topics are as follows:
‘High-emitting/high-carbon’ industries warrant more focus, and a just transition must recognise the fundamental role they will play in a future low carbon economy. This especially holds true for emerging economies. Using the example of gold mining, guest panellist John Mulligan – Market Relations and Climate Change Lead at the World Gold Council – explained its value as a global industry and as an important driver of regional and remote economies in countries such as Ghana, the DRC and Burkina Faso. Such industry is critical to the current livelihoods of local communities, and will continue to be essential to their socio-economic development throughout the pursuit of net zero. Supporting the decarbonisation of these industries will present new opportunities to level up local economies. Producing a re-skilled and up-skilled workforce, as well as factoring how community voices can be effectively integrated into these transition projects, will be critical.
Social reporting has lagged behind in ESG, with social issues often overshadowed by the ‘Environmental’ pillar. This is attributable to the difficulty in establishing the link between financial materiality and social issues, and that environmental disclosures have progressed far further than social disclosures. However, the ‘Social’ side of ESG has grown rapidly, particularly since the pandemic, and is an increasingly important area for investors to consider when deploying their capital. In saying this, health is still an area that poses a real blind spot to the investment community – for instance, only 1/10 men in the UK retire with ‘good health’. It’s a topic that has proven problematic to measure, whereas data can be easily available for other matters such as diversity. Asset owners will be a crucial actor moving forward, ensuring health, and social issues more broadly, are accounted for in their decision-making processes and investment portfolio.
Although investor interest in green bonds has rightfully expanded, it is key to ensure that the potential value inherent in unlabelled bonds is not ignored. Ultimately, proper due diligence and assessment will be vital to realising that bonds, although absent label, can deliver a meaningful environmental and social impact. Furthermore, there is also increasing concern surrounding the inclusion of Scope 3 emissions into ESG disclosures, and how this is changing the assessment landscape for investors. Asset managers require robust and complete emission data sets before distributing their capital, ensuring they are better informed on climate-related financial risks. However, with frequently inconsistent and limited data for this scope, investors are often left unaware of the potential climate-transition risks they face. Despite this, investors today must make a conservative effort to target high-emitting and high-scope 3 sectors, as they will remain economically essential throughout the energy transition.
Climate change, and regulations around the Taskforce on Climate-related Financial Disclosures (TCFD) in particular, have been a primary focus of the ‘Environmental’ pillar of ESG. While climate-related financial risks are now widely acknowledged, biodiversity is a topic area that has received equal attention by asset managers. The loss of natural capital, however, like climate change, also presents several physical, systemic and transition risks to the investment community. While there is significant potential to invest in natural capital assets, how you can actually value ‘natural capital’ is a fundamental question that is yet to have a concrete response. It is important that asset managers take a proactive stance to have policies in place for biodiversity specifically, ensuring that impacts on nature are integrated into investor’s risk assessments.
If you would like to discuss the impact of ESG on your business then please contact Daphne Biliouri-Grant.