- Transition financing may not have the speed required to meet the Paris Agreement goals, but it definitely has global momentum.
- The focus on nature and its relationship with climate and the urgency around it has never been greater.
- There is an existing disconnect in the financial system that still, after all these years, has not been fixed – partly between science and policy, but also between fiduciary duty and investment management.
The PRI in Person conference is arguably the biggest conference for the responsible investment community, and brings together asset owners, asset managers and service providers from around the world. The last time I was at the PRI conference was in Paris in 2019, before Covid. The fact that this year’s conference took place in Tokyo was significant given the importance of many emerging markets in Asia and the momentum that is building there – in terms of policy and finance – to ensure a just and effective transition to a low-carbon economy.
The responsible investment industry has evolved and accelerated a lot over the last few years. The number of initiatives, groups, bodies and stakeholders involved can be hard to keep track of. Most people that I spoke to shared the feeling of being overwhelmed and are working hard not to lose focus, given that it is impossible to ‘do it all’. Environmental, social and governance (ESG) teams have expanded, and the skill sets in the highest demand belong to engineers, data scientists and individuals that have worked on these issues in challenging industries and companies (such as mining, oil and gas, and industrials). I think this is one of the reasons that the PRI event continues to draw such an international crowd – it is a good opportunity to get all this activity distilled, as well as hear from peers about how they are progressing. With over 1,300 delegates from over 50 nations, it was a great gathering, filled with high-quality discussions on transition financing, nature measurements, policy and regulation, and data. Typically, we prioritize attending when it is taking place in one of our local regions. Following the integration of BNY Mellon Investment Management’s Japan equity team with Newton earlier this year, it was therefore also an opportunity to meet our new colleagues in Japan in person and discuss their next steps in terms of integration and elevated stewardship.
I would sum up the three main themes from the event as follows:
- First, transition financing may not have the speed required to meet the Paris Agreement goals, but it definitely has global momentum.
- Secondly, the focus on nature and its relationship with climate and the urgency around it has never been greater.
- Finally, there are existing disconnects in the system that still, after all these years, have not been fixed. One disconnect is between science and policy (which lags the science), particularly on climate change and biodiversity. Another is between long-term fiduciary duty and investment markets, which are too often short-term in their decision making. If you attended this event after living under a rock for the last decade, you would think that the global investment community had been reborn, and that market practice had been transformed. This is, as we know, not the case. The global investment community, in practice, is not yet built on, or rewarded for, the idea of investing for long-term stakeholder value creation. Seeking short-term returns, while ignoring longer-term systemic issues, is still the dominating force.
Japan was a great host for the event, and its ambitions for climate change were clear. Interestingly, there was also an emphasis on human capital and a recognition that investment and development of human capital is as fundamental and critical as the reaction to environmental stresses. It was a conference highlight to have the Japanese Prime Minister Fumio Kishida deliver the keynote speech, and the representation from several Japanese and Asian financial institutions and companies made a positive impression in terms of the commitment and direction of travel.
There is so much going on at these conferences that I try to be disciplined about finding a few interesting takeaways. These are the ones that stood out the most:
- Transition financing. This topic dominated the overall conference and was discussed in the context of both the ‘carrot’ and the ‘stick’. Policymakers and investors both play a big role, and neither will be successful without the other. In a higher-inflation world, we have our work cut out more than ever. Globally, financing has been accelerated by the Green Deal in Europe, as well as by the Inflation Reduction Act (IRA) in the US. Japan’s Prime Minister Fumio Kishida announced a series of planned sustainable finance policy measures, including the issuance of a climate transition bond. This would be the first of its kind, worth $130bn. Funding from the bond will go towards Japan’s Green Transformation (GX) policy, supporting the carbon neutrality of 22 industrial sectors over the next ten years. The focus on ammonia-coal co-firing as a unique element of Japan’s decarbonization strategy will be challenged by some who are unsure about the environmental and economic benefits. Kishida also announced that seven public pension funds with $600 billion in retirement assets will start working towards being PRI signatories.
- Policy and regulation are being used in an effort to carve out the conditions for markets to internalize ESG externalities. There are fewer places to hide for companies as the demand for disclosure grows. The big push is for standardized sustainability reporting, which is increasingly being mandated across the world, either through stock exchanges, governments or financial regulators. The issue of ‘interoperability’ to streamline reporting is mainly now focused on the International Sustainability Standards Board (ISSB) and European Sustainability Reporting Standards (ESRS). Unless these can come together, many companies still face the challenge of different reporting systems. Regardless of this development, it matters to companies as they need to get ready to measure and report this data. For investors, it is positive as it will address many of the data gaps. Apart from disclosure regulations, the development of more taxonomies around the world is an important sign that sustainable investments are going to become more objective, while being treated differently in different jurisdictions. The Sustainable Finance Disclosure Regulation (SFDR) was not a notable discussion, possibly because of the continuing consultation for its next chapter, where things could look very different.
- Climate change is a real-world issue. There was a short but powerful speech by a representative from the Palau sovereign wealth fund. This island of Palau in the western Pacific ocean is increasingly affected by climate change and will be destroyed if the challenge is not addressed. Listening to the thinking it had done as a sovereign wealth fund about how it invests to protect its island, it was striking to see the photos of destroyed ecosystems from adverse weather events, some of which will never recover. In an industry where these issues are discussed by dedicated individuals, it is always powerful to hear from people who are affected on a day-to-day basis.
- Nature and the Taskforce on Nature-related Financial Disclosures (TNFD). With nature having such an important connection with climate change, it was expected to be a dominating topic. Land and oceanic ecosystems absorb 60% of human-caused emissions. The loss of biodiversity and nature is a serious crisis. With biodiversity reducing faster than ever before in human history, more than one million species are facing extinction. According to the World Wide Fund for Nature (WWF), 80% of the remaining biodiversity is protected by indigenous people which makes the social and human dimension important.[i] Nature is a risk to balance sheets (which may not be visible), and the TNFD project provides, similarly to the Task Force on Climate-Related Financial Disclosures (TCFD), a framework for addressing and reporting on an organization’s impact on and from biodiversity and nature. The TNFD released its final guidance and recommendations during New York Climate Week a few weeks ago, and the momentum of investors is encouraging. Many investors are in the early phase and are simply seeking to understand the way different industries and investments are affecting or dependent on nature. In a presentation by the TNFD chair, the results of a survey suggest that 75% of forum members intend to start reporting against the TNFD disclosures by 2024-2025. In addition, via the investor initiative Nature Action 100, engagement on nature should also gain momentum with investors.
- Sustainable Development Goal (SDG) progress is not enough. With around six years left to achieve the SDGs, it is clear that progress is uneven and behind schedule. There is a mismatch between what has been achieved and the implied assets under management aligned or contributing to the SDGs, which is a concern, and there was focus on how the investment industry can make the most of the remaining years. There is no doubt that there has been ‘rainbow washing’ in the market, and the focus should now be on the SDG enablers, such as the payment of a living wage.
- The responsible investment (RI) industry is getting back on its feet. Over the last year, the lethargy among industry participants has somewhat improved. The industry is faced with challenges from European legislation (SFDR), and growing expectations from clients and investment teams. While the ‘boom’ in the RI sector from a few years back is positive, many of the industry colleagues I have spoken to have been frustrated and overwhelmed, especially as politics have drifted further into the space. There is also frustration about terminology, and many argue that the industry has not done itself any favors by being unclear about ESG. At Newton, we aim to be clear about this: ESG is about risk management and is an input for our multidimensional research process. It is distinct from sustainable investment, where an outcome is intended to address a social or environmental objective.
- ESG backlash. One of the final panels of the week addressed the ESG backlash, which is particularly prominent in the US at the moment. This backlash takes two main forms: first, some reasonable conjecture asking some challenging but good questions about the way investors are going about RI and the impact it can have on performance; and secondly, another side which is more rooted in the currently complex political landscape. The PRI is seeking to navigate and support this debate and, particularly, to help clarify some of the confusion that has arisen around concepts such as ESG and RI.
Next year the PRI in Person event will take place in Canada, and we look forward to being on the ground once again, working and engaging with clients and peers.
[i] WWF, Recognizing indigenous peoples’ land interests is critical for people and nature, October 22, 2020.
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