ESG | Opinion
Climate change: A hot topic
ESG is as popular as ever, but, as Mark Dunne explains, managers have to provide hard evidence that it works.
Climate change is a hot topic that is not going to cool anytime soon. It is not a fad in investment circles or an ideal taken from people who glue themselves to trains or the front door of the London Stock Exchange. Pension scheme trustees, who are the guardians of billions and billions of pounds of savers’ retirement capital, are taking this seriously by appointing a head of responsi- ble investment, or creating similar roles. This is perhaps a sign of how seriously the authorities are taking the issue of sustaina- ble investing and long-term capital. The Department of Work and Pensions has stepped into the issue by announcing that from October 2019 all trustee boards must show how they are protecting investors from the threat of climate change. This, or perhaps rising public awareness, or research from academia and the finan- cial services industry that points to the long-term financial benefits of factoring such issues into how you construct a port- folio, could be why renewable energy and not the oil and gas industry is the favoured
sector among UK investors, despite fossil fuel companies generating billions of dol- lars of profit each year.
Indeed, almost a third (30%) of investors surveyed by investment company Granite- Shares picked clean energy as their pre- ferred industry to achieve long-term returns. Yet investing to protect the environment is not just about changing weather patterns and rising ocean levels. Soil pollution and water conservation are big topics that impact our wellbeing and so should not be overlooked when assessing environmental risk. So there are indications that the environ- mental aspect of ESG, along with the social and governance pillars, will continue to write headlines in mainstream and finan- cial newspages in 2020. But in time this could change if asset owners fail to prove that their portfolios are helping to make the world a better place. Attitudes towards sustainable investing are maturing and now that it is widely under-
stood that you are increasing your risk by not factoring these issues into investment decisions, investors want their asset man- agers to prove to them that an ESG-compli- ant investment is doing what they said it would. Data, of course, is the answer here. Show- ing shareholders, regulators and the public that the non-financial aspects of your port- folio are performing as expected is becom- ing more and more important. It is about showing that your sustainability policies are not just a cynical public relations exer- cise leaving you open to allegations of “greenwashing”, where an asset is not as sustainable as it claims to be.
The quality of independent data is being questioned and heightened corporate dis- closure would help here. This is why large shareholders, such as pension schemes, need to take the initiative and get on the front foot to be seen as leaders in driving sustainable investment and not be accused of being reactive to regulation, speeches by a teenager from Sweden or people who glue themselves to trains or buildings in the name of saving the planet. Our ESG feature this month looks at what themes could lead the ESG debate in 2020, but one point is clear: it is not going to lose its importance in the eyes of many inves- tors in the next 12 months, especially if the data continues to improve.
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22 | portfolio institutional | December-January 2020 | issue 89
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