The past decade has seen an important jump in assets invested under responsible strategies,1 among which environment-focused principles rank high.
The landmark Paris Agreement,2 under which 125 nations have pledged to take action to limit the planet’s temperature increase, has prompted some governments to enforce rules for financial-services firms aimed at combating climate change.
To understand where the asset management industry is in this green transition, Pulse Online caught up with Laurent Babikian, Director for Investor Engagement at CDP Europe, to ask him about progress being made. CDP, a leading researcher in the field of corporate climate data, is STOXX’s partner in designing climate-change and low-carbon indices.
Laurent, what is the role of the investment community in the global action to combat climate change?
We will not achieve the goals of the Paris Agreement without, obviously, a change of the business model of the oil and gas industry; but neither without a new way of investing from the investor community. The asset management industry needs to dramatically change the way it allocates capital. We have had some large asset managers, such as Amundi, who have announced bold targets to integrate environmental, social and governance (ESG) criteria across all assets in coming years.3 We need all investors to do the same, obviously focusing on the environmental aspect, at a global level. Likewise, we have a lot of countries that are leading in the low-carbon transition, and others that are not. Those laggards need to accelerate significantly. If everyone — asset managers, asset owners, insurers, banks, were to change the way they invest, then corporations would react much more quickly to the climate challenge. Because if they do not react, at some stage their cost of capital will probably increase.
And what are governments doing about this?
We have the example of Article 173 in France4, where for the first time a country has imposed climate-change and ESG reporting requirements on institutional investors. At the European level there has been agreement to require similar disclosures. If we adopt laws that raise the level of transparency, then asset owners and asset managers will want to improve the carbon footprint of their portfolios. So, recent moves have been good news, but we need to do much more. There is progress on the policymaking front, but it takes time to implement the laws and the clock is running. The way business is run now, we won’t reach the Paris Agreement goals. Everybody needs to accelerate a lot — companies, cities, state, investors, individuals.
Will all investors and asset owners eventually have to score their holdings in terms of ESG?
I think so. We have to. The question is the speed at which we get to that point. The other important driver will be the fiduciary duty role of asset owners. We need to strengthen fiduciary duty responsibility, and this has been mentioned in the European Commission’s Action Plan on Sustainable Finance. If you force asset owners to report the full transparency of investments to the end user, such as the individual pensioner, this will be a strong piece in the climate-transition puzzle. Fiduciary duties are being actively discussed. In the MiFID II directive, financial advisers must ask the end customer their preferred profile of investments.
How is CDP involved in the fight against climate change?
The big question in the asset management industry is how to shift the trillions of euros from brown to green assets. In order to do that, you need two prerequisite conditions. Firstly, you need accurate climate-related data, and this is what CDP provides. But you also need all the bricks in the financial market to be ESG-compliant. I am talking about shares, bonds, indices, credit ratings, swaps, futures, etc. All of this brings liquidity to the market. The more liquid the market is, the more confident the market makers, the investors, the hedgers, the speculators will be to shift these trillions.
Thanks to STOXX, we now have listed ESG futures,5 which is a big milestone. We now also need swaps, options and other instruments to be applied to ESG.
Many indices tracking the most climate-aware companies are outperforming benchmarks. How do you explain that?
Academically, I can’t explain it. Empirically, I can say that companies that are very good at production, operations, marketing and finance, then become very good according to sustainability metrics, once and when they tackle the topic. And this is then reflected one way or another in the share price. In other words, companies that are looking at their sustainability footprint have most likely already done everything else before and become very efficient at it.
1 According to the Global Sustainable Investment Alliance (GSIA), assets managed under environmental, social and governance (ESG) strategies grew to $30.7 trillion at the end of 2017, from $22.9 trillion two years earlier.
2 The United Nations Framework Convention on Climate Change’s Paris Agreement, signed in 2015, is a multinational pledge that charts a new course in the global climate effort.
3 Amundi has announced that ESG will be integrated in all of its 1.4 trillion euros in managed assets by 2021.
4 See IP&E, ‘France aims high with first-ever investor climate-reporting law,’ Feb. 1, 2016.
5 Since February, the first ESG futures contracts are available on Eurex. They track the STOXX® Europe 600 ESG-X Index, EURO STOXX 50® Low Carbon Index and STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco Index.