ESG from an Investor’s Perspective

ESG from an Investor’s Perspective

Posted 26th January 2022

This blog was authored by Sarah Gordon, a keynote speaker at our recent sectoral conference – ‘ESG and Social Value: are we trying to achieve the same thing?’.

Sarah Gordon is the first chief executive of the Impact Investing Institute, which launched in November 2019. The Institute aims to make capital markets fairer and work better for people and the planet and works to accelerate the growth and improve the effectiveness of the impact investment market in the UK and internationally.

“In autumn 2019, I spoke to a group of clients of a large US asset management firm about environmental, social and governance issues and impact investment. It was soon after the official launch of the Impact Investing Institute, and my message was that ESG issues could no longer be ignored by the financial services industry, that impact investment – investment that is made with the intention to deliver measurable, positive social and environmental benefit alongside a financial return – was the future of capital markets.

I think it’s fair to say that this message was received with considerable scepticism by the assembled money managers in the room. Several pointed out how difficult it was to do any of “this stuff” well without shared global standards around sustainability reporting. Others argued that taking impact into account meant having to dilute the financial returns they delivered to clients.

A lot has happened since then. The world has been swept by a global pandemic, and remains in the grip of a worsening environmental emergency. But in ESG and impact investing, there have been some very important and positive developments. Looking back at 2019 now, from the start of 2022, I could never have imagined what fast and substantial progress there would be.

Back then, in the room full of institutional investors, I argued that, although it took many decades for there to be agreement on international reporting standards for financial performance, I thought that, perhaps within even a decade, there would be global ESG and impact standards.

Now look at where we are today. The International Financial Reporting Standards foundation, which is responsible for maintaining and overseeing global financial reporting standards, has just set up an International Sustainability Standards Board, which will provide the first global standards for ESG reporting.

This has happened much faster than I, and many others, believed would happen, thanks, in part, to the efforts of the Impact Management Project, which has really driven change.

It is not the only encouraging development. Impact investing, globally, has grown to a $2.3 trillion market from just $500 billion in 2019. Companies and investors, meanwhile, are having to get smarter and more transparent about their impact. In the UK, businesses will soon have to publish – and be marked on – their transition plans. This means they won’t just be able to say that they are making the transition to net zero, but they will have to make public how they are going to reach that goal.

This is all great progress. And behind this progress lies a bigger picture. Two things have given enormous momentum to our agenda: the Covid pandemic, and the climate crisis.

There has been a growing recognition of the terrible urgency of the climate crisis, that, if we don’t all act now, our planet as we know it is going to be a very different – and much worse – place for us and for future generations.

And the pandemic has given us a much greater and more painful awareness of how interlinked we are as a globe, and how inequality and poverty have hugely worsened the impact of the pandemic and reduced our resilience as a society.

These two issues are interlinked. We are not going to get to net zero, if we don’t address people’s lack of access – to decent jobs, to proper healthcare, to educational opportunities, to 21st century skills – at the same time.

At the Impact Investing Institute, we believe that this is the right thing to do, but it doesn’t matter if you don’t believe that. Without a transition that is just, inclusive and equitable, the climate emergency will get worse. Without this focus, there will not be the popular support for the huge changes to our society and our economy which the transition requires. Without seeking social, as well as environmental outcomes, the transition to net zero is simply not going to happen.

We spent much of 2021 co-leading an Impact Taskforce, alongside the Global Steering Group for Impact Investment, under the UK government’s presidency of the G7, where our work focused on the policies and financing vehicles that are needed to drive a just transition.

We spoke to over 170 people, representing 120 organisations across the world, from the World Bank, to organisations working on the ground in sub-Saharan Africa, and to institutional investors like Temasek, Singapore’s state investment company.

We came up with a number of recommendations, which we believe reflect where the market needs to go in order to address the social and environmental challenges we face.

Firstly, all actors need to act now, whether that is individuals, investors or governments. Too often, in the past, people have failed to take action because they require someone else to act first. Institutional investors, for example, say they can’t invest in emerging markets, because it’s too risky. Someone else – a government, a multilateral bank – has to derisk the investment.

Meanwhile, governments have not incentivised their development finance branches enough to mobilise the huge pools of private sector capital available – and willing – to finance a just transition.

Secondly, institutional investors need to bring to market more products delivering just transition outcomes – investments that will deliver a combined social and environmental benefit alongside a financial return.

And thirdly, a just transition does not only mean climate and environmental action, combined with socioeconomic equity and distribution, it also requires community voice – that the people impacted by these investments must have voice and agency, must be involved in the design, delivery and governance structures of these financing vehicles.

We’ve been lucky enough at the Institute to work in a world where there are increasing numbers of these types of investments to show to other investors, to reassure them that these investments can be done – and to get the competitive juices flowing, so that they are encouraged to compete to design better ones.

There are great examples of impact investments that deliver a financial return, that are attractive to large institutional investors, and also – critically – help to deliver a transition to net zero that is fair, inclusive, and which takes advantages of the many opportunities for people and communities that this transition offers. These investments need to be replicated at much greater scale, across the globe, for the transition to happen.

I think of capital markets as being pushed and pulled at the same time. Pulled by people who want their savings and investments – their pensions, their bank accounts – to be put to positive purpose, as well as make a financial return. And pushed by regulators and policy makers introducing rules to make businesses more accountable for their impacts on society and the environment, both positive and negative. And, in the middle, the investment managers, who are now incentivised to change from two different directions, growing client demand for ESG and impact products, and growing pressure from policy and regulation to improve the practices of the businesses in which they invest.

Change is happening much faster than I – and many others – expected. That is not to be too starry eyed. There are plenty of people, plenty of investors, and plenty of businesses, who either don’t know or don’t care about ESG, don’t care about their impact on society and the environment. The commitments made at COP26 last November, by governments, businesses and investors were not enough to stop climate change. And previous commitments have not been met. But if the momentum of the last two years continues, I believe that can change.

Everyone has to change for us to address the huge challenges we face, as a country, and as a planet – individuals, governments, regulators, investors. We all have a responsibility to drive that change even faster.”

Posted 26th January 2022