Jane Ambachtsheer is the Global Head of Sustainability at BNP Paribas Asset Management
It’s been a mixed year for sustainable investing. On the one hand, the financial sector has signed net zero commitments at an unprecedented rate, while thousands across the sector have been involved in the preparation and implementation of the EU’s Sustainable Finance Disclosure Regulation.
On the other hand, we have seen growing skepticism about the depth of implementation of ESG integration and sustainable investment practices, including sanctions from regulators on several continents.
Are we seeing a fundamental shift in industry practice or is greenwashing at work? The likely reality is that there are some of each. Here are five ways to help determine which is which.
There is a lot more regulation and oversight
The rapid growth of sustainable investing has precipitated the need for an adequate regulatory framework through which the financial sector, and asset managers in particular, can continue to evolve. Led by Europe, regulators around the world are sharpening their pencils on how to define, measure, monitor and enforce standards and disclosure linked to sustainable investment.
So while navigating the flurry of regulations from the SFDR to MiFID II, the Corporate Sustainability Reporting Directive or the EU taxonomy can be challenging, the good news is that progress is being made right direction, towards more harmonization of ESG integration, making data accessible. and define common measurement tools.
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Other areas of sustainable investment that are the focus of a growing number of voluntary and formal industry and regulatory initiatives across regions include governance (voting and engagement), implementation of exclusion policies and thematic and impact investment. As sustainable investing continues to mature, so will the convenience and means by which investors can be assured that there is something behind the curtain and that they are not being sold empty promises.
Everyone goes to zero
According to recent forecasts, the world will need between 3 and 3.5 trillion dollars per year in additional capital between now and 2050 to meet the challenges of the energy transition. This is a major disruption to the asset management industry and the largest reallocation of capital ever seen in our industry.
Glasgow COP26 helped galvanize national and investor commitments to achieve net zero carbon emissions by 2050, and more than 500 financial institutions representing $13 trillion have committed to the Glasgow Financial Alliance for Net Zero. This will require fundamental changes in the way the financial sector finances and invests in the real economy, and calls for the necessary policy changes that will price emissions and pave the way for a more sustainable and inclusive economy.
People are now paying attention to custodial practices
Stewardship activities such as voting at AGMs, ongoing dialogue with companies and public policy have become much more recognized in recent years, which has also led to greater scrutiny on to assess how asset managers carry out these activities: are they supporting climate-related activities? shareholder proposals? Maybe even archive them? Are they responding to the many inquiries from industry (eg from the Securities and Exchange Commission) about the introduction of mandatory corporate climate disclosures? If so, why do they defend and why?
Gone are the days of flying under the radar; How asset managers vote and engage not only matters, but will increasingly influence when they win (or lose) mandates from asset owners. Climate strategies are at the center of the resolutions, but other areas of sustainability, such as diversity and inclusion, or governance, are also making their way onto the agenda.
Measuring impact is the future
It’s human nature to want to make a positive impact, and that goes for institutional investors, too. While we still see some confusion about what impact investing can and should have, is it just in the private markets? Does it align perfectly with Article 9 funds? — There is a clear drive to achieve this.
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We will see increasing progress not only on how to measure impact at the firm and portfolio level, but asset managers themselves should seek to measure and manage the impact they have on the trillions of AUM they manage collectively
Asset managers need to walk the talk
As asset managers focus more on asking companies to improve their performance on numerous ESG factors, such as achieving net zero, reducing impact on nature and improving their internal diversity performance, it is only fair that prioritize these initiatives within their own businesses. Asset managers need to lead by example and ‘walk the talk’ through internal corporate social responsibility activities such as diversity and inclusion, paper reduction, single-use plastic bans or community outreach initiatives.
This will provide the necessary legitimacy to make an impact with your participating companies, while demonstrating a culture of sustainability will also become a prerequisite for meeting customer expectations.
The evolution of sustainable investment along these lines can help to safeguard it. The financial sector has an opportunity and an obligation to use its capital allocation and management practices to promote a more sustainable real economy. With the growth of transparency in the industry, driven by an increasingly demanding set of regulators, it will be increasingly difficult for laggards to keep up.
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