There was palpable energy in the room as the investment industry gathered in London on April 26th for a post-pandemic rarity – a live conference with participants meeting face-to-face. The well-attended Sustainable Investment Forum Europe 2022, organised by Climate Action in partnership with the UN Environment Programme Finance Initiative (UNEP FI) was also streamed live to several hundred online attendees around the world. With a storm of ideas swirling around the room, NordSIP seeks to gather them up and highlight some of the main themes that emerged from this event.
ESG has become mainstream, but is not yet effective enough
Net Zero Finance – Is green finally going mainstream? This is the question posed to a panel moderated by Climate Bonds Initiative CEO Sean Kidney, during which Fonds de Réserve pour les Retraites (FRR) Executive Director Olivier Rousseau is particularly vocal in expressing frustration at the slow pace of change. “There are nice words”, he says “but the real world is not changing at the right speed.” Rousseau believes there are too many separate national and international initiatives, well-intentioned but in many cases trying to achieve similar goals. There needs to be more consolidation to get things moving more efficiently. He is also worried by the trend to decarbonise investment portfolios leading to relatively cheap fossil fuel-related assets being bought by purely return-seeking “investors that don’t care about the climate.” According to Rousseau these include private equity firms, family offices and hedge funds that can benefit from a short-term “bad climate premium”, partly because they operate under the radar and are therefore unlikely to have climate protestors picketing their offices.
Rousseau explains that as a state-sponsored wealth fund the FRR has limited scope to being a truly activist investor. While they were early adopters of ESG integration, they depend on the general public to push government policy forward. Individual and institutional investors’ actions are positive but “only a small part of the solution.” Climate goals, he says, will only be achieved through regulation and taxation at state and supranational level, but progress can be very hard when faced with public resistance such as the “gilets jaunes” in France. Rousseau believes it is crucial for the public to perceive direct benefits from climate mitigation efforts. He is a fan of what he calls the ”populist carbon tax” within solutions like the Baker-Shulz Carbon Dividends plan, which proposed to create a positive feedback loop by directly redistributing carbon fee proceeds throughout the US population.
Changing mindsets to accelerate the transition
Beyond state intervention, conference participants focus on other ways to grease the wheels of the transition. There is clear consensus that the public and private sectors must work in concert to instigate change at the scale needed for meaningful change to be achieved. Speaking on a panel aimed at tackling the public-private culture gap, Charlotte O’Leary, CEO of Pensions for Purpose describes how UK pension trustees are still stuck in a 3 to 5-year time horizon. Much of her organisation’s work is aimed at changing this mindset. In her words “there is little point in securing your retirement for a 4-degree world.” Changing mindsets is also a key focus for Nigel Jollands, Associate Director at the European Bank for Reconstruction and Development (EBRD): “we shouldn’t be selling energy efficiency, just call it productivity.” In his view, this approach is more likely to capture the attention of those for whom sustainability is still secondary to return-seeking activities.
Institutional investors must be prepared to take on more risk, according to Mark Napier, CEO of specialist development agency FSD Africa. The sustainability focused investments made by large institutions so far are too narrow in focus and need to rapidly involve more of the developing countries. He sees a lot of investment in renewables, but not enough in electric vehicles and adaptation measures to complete the picture. Speaking on the same panel, Elina Kamenitzer, Director, Operations Support & Climate at the European Investment Bank (EIB) agrees that adaptation is somewhat neglected among investors. Part of the reason is that the related projects are harder to capitalise, often depend on upcoming regulation and public intervention. “Avoidance of future costs is less attractive to private investors than returns,” she explains. The problem is particularly acute in emerging markets, which account for less than 8% of historic emissions but are the most vulnerable to the effects of the climate crisis. This imbalance is picked up again by the Impact Investing Institute’s Deputy Chair Jamie Broderick while presenting their concept of the “Just Transition.”
In a separate session, Catherine Howarth, CEO of responsible lobbying group Shareaction also focuses on the psychology of climate change action. She is convinced that well-intentioned but overly cautious lawyers are putting the brakes on ESG-focused investments. There needs to be “a better definition of what the best interests of beneficiaries represents,” beyond pure monetary measures. Howarth sees strong demand for positive impact from pension trustees and retail investors, but an out-of-date and limited understanding of fiduciary duty is still holding things back.
Technology, energy security and war
NordSIP has explored the impact so far of the Ukraine war on investor’s sustainability efforts and its impact on energy policy and security. Understandably, this topic is a common thread throughout the Sustainable Investment Forum. The FRR’s Rousseau urges investors to “put the Dollars into electricity storage”, as in his view energy transmission grids need to be stabilised to make proper use of renewables. He is also an advocate of nuclear, both as a buffer for renewables and a source of the excess energy that would be needed to operate carbon capture plants.
Many participants in the forum express hopes that the response to the Ukraine war will refocus governments’ attention towards rapidly improving energy efficiency and self-sufficiency. There are also further calls for more action from institutional investors despite the limitations of ESG data. S&P Global Sustainable1’s Aaron Morales says we have enough data to make meaningful decisions, and “imperfections in data should not be the enemy of progress.”
Meeting face-to-face in London was a welcome shot in the arm for the sustainable investment community. There is a lot of innovation, expertise, and energy on display, which bodes well for our response to the various sustainability-related crises we face. The Sustainable Investment Forum 2022 continues online on May 4th and 5th. For details on how to register and tune in contact Climate Action.
