Stockholm (NordSIP) – As the financial industry continues its journey towards climate change mitigation it can often appear as though every old hurdle that is overcome is replaced by a new challenge. These concerns were on top of our minds when NordISP met with Thibaud Clisson, Climate Change Lead for BNP Paribas Asset Management on the occasion of his latest visit to Stockholm.
The discussion revolved around the continued investor interest in sustainable assets and the topics where methodological conceptualisation and harmonisation is still required. While a tremendous amount of progress has been achieved, Clisson lists a series of issues that still require much work if we are to achieve net-zero greenhouse gas (GHG) emissions by 2050.
Investors Have Not Lost Their Appetite for Sustainability
Despite concerning recent developments in the polarisation of ESG in the USA, Clisson argues that client interest in sustainable investments remains strong. “From our perspective, we have not seen any ESG backlash from our clients in Europe, especially in Sweden. 90% of our funds in Europe are classified as Article 8 or Article 9 under the Sustainable Finance Disclosures Regulation (SFDR). And we keep seeing reliable net inflows for our article 8 sustainable funds. In the market, those products have the highest 1Y inflows according to Morningstar data. So, we hear a lot of noise coming out of the USA, but it should not be generalised to the whole country, and certainly not to the whole global market.”
According to Clisson, Europe’s steadfast commitment to tackling climate change has provided the foundation upon which the industry can channel resources towards the energy transition. “The goal of EU regulation was to mobilize private savings to finance the energy transition. This has not changed nor will it change. On the contrary. The consensus across all sectors of society across Europe is that we need to do much more than we are doing. I don’t see any inflexion in this trend because of short-term political shocks. We are long-term oriented. We consider ourselves to be ‘the sustainable investor for a changing world’. I don’t see that changing because of conjunctural issues,” Clisson explains.
To ensure that this demand is appropriately met by sustainable assets, Clisson highlights 7 topics that need to be better addressed if we are to achieve net-zero GHG emissions by 2050: Implied Temperature Rise (ITR) estimates, transitioning companies, biodiversity, the just transition, the need to expand the role of blended finance and the need to address physical risk.
Harmonising Approaches to Assess Companies and Portfolio Alignment with Climate Goals
Since the 2015 Paris Agreement, the global consensus has evolved from targeting “well below 2⁰C”, to 1.5⁰C, and now this has been translated into “reaching Net-Zero by 2050”. “The movement towards net-zero has facilitated a general understanding of what we should expect from corporates and investors in terms of contribution to emission reduction,” Clisson tells NordSIP.
“To this effect, ITR has become a very appealing measure, because it can provide a clear picture of the efforts that a fund or a company is making to help facilitate a decrease in global warming. When a fund says that its ‘portfolio is consistent with a 1.5⁰C scenario’, everyone understands what is meant. However, such clarity of wording hides tremendous methodological complexity and uncertainties. There is no consensus on the details of the methodology and any such methodology would need to make a lot of assumptions,” Clisson warns.
According to Clisson, the diversity of potential approaches hiding underneath the heading of ITRs matters not just for the claims that companies make but for other assessments made by investors. “There are a number of industry initiatives to try to find a common set of rules for assessing companies’ efforts to reduce their emissions in a way which is consistent with global climate goals. BNP Paribas participates in the Institutional Investors Group on Climate Change (IIGCC), which is attempting to define the relevant concepts, what tools are necessary and what methodologies are appropriate for the assessments of decarbonisation and temperature increases. Efforts to clarify methodologies relevant to climate change are not restricted to IPRs.
The Need for a “Transition” Framework
“’Transition’ is another concept that has become increasingly important and that also needs to be better defined. We need to find an agreement on what we mean when we argue that some companies should be considered as ‘transitioning companies’. The EU’s Taxonomy defines what is green and what is not. Now we need to clarify what is transitioning from one end of the spectrum to the other,” Clisson says.
“France’s Asset Management Association (AFG) and the European Commission have started to hint at what it is they may require companies to disclose and what they would require to define a company as transitioning. There are also ongoing discussions within the IIGCC and other investor initiatives to try to define minimum criteria and a common framework for assessing transition efforts,” Clisson continues.
“All upcoming frameworks will share a similar structure: companies need to have a clearly stated ambition. This ambition needs to be tied to specific targets that are themselves quantitatively significant enough to match that ambition. This also needs to be supported by a Capex strategy that is consistent with these goals and ambitions. Meanwhile, underlying all these layers, a governance structure needs to be in place to help the company deliver on its commitments and requirements for lobbying to point in the same direction as those ambitions,” Clisson explains.
Biodiversity and the Just Transition
Beyond what remains to be done in terms of achieving common definitions of “ITRs” and “Transition”, similar concerns also pervade the issues of “Biodiversity” and the “Just Transition”.
“These two issues are a good example of why BNP Paribas Asset Management’ global sustainable strategy is structured around the 3 pillars of Energy transition, healthy Ecosystems, and greater Equality in our societies, which have to be considered in tandem and not in silo.”
The need for methodologies and definitions is not quite at an early stage for biodiversity as for the just transition, thanks to recent efforts. “There has been a lot of interest in biodiversity over the last 18 months, thanks in part to the COP15, the 20 targets it set and the 30 by 30 goal of protecting 30% of the world’s biodiversity by 2030. The Taskforce on Nature-related Financial Disclosures (TNFD) and its disclosure recommendations was another crucial step towards better internalising the nature-based costs of climate change and protecting biodiversity. All these developments have facilitated very useful discussions. We need to stop pushing the natural boundaries of our planet,” Clisson argues.
Nevertheless, there is a concern that gains in some aspect of climate mitigation could be achieved at the detriment of fairness and the well-being of local communities. “We cannot leave anyone behind. A transition that does not care about social justice will simply create new forms of inequality,” Clisson explains. “The issue is very complex. Climate change and policies to tackle it can fix as well as create new challenges. In Europe, environmental policies have been perceived to negatively impact farmers, while developing countries have also resisted international initiatives to curb pollution because they seem to undermine their industrial development. We need to define what amounts to a ‘just transition’. What do we need to keep in mind when assessing a company? What expectations should we have when we engage with them on these topics? At BNP Paribas Asset Management we have attempted to tackle these issues through our Equality Roadmap, which is due to be published this year,” Clisson adds.
Blended Finance and Physical Risks
According to Clisson, the financial resources necessary to accomplish the energy transition cannot come exclusively from the private sector. “Public institutions have a role to play, especially development banks who can partner with private investors through blended finance initiatives. However, I am not aware of any particularly prominent or successful blended finance funds. Multinational Development Banks (MDBs) have faced sharp criticisms over the limited scale of their efforts and the fact that their efforts have too often not been sufficiently focused on the developing world where there would be most needed,” Clisson says.
The industry also needs to increase its efforts to internalise physical risk. However, the absence of sufficiently complete databases complicates our ability to do bottom-up asset-by-asset analysis. We’ll only have access to the vulnerability part of the assessment, which is not sufficiently to understand how the company manages this risk. At the same time, a top-down approach is too broad and general to be relevant to the very specific conditions faced by companies on the ground. BNP Paribas Asset Management is involved with Open Source (OS) Climate, one of the initiatives where stakeholders work together to develop methodologies that seeks to improve our understanding of climate risks.
“During the last COP, our leaders have re-acknowledged the need to limit global warning to 1.5°C. And many organisations around the world have committed to contribute to this goal. Now, we all need to be much more ambitious in how we translate our commitments into actual actions if we are to achieve our goals. This will take an enhanced understanding of the issues driving these changes and a will to allocate the necessary human and financial resources to accomplish those goals,” Clisson concludes.
