Why climate change must be approached as a systemic risk
Senior industry figures say that disparate strategies for managing E, S, and G won’t lessen risk as methodologies develop.
Andrew Putwain POSTED ON 11/14/2023 1:00:00 PM
The challenge of dealing with often conflicting E, S, and G needs – looking for attractive assets whilst considering an organisation’s limited operational resources – has no easy resolution. However, the standardisation of ESG frameworks and metrics will ease administrative burdens, said a recent panel of senior industry figures.
The discussion took place at the ESG Investment Leader | 2023 event in London last week and included the following participants: Kroum Sourov, Lead ESG Analyst, Sovereign Sustainability at Candriam, Maria Nazarova-Doyle, Global Head of Sustainable Investment at IFM Investors, Mitch Reznick, Head of Sustainable Fixed Income at Federated Hermes, and Alex Struc, CEO of Goalsfirst. It was moderated by Simba Mamboininga, Managing Partner at Devlin Mambo, and the topic was “Managing resources in an overcommitted world: Emerging regulation, attractive assets, and coping with shifting E, S, and G priorities”.
"You need E to S to G, and achievable goals are necessary.”
“When you look at sovereigns, all the issues are interconnected,” said Sourov, kicking off with a note that the climate crisis is an overarching systemic risk that requires investment operations professionals to look at their entire portfolios to better assess it.
Sourov believed that many of the procedures could be used for the operations side of multiple investment vehicles. “[Sovereigns] won’t fix any problems without having broad subscription from general public,” he said. “You need E to S to G, and achievable goals are necessary.”
Reznick said the investment industry needed “to see that ESG is inextricably linked” and creates an environment in which companies can excel. He expanded on this point, saying that, globally, regulatory frameworks were all at different paces – which, in turn, was hampering endeavours.
However, “the volatility of 2022 meant that things showed how the market could work”, he said, emphasising that a one-size-fits-all approach was not one he supported. ESG contained too many disparate moving parts, he added, to be pinned down globally. “It’s about trade-offs. You solve one ESG problem you create another.”
Metrics and materiality
With the conversation focused on how to better approach this balancing act, Mamboininga shifted to the topic of metrics, asking if there were new data configurations coming down the pipeline.
Sourov said the Ukraine/Russia situation was a perfect example of the kind of events and volatility the market would need to experience to build up enough data to be able to provide such metrics. Once they had the data, however, he said it would be beneficial. “We're too backward looking,” he said. “Once we have several years of these examples [of market volatility] we'll get more accustomed to volatility.”
Struc emphasised that the US was a different landscape, where ESG was further behind than in many other developed economies in terms of its embeddedness and the political will behind it. This situation, he said, could hamper ESG data and metrics coming from the US, which would ultimately be detrimental due to the fact that the US provided so much to the market in terms of scope. “The largest growth market [for ESG] is in the US,” he added.
“What was once a leader will become average. A leader from a few years ago
with Science-based targets is now nothing special.”
Struc also said that “ESG is different to different people”, and emphasised the need to consider various cultural norms and goals when it came to building these data sets. However, he later said that “it’s not different when it comes to metrics”.
He added that it was important to continue developing the industry – and frameworks, most critically. When that development happened, he said, “what was once a leader will become average. A leader from a few years ago with Science-based targets is now nothing special.”
Reznick agreed with a metaphor; “you never stop painting Golden Gate Bridge,” he said, emphasising that ESG was a process of constant learning and improvement.
When asked if ESG had a problem with shifting priorities or a resource ‘squeeze’, Nazarova-Doyle said that these conditions were inevitable, but would only have marginal effects. The market had largely accepted these conditions as necessary, she added.
“The shifting priorities are not that bad,” she said. “The market coalesced around climate being the biggest existential risk. We now know roughly what we're doing with climate do we've moved onto social.”
She touched on how the market had largely matured in response to the challenges of the climate emergency and had moved on somewhat to developing conditions and frameworks around biodiversity and nature. “Nature is now the elephant in room that people are putting effort into,” she said. “Once we have one area roughly down we move on to the next.”
She gave the example of the UK’s Department of Work and Pensions (DWP) starting a review of the pension industry to see what improvements could be made there. Because the market had matured, it was now looking to improve less ‘time essential’ matters.
"Link investment to the structural changes in the economy. Investors and economy are
respondent to systemic risk regardless of moral responsibility.”
Sourov emphasised and built on this point, saying that “this type of investing is fairly new, and parts of the industry are more traditional and want track records and predictability [before they make changes].”
He said that because the world was shifting, it was difficult to determine exactly what would capture the market’s imagination next. “Reconciliation of how you maintain assets and performance is shifting. There are going to be ebbs and flows,” he said. “Typical investors are a lot stickier on this area than in regular investment and now the pension industry is waking up to end goal.”
The panellists put forward long-term solutions, such as removing the morality from the investing world. “Move away from moral imperative of companies and how they affect society,” said Reznick. “Link investment to the structural changes in the economy. Investors and economy are respondent to systemic risk regardless of moral responsibility.”
Ultimately, the panellists were in agreement that more data was better, and more data was coming. Whether it would drive the industry in the right direction, however, was another question entirely.
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