It’s not easy being green

Written by: Richard Willsher Posted: 11/05/2020

BL67_sustainability illoBarely a day passes without mention of the need to increase our green credentials, for companies to ensure they are acting sustainably, and for the sector to deliver ethical products. But just how green is the finance sector?

It feels like every day there’s a new commitment. A major multinational corporation announces its green agenda; a pension fund or a sovereign wealth fund announces it is dumping fossil fuel stocks; another billionaire says how much he or she is going to give to make the planet a better place. 

So, has the green investment agenda reached its tipping point? ‘Green’ means different things to different people. For some investors, it means addressing climate change and preventing global warming.

Others have a broader agenda of responsible investing and environmental, social and corporate governance (ESG) – see box on Principles for Responsible Investment (PRI). 

Wider still are the United Nations’ Sustainable Development Goals (SDGs), which cover the complete global waterfront of fostering peace and prosperity for all. So it’s hardly surprising that different types of investor take a range of approaches to being green – with some greener than others. 

Take pension funds, for example. Because pension funds have very long investment time horizons – to match their future liabilities to pay out pensions – they’ve been quick to recognise that the long-term impact on markets of adopting socially responsible investment criteria could be significant. 

Malin Nilsson, Managing Director of Compliance and Regulatory Consulting at advisory firm Duff & Phelps, says: “Pension funds are the ones at the starting point of the ESG agenda. That trickles through the value chain in the investment industry. It means private equity firms have to think about ESG.

“It’s access to investor capital, basically. Investor capital demands ESG consideration, and that trickles right down through to, for instance, portfolio companies.”

In the private wealth space, investors have been a little slower to embrace green values. 

“We’re at pre-tipping point,” says Eugenia Koh, Head of Sustainable Investing and Engagement Strategy, Private Bank, at Standard Chartered in Singapore. “I think a lot of investors are starting to think about it, but with all the terminology they hear, it’s still quite a confusing issue for them to navigate. 

“However, as the issue is increasingly discussed, and as more investors are being educated by banks and industry, that’s helping them develop their own thoughts, and is having an impact from an investment perspective.”

Research carried out by Standard Chartered at the beginning of last year – among high-net-worth clients in Hong Kong, Singapore, the United Arab Emirates and the UK – showed that those clients are gradually moving towards sustainable investing. They showed a preference for investing to support several of the UN SDGs, particularly affordable and clean energy, clean water and sanitation and good health and wellbeing. 

They also found that 16% of wealthy people’s assets under management were allocated to philanthropy – but that a large majority of investors were open to shifting those funds to sustainable investing.

What is and is not green?

One of the issues with so-called green investing is that it is difficult to evaluate the offers available in the marketplace. While SDGs and the PRIs are helpful guides, how are investors to know how their funds are actually being deployed? 

Koh points to the “noise in the market” around ESG. She suspects marketing hype is used to seduce investors. 

Zoë Hallam, Senior Banking Counsel at law firm Walkers in Guernsey, notes the importance of being able to measure the impacts of investment, to make sure there’s no ‘greenwashing’ and to give investors the level of comfort they need.

“There are individuals and organisations in the market that will advise you on setting your metrics for your goals rather than against, for example, the UN SDGs.” 

She also points to new taxonomy regulation that the EU is introducing, which will establish a classification framework against which to measure whether the activities into which investors put their money are, in fact, environmentally sustainable. 

BL67_sustainability illo2“That framework is important from an investor confidence perspective – once you set your investments against those metrics, performance against them can be properly measured and independently verified.”

Malin Nilsson sounds a more worrying tone, however, suggesting that what sometimes appears to be ‘ESG good’ is, in fact, not what it seems. 

“Plastic bags are considered bad,” she says. “But are they really? People may try to push a canvas bag instead, but actually you’d have to use a canvas bag for your entire life to make the carbon footprint the same as using a plastic bag once and then burning it. 

“Electric cars are another example. They’re good, but do they take into account the social impact and the environmental impact of the battery production? It’s not as black and white as it might seem.” 

She adds: “Another example is fossil fuel companies – which are obviously considered bad. But what if a fossil fuel company wants to transform itself into a renewable energy company, which requires investment?”

This highlights a further concern whereby companies perceived as environmentally bad find their stock being sold by investors and its value dropping. 

In fact, this may hobble their ability to operate and invest in what they do, such as drilling for oil. Their assets in the ground become orphaned, as they can’t afford to bring them to market. 

Some would say that this is market forces at work for good. But, like it not, the world still needs oil to be able to operate. We have not yet developed sustainable energy to a level where we can divorce ourselves from fossil fuels – and it’s likely to take quite some time to achieve that.

Guernsey green initiative

One response to such concerns is being delivered by Guernsey Green Finance. 

Its CEO, Andy Sloan, explains that the initiative is fully committed to delivering strategic action around green and sustainable finance.

“The initiative brings together stakeholders from the public and the private sectors,” he says, “to develop projects, initiatives and products to route capital into climate change mitigation projects.” 

In the next few weeks it will be publishing its private equity principles to guide general partners in the private equity arena towards best practice for green and sustainable investing. 

“As a jurisdiction, we are committed at the most senior levels within the States of Guernsey. We’re at five funds now, with the sixth about go live, which in just over 10 months is not bad. And if you look at the AUM, it’s around $4bn. That’s about 1% of all Guernsey-administered funds.” 

Listening to the press hype and buzz around green investing, you might think that everyone is thinking green these days. But that’s only partially true.

While investors such as pension funds and Guernsey Green Finance are well advanced, others such as private wealth have yet to reach their tipping point – where investing for good is front and centre of their investment strategy. For some, there is still some way to go. 

KEY COMMITMENTS

United Nations Sustainable Development Goals
• No poverty
• Zero hunger
• Good health and wellbeing
• Quality education
• Gender equality
• Clean water and sanitation
• Affordable and clean energy
• Decent work and economic growth
• Industry, innovation and infrastructure
• Reduced inequalities
• Sustainable cities and communities
• Responsible consumption and production
• Climate action
• Life below water
• Life on land
• Peace, justice and strong institutions
• Partnerships for the goals


Principles for Responsible Investment 
The United Nations supports Principles for Responsible Investment, a large, international network of investors who believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios.

They also ‘recognise that applying these principles may better align investors with broader objectives of society’. The six principles, launched in 2006, are:

• We will incorporate ESG issues into investment analysis and decision-making processes.
• We will be active owners and incorporate ESG issues into our ownership policies and practices.
• We will seek appropriate disclosure on ESG issues by the entities in which we invest.
• We will promote acceptance and implementation of the principles within the investment industry.
• We will work together to enhance our effectiveness in implementing the principles.
• We will each report on our activities and progress towards implementing the principles.


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