This week an article by Martin Wolf, chief economics commentator at the Financial Times, caught my eye. Inaction over climate change is shameful begins with the statement: “We need to shift the world on to a different investment and growth path immediately”. I couldn't agree more but when I speak to corporate treasurers and CFOs about climate change, they don't seem interested. Other financial considerations – profits, shareholders, moving cash to fund operations and M&A, and managing FX risks – are seen as far greater priorities. I emailed Martin to ask him what he thinks might drive home this message – that action needs to be taken now – to corporate treasurers and CFOs. His reply:
“I ask myself the same question! I don't know the answer, alas.”
Thank you Martin for your honesty and your article. Towards the end of the piece he spells out the folly of continuing not to take action: “One line of argument against action is that we do not know how costly climate change will prove to be. But this argument evidently cuts both ways. The scale of the uncertainty is an argument for action, not inaction.”
Sustainability: a great idea but in practice?
A report on sustainable investing by Schroders echoes some of the apathy towards taking action on climate change. It shows that institutional investors are in much the same position as the corporate treasurers and CFOs – they are under pressure to prioritise profits and risk management above sustainable investments.
The report, Schroders Institutional Investor Study 2018, found that sustainability is a good idea – but in practice it plays a limited role in investment decision-making. Of the 650 global institutional investors who responded to the survey, only a quarter said sustainability has a significant influence on their allocation decisions and a third said it has little to no influence at all.
Just over a quarter (26 per cent) of respondents manage a corporate pension plan, 28 per cent manage a government or pubic pension plan, 24 per cent manage assets for an insurance company and the remainder work for a sovereign wealth fund, an endowment, foundation, or other. The largest group of respondents – 250 – was in Europe.
The outlook is less bleak in the near future, with the majority of institutional investors saying sustainability is set to play a more important role within their portfolios over the next five years. The outlook was particularly positive in Europe, where 83 per cent of investors said they expect the role of sustainable investing to become more important in the next five years. And European investors again lead their global counterparts with 60 per cent reporting increased sustainable investment in the past five years.
Larger investors increase focus on sustainability
The report found that larger institutional investors are more focused on improving the sustainability of their portfolios’ investments and say sustainability is of greater influence on their investment decisions. It gives some examples of increased sustainable investment from large institutional investors:
- Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund with $1.3 trillion under management,formalised a partnership with the World Bank Group to promote sustainable investments in October 2017. In its stewardship activities report, GPIF announced it had selected three ESG indices for Japanese equities – further showing its commitment to this area.
- CalPERS injected $1 billion into an internally managed ESG global equity strategy in February 2018.
- Swiss Re, which was one of the first in the reinsurance industry to switch to ESG benchmarks, now applies ESG criteria to almost all of the company’s portfolio.
Transparency, risk, cost, peformance need to be addressed
And while there has been growing interest in sustainable investing in recent years, the Schroders report notes that investors need to become more confident in this asset class: “Performance, transparency, risk and cost concerns need to be addressed if future investment forecasts are to become a reality.”
Factors such as strategic asset allocation, fund manager track record, anticipated return and risk tolerance have a far greater influence on investment decision-making than the sustainability focus of the investment. However, it also seems that investors with more assets under management (AUM), above $50 billion, place more importance on sustainability. And investors with longer time horizons (longer than five years) also have a high focus on sustainability.
CTMfile take: The message from the survey is clear: while larger investors are taking action to allocate funds to sustainable enterprises, smaller investors are more likely to consider a host of other financial factors way before sustainability becomes a decisive factor. Until sustainable investment has a widely acknowledged link to better financial and risk management outcomes, this is unlikely to change.
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