Risk management continues to dominate the discussion around sustainable investment, as the IEA’s prediction that peak oil demand will be hit within the decade changes the dynamic of the investment environment.
The question now is not whether or not sustainable opportunities offer the most resilient future, but when this will become a mainstream investment position. Companies with over $1 trillion in annual revenue have called for COP28 to implement a fossil fuel phase out, so pressure is increasing on fossil fuel investments.
At the same time the 2019 World Scientists Warning of a Climate Emergency report has been updated, cosigned by more than 15,000 scientists in 163 countries. Of the 35 vital signs tracked by the authors, 20 are now at record extremes, they say, an alarming development tragically reflected in human suffering. Of particular concern, say the authors, are fossil fuel subsidies that have doubled to over $1 trillion between 2021 and 2021.
A failure to act quickly, says the report, could result in upwards of half of the world’s population being “confined beyond the livable region” of Earth, subject to deadly heat, limited food availability, and elevated mortality. The authors urge policies to prevent further “ecological overshoot,” the disastrous consequence of humanity’s overuse of resources. Specifically, they recommend an economic transition to prioritize meeting the basic needs of all people rather than supporting extreme consumption by the wealthy
Sustainable finance
Investors globally aim to harness the investment opportunities provided by the energy transition as they increasingly expand into private assets, Schroders flagship Institutional Investor Study has found. This year’s study has found that investors believe the transition to net zero offers significant opportunities. More than two-thirds (67%) of global respondents think it is likely or highly likely that the energy transition will spur investment in innovation, creating significant investment opportunities.
The annual study, which spans 770 investors across 36 regions and $34.7 trillion in assets, is a strong barometer of the investment appetite of investors across the globe.
Around half of global investors believe that infrastructure/renewables are best placed to capture energy transition investment opportunities in the medium-term, leading them to plan to increase allocations to the asset class.
The majority of investors believe sustainability and impact strategies will support their objective of achieving long-term financial returns, however , institutional investors require more support from their external managers to help navigate their sustainability and impact investing objectives, particularly regarding measurement of impact
What’s more, the majority of investors believe sustainability and impact strategies will support their objective of achieving long-term financial returns (e.g. this is simply good business) and 43% highlight having a positive impact on people and planet as being one of the top drivers for sustainable investing.
Investors identified infrastructure (44%) and natural capital & biodiversity (41%) as the best suited asset classes within private assets to deliver their sustainability and impact objectives, with this focus growing as their investment timeframe extends.
Whilst half of global respondents have already made commitments to reaching net zero across their portfolios, a little over a fifth (21%) stated that they have no intentions of doing so. Specifically, EMEA-based investors were the most committed to delivering net zero by or before 2050 and are implementing a strategy with interim targets (39%), whilst the majority of respondents with no commitment were based in the US (44%).
Risk management and extreme weather
Bloomberg and S&P Global have recognised the challenge that extreme weather and the physical impacts of climate change are going to play in operational decision making. S&PP’s Climate Credit Analytics will now include S&P Global Sustainable1 data providing information on the physical risk exposure and related financial impact for over 20,000 companies, mapped against a range of seven climate change-related hazards across several scenarios.
Bloomberg has partnered with Riskthinking.AI to launch of the first physical risk indicators that account for every climate scenario endorsed by the Intergovernmental Panel on Climate Change (IPCC).
Riskthinking.AI uses Bloomberg’s physical assets data on nearly 50,000 companies—covering over 1 million manufacturing sites, energy plants, mining operations, office buildings, and retail sites—to calculate a company’s physical risk exposure level. Riskthinking.AI applies a bottom-up methodology analysing the climate conditions at each asset location, which enables users to drill down to the individual assets of a parent company so specific threats can be analysed. These indicators can also be used in combination with Bloomberg’s global supply chain data to reveal physical vulnerabilities of key suppliers that may negatively impact company operations.
This follows that Verisk (Nasdaq: VRSK), a leading global data analytics and technology provider, had added a new Climate Risk Dataset to its growing suite of sustainability and resilience analytics to provide powerful, geospatial insight into one of the most pressing issues facing global business today.
The Dataset, launched by its risk intelligence business Verisk Maplecroft, has been developed as an end-to-end solution for insurers, corporates, banks, and investors to identify exposures to current and future climate risks across global operations, supply chains and portfolios.
Meanwhile AXA XL and the AXA Research Fund have joined a research hub created by the Cambridge Centre for Risk Studies (CCRS) to help mitigate systemic risks such as climate change, pandemics, cyber threats, geopolitical change and financial crisis.
The Cambridge Systemic Risks Hub focuses on gaining a deeper understanding of the interconnected nature of systemic risks, and explores the drivers, implications and potential solutions to inform and enable the insurance industry to better respond to current and future threats. The hub fosters private-public collaboration to encourage sharing of expertise to develop new risk transfer products and advisory services.
AXA XL and AXA Research Fund will focus on climate transition risk as their contribution to the initiative. The climate transition is expected to have significant global implications for geopolitics, technology, social cohesion and business development affecting all countries and all sectors of the economy.
Reporting
The impact from extreme weather events is of growing concern to investors as well as regulators who are requiring or planning to require the disclosure of climate-related risks in accordance with various reporting regimes.
Those regimes include, for example, the Corporate Sustainability Reporting Directive (CSRD) in Europe, the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and IFRS Sustainability Disclosure Standards in a number of key jurisdictions, and more.
While concern about the impact of the ESRS on reporting has been pushed back in the EU, this week has seen both Brazil and Australia announce plans for mandatory reporting on ESG and sustainability issues. This confirms the accelerating direction of travel in terms of risk reporting – and as multinational adopt such processes to comply with demands from a range of different jurisdictions, that requirement is going to cascade throughout the supply chain.
Green bonds
The EU adopted a regulation creating a green bond standard on 23rd October. The regulation lays down uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EuGB’ for their environmentally sustainable bonds. The new standard is intended to foster consistency and comparability in the green bond market, benefitting both issuers and investors of green bonds.
Issuers will be able to demonstrate that they are funding legitimate green projects aligned with the EU taxonomy. Investors’ confidence in green investment will be enhanced thanks to a framework that reduces the risks posed by greenwashing, ultimately stimulating capital flows into environmentally sustainable projects.
The regulation establishes a registration system and supervisory framework for external reviewers of European green bonds. To prevent greenwashing in the green bonds market in general, the regulation also provides for some voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU.
All proceeds of European green bonds will need to be invested in economic activities that are aligned with the EU taxonomy for sustainable activities, provided the sectors concerned are already covered by it. For those sectors not yet covered by the EU taxonomy and for certain very specific activities there will be a flexibility pocket of 15%. This is to ensure the usability of the European green bond standard from the start of its existence.
Increasing stringency in how a range of institutions are expected to communicate their actions is reflected in Switzerland’s announcement of plans to develop its own disclosure and labelling rules for ESG investment products. This is in order to tighten the rules around the prevention of greenwash in the financial sector.
H&M launched its initial €500 million green bond to generate finance for the implementation of its circularity and net zero roadmap. H&M said that the net proceeds from the bond will be allocated towards eligible projects in five categories as defined in the Sustainable Finance Framework published on 1st September 2023: Circular Economy, Green Buildings, Renewable Energy, Energy Efficiency and Sustainable Water Management & Wastewater Management.
And London-headquartered, global professional services firm Arup has become the first engineering consultancy in the Asia-Pacific region to be approved by the Climate Bonds Initiative as a verifier of green bonds.
