Responsible investing in an urgent age
Organizations are recognizing that ESG factors are relevant and are willing to incorporate them into their business model
The location of this year’s PRI in Person, Paris, and its title “responsible investing in an age of urgent transition” could probably not have been chosen better. The name of the French capital today is almost inextricably linked to the global targets to limit global warming well below 2C.
From this perspective, the gathering of nearly 2,000 delegates in Paris four years on felt like an important reminder for responsible investors and their managers that they have a critical role to play in helping to achieve that goal.
The good news is that environmental, social and governance (ESG) factors are now widely considered in mainstream investments.
Admittedly, there is still some work to be done. The frontier has now moved away from equities to ESG in fixed income and, in particular, practical questions for sovereign debt investors.
Corporations seem to be embracing the topic. The number of business leaders discussing sustainability issues during the conference can be viewed as a sign of how important the responsible investor base has become for them.
But more importantly, sustainability is now getting more attention on the CFO agenda. That means that organizations are recognizing that certain ESG factors are material for them and are willing to incorporate these into their strategy and business model and report on them in their annual reports – making them central to their company narrative.
The bad news: climate change will continue to keep investors awake at night. Only 12% of the delegates polled live at the PRI in Person conference believed in “an orderly policy transition” and a “technology-driven transition with limited need for significant policy changes”, the vast majority expected a “delayed, forceful and disruptive set of policy responses” and a “failure to transition that leads to climate breakdown”.
This corresponds to a small poll AllianzGI did with clients ahead of the PRI in Person where 85% expected that global warming in 2050 will be at 2.5C or higher despite climate action. Climate adaptation is emerging as an investment necessity and opportunity such as flood protection, for example.
“Managing the inevitable policy response” will be therefore a key topic for investors going forward. The pressure for climate-related policy is increasing from all angles, whether environmental, social and economic.
In the meantime, the levers for action are being enabled by progress in technology. A forceful policy response with implications for the real and financial economy is highly likely.
To prepare markets, the PRI will soon release a realistic forecast of this Inevitable Policy Response (IPR), with a focus on policy levers for the IPR, the need for business certainty and a just transition and technology trends as drivers of policy. It centers on a forecast of policy and technology pathways rather than a low probability scenario used as a tail event stress test.
Next to fixing the steep climate challenge is the political emphasis put on social fairness and inclusive capitalism. The countries which will be more disproportionately impacted by climate change are the ones that are already the most vulnerable countries.
Energy transition is likely to be a big disruptor for our modern economies and needs to be addressed fairly. It will have to be accompanied with social measures and will require true political vision and courage to ensure a fair transition for the workforce impacted by the restructuring of high-carbon industries and for the expected 1 billion climate refugees impacted by global warming.
We should however not lose our determination to achieve the Paris targets and should not forget that low-carbon transition offers interesting investment opportunities in technology innovation. Indeed, the vast majority of investors polled think that they have the power to mitigate climate risk.
At Allianz Global Investors, with its engagement activities at the policy and corporate level, we see it as our fiduciary duty to play our part and help to contribute to an orderly transition with investment solutions that positively contribute to climate transition.
French President Emmanuel Macron was very clear when he addressed the conference delegates to remind them of their deep responsibility. He said: “Investors are in the spotlight to mobilize the private sector and shift the whole of finance. Because incorporating sustainability issues in the investment and ownership decisions is part of the solution to meet the tremendous challenges ahead of us. We are indeed ‘in an age of urgent transition’. Investors have a critical role to play in safeguarding the climate in this decade.”
In the final week of September, all eyes will be on the UN Climate week and Climate Summit. But ultimately our gaze should also be on ourselves and our commitment to foster the much-needed change.
Beatrix Anton-Grönemeyer is chief sustainability officer of Allianz Global Investors.
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