Monday, Jan 31, 2022 • 22min
The ESG Race
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A decade ago, ESG was a term deployed as social lip service; now, it’s part of daily boardroom discussions, and top of the agenda for G7 leaders, financial institutions and businesses. The Paris Agreement propelled the conversation to the forefront of everyone’s minds, and today ESG credentials are key to securing anything from bank loans to equity investment. While progress has been made, the sector is still in its infancy and, with new regulation coming in seemingly every month, with its concomitant challenges, there’s still plenty of work to be done. However, get it right and the future should still look bright.
To help us navigate the subject, Amanda Young, Global Head of Responsible Investment at abrdn joins us on the show. Amanda is a board director for Social Investment Scotland’s SIS Ventures fund. She served on the board of the UK Sustainable Investment and Finance Association for six years, and now chairs the FTSE Russell ESG Advisory Committee.
Our sources for the show: FT resources, United Nations, Reuters, Forbes, Global Sustainable Investment Alliance, IFC World Bank Group. Mark Carney soundbite is taken from a UN climate change interview series.
This content is paid for by advertisers and is produced in partnership with the Financial Times' Commercial Department.
Hosted on Acast. See acast.com/privacy https://acast.com/privacy for more information.
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Amanda Young
Tom Parker
Mark Carney
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Transcript
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Tom Parker
00:06
Hello. I'm Tom Parker and welcome to "The Next Five" podcast brought to you by the FT Partner Studio. In this series, we ask industry experts about how their worlds will change over the next five years and the impact it will have on our day to day.
Share
00:24
This week we're focusing on
ESG
investing. I'll be speaking with Amanda Young, Global Head of Responsible Investment at Abrdn
about where the sector has come in the last five years and what she expects to see in the next five.Share
00:45
It's been five years since the
Paris Climate Agreement
inked into law the global goal to reach Net Zero by 2050. The ESG
landscape has evolved rapidly since then and ESG
performance is now integral to attracting equity investors, debt finance, bank loans and M&A transactions.Share
01:07
Here's
Mark Carney
, the UN
Special Envoy on Climate Action and Finance speaking in April this year explaining why.Share
Mark Carney
01:15
What we have now in private finance is a focus on a clear goal, Net Zero, and finding the opportunities to advance that and to be rewarded by it. And also at the same time, not just for private finance to judge which companies are part of the solution, but what's exciting and interesting and challenging for the private financial sector is increasingly they too are being judged.
Share
01:37
Whether it's a bank or a pension fund or an asset manager, they're increasingly having to show where they are on the transition towards Net Zero and then people are voting with their money.
Share
Tom Parker
01:49
But despite its progress,
ESG
is still in a developmental stage, lacking established common terminology, universal reporting frameworks or standards. Someone who knows a fair bit about these issues is Amanda Young, Global Head of Responsible Investment at Abrdn
.Share
Amanda Young
02:07
One of the big challenges that we're facing at the moment is that many governments around the world are competing to be seen to be the greenest or, you know, the most sustainable, and what I worry about is that a range of regulation is just going to come up that's piecemeal, that everybody's trying to just outdo everybody else and then we, as asset managers and asset owners need to think about how we adopt that regulation.
Share
02:33
So regulation only works if the aim is right, which I think in this instance all this regulation is aiming towards a more sustainable future for us all, but it has to be based on a set of principles that are easy to apply, but not vague. So I think the principles are not onerous, but the vagueness around the application still remains.
Share
02:57
I think this is where things like TCFD have been very successful, where carbon footprinting has been very successful because it is based on a common set of parameters and frameworks, you know, scope one, scope, two, scope three emissions and you're able to say "This is the carbon footprint of my portfolio."
Share
03:16
How you then take that in terms of reporting outcomes, which is ultimately where I think the industry will need to go to, that becomes more of a challenge.
Share
Tom Parker
03:25
Before we go any further for those who like me, may be struggling to keep up with the complex evolving world of
ESG
frameworks and acronyms, here's a quick heads up on some of the big ones.Share
03:37
The TCFD is the Task Force for Climate Finance Disclosures and was set up in December 2015 by the
FSB
, that's the Financial Stability Board
, not the Russian Security Services, to better understand and price climate related risks and opportunities. In November 2020 the UK
committed itself to implementing mandatory TCFD-based disclosures across its whole economy by 2025.Share
04:06
The EU recently updated its own NFRD, the Non-Financial Reporting Directive to tackle climate reporting.
Share
04:13
Then there's the TNFD. That's like the TCFD but looks at nature-related risks rather than climate ones.
Share
04:21
Next up is the
IFRS
, the International Financial Reporting Standards Foundation
, that since the G7
has been tasked with creating the ISSB
, The International Sustainability Standards Board
before COP26
in November.Share
04:37
For anyone interested
COP
stands for Conference Of The Parties
and it brings together countries that signed a UN Treaty in 1994 to tackle climate change, and yes, you've guessed it, it's in its 26th year.Share
04:51
And finally there's the
CPD
formerly known as the Carbon Disclosure Project
, an international not for profit organization that since 2002 has helped states, regions, cities and companies measure and disclose their environmental impact. Currently over 130 state and regional governments from 32 countries disclosed through the CPD
. That's over a fifth of the global economy.Share
05:18
So there you have it, now back to Amanda.
Share
Amanda Young
05:21
This has been an industry that has had so many acronyms and so many different things springing up over the last decade, and I think it's going to continue because, even if we think about third party research providers, there's been a lot of consolidation over the last ten years where smaller shops have set up to do very specific things and have been subsumed by a handful of now, really big players.
Share
05:44
So, I think the reason that we have task force repeating themselves on a different issue is the success of something like TCFD, and the success of the fact that that has become go-to standard, and carbon is a perfect example of where we have had some convergence.
Share
06:04
Regulation has been a lot more similar than some of the other
ESG
aspects that we look at, and scope one, scope two, scope three emissions, which was actually set up by the CP, another acronym which is, you know, again being subsumed into something else, but that was set up and worked with the government to make it mandatory for companies in the UK
to report against scope one, scope two, scope three, and eventually became a database for, you know, the largest number of companies in the world, and so that became a global standard and that's kind of what we want to see.Share
06:35
Nature related disclosure's really important. We focused very heavily on climate change but we actually have three key problems that I think we need to address as a world, and we as investors need to be acutely aware of. The first is climate change, which is obviously a lot happening with
COP
and everything else, but let's park that for aside.Share
06:55
The second is this unsustainable production and consumption. The fact that we consume produce, consume, produce constantly, and there is something called
World Overshoot Day
which every year comes earlier and World Overshoot Day
is the day in the year that we as a world have used all the natural resources that we can naturally replenish, so sustainable, natural resource use.Share
07:22
It is now in late July. That means five months of the year we are using resources we can't replenish. That's not sustainable! It's quite shocking when you think of it that way., so this circular economy piece and this need to preserve natural capital is going to be, in my view, a very, very big focus, and it is tangentially linked to climate change because we need our forests to be carbon sinks etcetera, etcetera.
Share
07:49
But actually deforestation, loss of biodiversity, all these have long term implications for lots of industries. Everything we have in our homes is either being mined, is being drilled or it's being chopped down, harvested. So if you think of that, if we keep consuming at the rate we're consuming we don't have a world to keep living in.
Share
08:11
So that's a reason behind needing to work out what companies are doing to measure their natural capital use, to measure their natural reliance on natural capital, because if we get to a point where natural capital becomes harder and harder to obtain, companies need to think about where they're going to get their raw materials from.
Share
Tom Parker
08:29
I just want to look back at where we've been in the last five years because the
Paris Climate Agreement
was signed in 2016, and where have we come since then?Share
Amanda Young
08:39
Well, I think you can genuinely say that
ESG
and climate change, specifically, has gone mainstream in the last five years. Five years ago, when the Paris Agreement
was signed, for investors, climate change was still an activity that was happening along the side, as opposed to being a fundamental part of many investment manager's portfolio analysis now, and even in the last two years what has been so extraordinary is the massive move to trying to think about where the investments we're making today will be in the future, so the next five years, the next ten years.Share
09:19
And a lot of this is driven by
COP
coming up, which was obviously meant to happen last year, but because of Covid
it didn't, and this push, particularly by the UK
government, to galvanize appetite towards Net Zero.Share
09:37
So Net Zero's is the new big thing. What does Net Zero mean? So, governments are talking about Net Zero, companies are talking about Net Zero, asset owners are talking about Net Zero and asset managers are talking about Net Zero, and there are big commitments being made by asset owners to decarbonize their portfolios, and these big commitments are driving a huge amount of change in the industry.
Share
Tom Parker
09:59
We've got
COP26
coming up in November this year and we've had the G7
already. What do you expect to see coming out of COP26
that hasn't been suggested already from the G7
?Share
Amanda Young
10:09
Well, let's see if actually the things that have been suggested, it actually gets signed up to. So that's the starting point. I remember the negotiations of
Paris
, the backwards and forwards and backwards and forwards and who was going to sign who wasn't. I think that's a significant shift in the last six years, is that governments are far more vocal in committing to reducing CO2 etcetera, etcetera.Share
10:34
But actually you can make the commitments, but then you need to see the action happening. So, if it's a case of "we need to protect our rainforests", then we need to see governments making sure that that happens.
Share
10:45
If it's a case of making sure that a commercial imperative to grow and pushing economies actually overrides the need to preserve natural capital and to protect the environment, let's see what happens. I think there'll be a lot of hot air. I think governments will commit but they will do so only if other governments can do because obviously they need a level playing field.
Share
11:11
But then the proof will be in the pudding. What is the action? I mean, if we look at the political landscape since
Paris
you had the US
sign up to the Paris Agreement
, you then had the US pul out of the Paris Agreement
.Share
Donald Trump
11:22
The United States will withdraw from the
Paris Climate Accord
.Share
Amanda Young
11:28
And now you have the
US
signing up to the Paris Agreement
again.Share
Joe Biden
11:30
I'll bring us back into the
Paris Agreement
. I'll put us back in the business of leading the world on climate change.Share
Amanda Young
11:37
I always said, actually it doesn't really matter what governments do, it's the stakeholders within those countries that will drive the change, because even though the US pulled out, you still had individual states saying they were committed. You had agreements going backwards and forwards with China which were reliant on certain carbon and climate change outcomes.
Share
Tom Parker
11:58
This point about stakeholders is interesting. In other sectors, take energy for example, there is a collaboration between stakeholders but very much a hierarchy of delivery to reach Net Zero. Firstly, governments set the framework for industry investment and public acceptance and then providers create the technologies. Consumers come last in the process.
Share
12:21
They can't use hydrogen before it exists, for example, but we heard
Mark Carney
talking earlier about investors voting with their cash. So where do the responsibilities lie in the finance sector?Share
Amanda Young
12:34
The investment industry is very guilty of operating in isolation. i. e. "don't worry your pretty little heads about it, we know what we're doing, and as long as we are doing with our institutional investment, people want then that's fine".
Share
12:49
We all need to take a step back and remember and recognize that we are there to manage money on behalf of the person on the street, not the big institutional investors because they have their own stakeholders who they represent, and most of the money in the world is now invested for pensions and for savings and for the person on the street.
Share
13:11
So actually, the person on the street has a very, very strong voice. The challenge is, they are very disconnected to actually what happens at the end of that food chain, but I think that the voices of people are being heard and there are increasingly a larger number of younger people coming into financial services who just get this, who just want to do things because it's the right thing to do, but at the same time, they're entrepreneurial and they want to make money.
Share
13:38
So we, as asset managers, need to listen to our clients. Very often our clients are institutional investors, asset owners, you know, the pension funds of the world, but ultimately they are representing the end investor, you and me and anyone who has a pension fund, anyone who has a saving and anyone who's investing directly into the markets themselves.
Share
14:01
And I think this is one of the reasons the regulation has come to force is that they are seeing that there is this disconnect between the person on the street and their portfolios and they're trying to somehow make asset managers much more accountable to the investors, so they have a clearer idea of where their money's being invested.
Share
14:18
What worries me slightly is that the regulation derails the activity, so you become beholden to reporting and ticking a box and making sure that you're on the right side of the regulation, rather than thinking very carefully and clearly about how you want to allocate your capital.
Share
14:35
So we need to be conscious that this does not derail the people who are making those investment decisions, who want to do so in a thoughtful, pragmatic way, but there are people who have been pushing the agenda for the right reason, and again, it comes back to that point that I said at the beginning.
Share
14:51
Are we doing sustainability because it's the right thing to do, and it will make you money? Or are we going, "Oh, sustainability's gonna make us money so we all need to jump on the bandwagon". There is a big chunk in the industry doing that at the moment. This needs to be done in a thoughtful pragmatic manner, that's actually going to shift capital rather than tick boxes and meet legislative requirements.
Share
Tom Parker
15:14
Amazon
, in May this year, issued a $1 billion Green Bond
to invest in electric vehicles and clean transportation and warehousing to help meet their goal of powering all of their operations with renewable energy by 2030 and have Net Zero emissions by 2040.Share
15:30
That's a worthy cause, and great targets set by a big company, but Amazon holds nearly $85 billion in cash, a quarter of their assets, and have already invested in the projects they're asking more money for. Alongside other multi billion dollar
Green Bonds
issued by Alphabet
and Apple
, both of which have even larger amounts of cash available and could easily fund their own Green revolution, this begs the question "Are these bonds necessary and is it detracting disposable capital away from companies that really need the cash to invest in their own climate ambitions?"Share
Amanda Young
16:04
I think it's a very good question. It's a broader question, isn't it? You know, propping up big companies, full stop, let alone if it's green or not green. I think the big companies, whilst occasionally are often the pariahs in responsible investment industry, can also be the biggest movers of change because the small companies need to live up to their standards.
Share
16:23
So in some ways, the big companies need to step up and have a bigger sense of duty and demonstrate that responsibility. So I'm not anti big companies issuing
Green Bonds
if they can genuinely demonstrate and set some standards and be leaders about where that capital is being allocated.Share
16:42
That said, we do need to support innovation in the smaller areas and we have seen a rise in social impact investment houses that are doing just that. What we need to do is to see those pure impact players partnering with the big asset managers, where the big chunks of capital are, so that we can see scale in the social impact investment market.
Share
17:06
So we can see that going from niche to far more mainstream and in doing that will give better options for our end investors in terms of the sorts of things that they can invest in. Social impact investment market is thriving, but it is reliant on a few wealthy individuals who are high net worth individuals who can and have the luxury to invest in that type of activity.
Share
17:31
If you're a person on the street, you need to go through the big houses, you need to have the regulation that goes behind that, and so, you actually need the big houses to start developing the sort of products that you would like to say put 5% of your pension fund into.
Share
17:45
I just want pure outcomes driven impact investment, which might be all private small social enterprises, but that opportunity is not really being given to the individual. So it's the need to democratize investment and democratize the ability to access some of these investment opportunities.
Share
Tom Parker
18:07
I want to talk now about the next five years. What's the most exciting prospects and what do you expect to see happen?
Share
Amanda Young
18:15
I think it's amazing that we've seen such an interest in sustainability. We now need to protect the values and the standards of that industry. So, I think there will be a big push towards demonstrating proper governance structures, proper regulation, properly well thought out mechanisms. And I would like to think that that can keep apace of all the different things that investors are starting to look at.
Share
18:41
There's been a lot of people talking about the "S". I spoke earlier about, you know, climate change and unsustainable production and consumption being two of the biggest of the three challenges. The third is actually much more social one and it's not diversity and all of these other things that people are talking about, it's inequalities.
Share
18:60
We have this massive growth in inequality around the world and access to basic needs is going to be a massive driver both in terms of risk, but also in opportunities. So people need an education and we can see the disparities that happen around who gets access to education, who doesn't. People need access to health care.
Covid
has been the perfect example of how the rich west can invest in vaccines and get their populations vaccinated.Share
19:26
And then there's the rest of the world suffering in these really trying times and we all need to take an equal share in that. Access to housing, access to clean energy, access to lots of different things. That bottom of the pyramid where there's so much discrepancies between the haves and the have nots is also a real opportunity.
Share
19:45
What I would like to see over the next five years, this is probably more an ask rather than it will definitely happen, is that focus on demonstrating your value to society as a business. In order to get investments you need to demonstrate your worth beyond a paycheck, beyond the bottom line.
Share
20:04
That you can actually start reporting on the outcomes of your business so, how many lives have been reached? What difference does that make to those people's lives? It's not just about offering jobs, it's offering quality jobs. All of these things that meets that third big piece of the triangle, that inequality piece.
Share
Tom Parker
20:23
What won't we see in the
ESG
Investment landscape in five years?Share
Amanda Young
20:28
Well, we won't see it dying. It's here to stay which is great and I hope we don't see a bubble. I think, it's a difficult one. I don't think we will see enough data and that is a big, big issue. You know, properly used data, I think that's going to take longer. But then, saying that, I've been quite astounded at how fast the last five years has been.
Share
20:52
I think we won't see deniers. I think they will start peetering out. People who say you can't do this because it's going to lose your return, so, I'd like to think that that would be the death of the deniers in the next five years, is something that we will see and they won't be around.
Share
Tom Parker
21:08
Do you think there are the five key points that really summarize this whole
ESG
landscape? Where we are. Where we're going to be.Share
Amanda Young
21:16
Yes, so the first would be that
ESG
and sustainability has become mainstream. The second is that we risk there being a bubble if we don't put standards above the need to make money.Share
21:28
The third is that if we don't do this we won't have a world to live in going forward, so the capital and how we allocate it will be key to the future of the world that we invest in. The fourth is the need for data to improve, and the fifth is to make sure that our regulation is not vague and unclear.
Share
Tom Parker
21:50
Is there anything more that is a, sort of, burning desire for the world to know? Anything you want to share?
Share
Amanda Young
21:57
I am super excited that in the last twenty years we've actually been able to make this mainstream. I know there are a lot of people who have been around for a long time who are feeling quite weary and tired, and occasionally as you're walking up a mountain you need to turn around and look just how far you've come, and that is a really exciting prospect, and people need to recognize just how much has been achieved.
Share
Tom Parker
22:25
Well that's it for the second episode of "The Next Five" podcast. Many thanks to Amanda Young for chatting with me today and thank you to everybody for listening.
Share
22:35
For more information on
ESG
and the sources we used in the show please check out the episode description. Take care and bye for now.Share
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