The focus on sustainable investing has faded somewhat, with the drumbeat of crisis after crisis recently, and now problems with banks in Switzerland and the United States grabbing the headlines. But listen to anyone focussed on the climate for long and you’ll realise that however bad things are now, it will get much worse. Large investment firms are developing impact investing projects and reaching for the next level in ESG – maintaining biodiversity.
“I’m sorry that talking about a future crisis is happening in the middle of what looks like yet another current crisis, this time in the global banking system,” said Sarah Gordon, a senior advisor at the UK based Impact Investing Institute.
“When you’re in this space of perma-crisis,” she said, “it’s really difficult to look beyond the short term.” She said a focus on the challenges of the here and now “means that as a society, as a planet, we neglect to focus on the longer term challenges, and the challenges that are going to have devastating consequences for us all.”
Bleak outlook
Gordon, speaking at the recent Alfi conference on how the financial services industry can help deliver a just transition to net zero, reminded her audience of the bleak outlook in the latest IPCC reports.
But despite this frightening prospect, there is hope. “The truth is, solutions to climate change already exist. It’s a question of how quickly and how broadly we apply them.”
The Impact Investing Institute is working towards developing a “just transition inclusive” playbook to make that happen. “If your transition to net zero is not just transition inclusive, it’s simply not going to happen,” she argued.
The transition is the “greatest commercial opportunity of our time” according to Canadian economist and former Bank of England governor Mark Carney, she said.
‘Just transition’ challenge
The Impact Investment Institute has, with the City of London Corporation, launched its “Just Transition Finance Challenge”, bringing together leading global financial institutions such as Fidelity, BNY Mellon, Schroders, HSBC and many of the UK’s biggest pension funds, for example Nest.
Luxembourg-based InsuResilience investment fund, designed to improve access to and use of climate insurance in developing countries, is an example she cited.
Actis Energy 4, a private equity fund that is active in installing solar panels in South America, was also on the list. The project trains women from local communities to install and maintain those panels. A UK project called Sleaford, which is a renewable energy plant uses locally-sourced straw and woodchip to provide power to 65,000 homes.
Natural relationship
The frontiers of ESG are moving forward, finding new targets and goals. Thomas O’Malley, HSBC Asset Management’s head of policy. He focuses on the intersection between companies and nature.
He explained that historically, many companies have always understood the link, like breweries situated on river. “But other companies are now finding out that they also have dependence on nature, which perhaps they didn’t understand,” he said, speaking during a segment on implementing ESG principles to develop investment fund products.
He told the audience that HSBC Asset Management has signed the Financial Biodiversity Pledge, a commitment to work together to protect and restore biodiversity. “We’re already voting against the chairs of companies in exposed sectors who don’t have a good enough plan or have insufficient reporting on their biodiversity,” said O’Malley.
Biodiversity risk reporting
The firm took part in defining and communicating the finance for biodiversity agenda ahead of the biodiversity COP in Montreal, Canada last December. “Under the framework, large transnational companies and financial institutions will have to report on and assess their risk exposure to biodiversity and nature loss.”
There are projects that directly bring biodiversity challenges into investment portfolios. He mentioned the World ESG Biodiversity Screen Ucits ETF, which is an article 8 fund. It’s an index fund using standard ESG restrictions as well as a corporate biodiversity framework to screen out firms with the highest biodiversity risk.
“This means that investors can have exposure to a global index, but reduce their exposure to biodiversity risk,” said O’Malley. “The index delivers a 35% reduction in biodiversity impact, a 50% reduction in Scope 1 and Scope 2 emissions, and a 20% reduction in broader ESG measure.”
HSBC, O’Malley explained, has developed a joint venture with a nature investor called Pollination, called Climate Asset Management to run an Article 9 natural capital fund. Its first asset is a 40 hectare almond farm that regenerates agricultural land while supporting local farms. The EU has a significant trade deficit in almonds.