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Will COP26 be a game changer for ESG investing?

The 26th United Nations Climate Change conference (COP26) is happening as we speak. Given the UN’s hashtag and strapline of #TogetherForOurPlanet Rebecca Tomes asks what this highly anticipated summit might mean for the investment and advice profession – and whether it will be a game changer for sustainable investing.

The long awaited COP26 summit is taking place in Glasgow this November. It aims to bring together world leaders to commit to urgent global climate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change.

With so much of the future health of our planet resting on its outcomes, we take a look a little closer to home and ask what the summit might mean for the world of financial planning and investment?

We’ve been talking to a range of sector practitioners and experts to find out their views and expectations. Do they believe that the summit and the associated media coverage will be a catalyst for changing investors’ attitudes to sustainable investing? What are the challenges we face in doing so?

According to Gretchen Betts, Managing Director of Magenta Financial Planning,  “COP 26 is being described as the most significant climate event since the 2015 Paris Agreement” – it’s a promising and exciting claim.  “However” she warns “COP26 needs to be a meeting of ACTIONS” rather than a mere discussion of climate risks.”

Andrew Hardy, Director of Investment Management at Momentum Global Investment Management (MGIM), agrees that COP26 needs delivery of actions:The need and the expectation for this summit, six years after the Paris Agreement, is for concrete action to be agreed, particularly in the form of countries setting more ambitious targets for carbon reduction, together with much improved disclosure and governance around tracking progress. Wider agreements around carbon pricing are also on the agenda. Real progress along these lines would consequently force investors to place much greater emphasis on the environmental impact of their investments.”

Although Betts also recognises that COP26, and the associated media coverage, will, at the very least, direct attention to ESG issues and generate more interest in sustainable investing amongst the British public. She says, “the media coverage of COP 26 and focus on everyone doing their bit for climate change, plus the momentum gathered throughout the pandemic, will most certainly mean more clients want to talk about sustainable investing. I’ve been advising on ethical and sustainable investing for over 15 years, but at Magenta, we’ve seen a massive increase since 2018 –easily up by 60% – of those investors who want to talk about this type of investing, and we envisage this will continue.”

Ernst Knacke, Head of Research at Shard Capital, also believes that COP26 media coverage will increase considerations of ESG and claims that currently, “climate change is still under appreciated by society as a whole”.

Be part of the solution

Betts firmly believes that sustainable investing is at the heart of the solution to the climate crisis. She quotes research conducted by Nordea Investment Management which “has proven that investing ethically is 27 times more powerful in reducing CO2, than anything we can do personally, like eating less meat, shorter showers, less consumption.” Therefore, she believes it’s imperative that financial planners and investment advisers are not only “equipped with expert knowledge and with the right skills to talk about sustainable investment options with confidence” but that they also consider their own morals and impact in the climate crisis. As Betts’ concludes “now is not the time to sit on the fence or stick stoically to what we have always done and not be open to rising to this climate change challenge. Every business needs to do its bit for climate change and our future financial planning clients will be expecting it.”

Amanda Young, Global Head of Responsible Investment at abrdn, agrees with Betts that COP26 will shine a spotlight on the climate threat and the important part the finance industry can play in mitigating the threat. She forecasts, “COP26 will certainly focus people’s attention on climate change, particularly in the UK where COP is taking place. People are far more aware that how they use energy, drive their cars and choose what food to eat, can impact the natural environment. We are already seeing a movement among younger generations who are increasingly aware of the significant damage climate change is doing to the world, as well as a greater understanding of how lifestyles, business and energy use all contribute to a changing climate. And with that, a growing awareness that the finance industry has its role to play in how it finances both carbon intensive industries, as well as those companies involved in clean energy and greener technologies.”

There’s work to be done

Nevertheless, Young is conscious that COP26 will not tackle all ESG factors. She says, “While climate change is the biggest focus area in the sustainable investing sphere, it is not the only one. COP26 will continue to support this trend and indeed, there is a greater interest in green and climate focused funds. But it’s important not to forget some of the other sustainability issues that investors are increasingly thinking about, such as human rights, labour issues or wider environmental degradation not linked with climate change.”

She also corroborates Betts’ claim that it is crucial for financial and investment professionals have a solid grasp of sustainable investment issues and the necessary skills to advise on this matter- ensuring clients’ needs are being properly met. Young sums it up as follows, “Investment managers as well as those advising end investors need to take more time to (a) understand sustainability issues themselves, and how sustainability factors are used in investments, and (b) understand the demands and needs of savers.  Education is key and firms need to have sufficient ESG expertise within the business on these matters to ensure it is done in a credible manner.”

According to Young, the finance industry must also address the lack of consistency in regards to sustainable investing. She argues that terminology and taxonomies often cause confusion and that there is inconsistency among labelling and regulatory firmsShe comments “labelling organisations are attempting to do a commendable job in providing some assurance and guidance for the end saver. The challenge for the investment industry is that different labelling systems, from different countries take different approaches.” Nonetheless, Young concludes that the industry does present consistency in terms of climate change, it being “one of the most advanced sustainability issues investors look at today” and that “with COP on the horizon, the focus will be even greater.”

Ernst Knacke, on the other hand, believes that the finance sector still has work to do in addressing climate change commenting “The investment industry should think less about their own profits – asset gathering and squeezing margins – and more about engagement and how to collectively solve problems pertaining to global warming.”

A catalyst for change

MGIM’s Andrew Hardy pinpoints two courses of action that he feels the investment and advice profession must take in order to help combat climate change. These are educating their clients on how they can allocate their capital in a way that can contribute positively to the environment; and scrutinising the asset managers and service providers they work with, to understand how they manage environmental risks and the characteristics of their portfolios.” He believes that if this were done comprehensively across the industry globally, “the impact of mobilising such vast amounts of capital would be enormous.”

Finally, Mark Northway, investment manager at Sparrows Capital, believes the investment industry is at a crossroads. He comments “It has reorganised itself to cover the whole sustainability spectrum of investor choice from ESG ranking and filters, through to impact investing and ultimately philanthropy. But the language of sustainable investing is still in its infancy, and the competing needs of environment and social inequality still need to be defined in a way to allow capital to be allocated intelligently and with a realistic return expectation. The good news is recent years have awakened an ever more strident global social conscience. The task now is to harness that conscience into action through the medium of politicians. Lots to do….” Let’s hope that they can do it. Only time will tell.

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