Monthly Archives: July 2019

Environmental Social Governance: The Changing Attitudes of Investment Funds

 

Environmental Social Governance (ESG) Investing has shifted from a bit part player in investment screening to mainstream practice for investment decisions.  The influence of activists, NGOs and media campaigns on the environmental scandals of large corporations has meant corporates can no longer avoid adhering to ESG principles, and in particular, addressing climate change. The actions of NGOs create public attention and deliberately expose the biggest players.

Plastics is the perfect example, their inherent potential to pollute the earth has been known for decades, yet the pressure for corporations to change their production and business models has only become prevalent in recent years. This is largely down to NGO campaigns and media coverage. (The same has happened on plant-based diets – check out our article on planetary health diets here).

However, pressure for companies to implement ESG into their business practices and models is now being applied from the other side of the coin. Investors and investment funds are increasingly integrating ESG into their investment screening and decisions. A company implementing and championing ESG principles indicates less risk, and therefore presents itself as a much more viable investment.

Visual example of how one investment fund, Hermes, determines how companies manage ESG risk.

Visual example of how one investment fund, Hermes, determines how companies manage ESG risk.

It indicates to investors a company is less likely to commit environmental and social mal-practice throughout their supply chains and operations, meanwhile upholding ethical governance policies and practices both within their internal structures (e.g. whistleblowing, executive pay, shareholder rights) and external behaviours (e.g. bribery, illegal practices).

It is undeniable NGOs set the tone on ESG, but investors now influence demand for sustainable and ethical business practices.

Why is this ?

There are two main reasons.

In summary, companies with good social and governance characteristics and strong track records of actions to mitigate their impact on climate change, generally outperform others based on ‘basis points’ (bps). This is a common unit of measure for investment returns and growth rates and therefore suggests to an investor a more profitable investment.

However, investment managers with ethical investment criteria will inherently look to ensure a company meets their specific criteria for an ethical investment. This underpins the investment decisions instead of basis points and investment returns. This is the major shift.

Interestingly, it is now widely accepted social factors are now statistically significant in company performance and how ESG practices impact shareholder returns. Previously environmental and governance characteristics of a business were the key players for investors. A companies social ‘risks’ can be so significant that they offset sound environmental and governance practices all together. Social factors now highlight badly performing companies during investment screening.

 

A Move from Government

In July 2019 the UK government released their Green Finance Strategy which sets out their plans to ‘green’ finance. One of the main intentions of this new strategy is to make corporate disclosure of sustainability performance mandatory within the private sector. The government intends to develop clarity on what and how companies should report sustainability performance. This is to allow investors to make ESG-information led decisions on investments. Through this, the government believes they can restructure our financial systems whereby environmental, social and governance factors are centralised into financial risk assessment. They argue this would hugely assist with achieving the legally binding net-zero carbon target by 2050.

Have a further read on the Green Finance Strategy here.

UK Government Releases Green Finance Strategy

The UK government recently released the new Green Finance Strategy (GFS) with three main intentions:

Greening finance: Restructuring our financial systems to ensure environmental factors a fully integrated into mainstream financial decision making.

Financing Greening: Increased investment in green and low carbon technology through new policy frameworks and £3billion between 2015-2021.

Capturing Opportunity: Government to support the private sector tap in to the global market for low carbon financial services and ensure the UK is a hub for the global green finance market.

Click the image for a visual summary.

Green Finance Strategy Infographic

 

As a sustainability company offering Environmental Social Governance (ESG) consultancy, monitoring and auditing, Mainer Associates are particularly interested in point 1. Investors increasingly integrate ESG factors into their financial risk screening. The move from the Government to restructure our financial systems to make this mainstream, is a bold and positive move.

Why?

The UK is the first country in the world to set legally binding emission reduction targets. The big target that makes the headlines is net-zero carbon emissions by 2050.The government believes the GFS is one way to make sure the UK achieves this.

The argument is that meeting these objectives will require unprecedented levels of investment in green and low carbon technologies, services and infrastructure which will require sustainability performance to become central to investment decisions.

WHAT does this mean?

What we are seeing is a two-pronged approach – ‘greening’ the global financial system to ensure companies with reputable and verifiable sustainability credentials are favoured for investment, and, catalysing investment in technologies.

The transformation of the financial system must go beyond just funding green projects 

It will require fundamental changes in the way investment decisions are made across the economy. All finance will need to incorporate the financial risk of climate change.

But HOW will the Government do this?

The strategy focuses on 4 elements: establish shared understanding, clarify roles, foster transparency and develop a long-term approach, and build robust consistent green financial market frameworks.

The government intend to achieve this is by making the private sector companies implement the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).

The purpose of the TCFD is to develop consistent information on climate related financial risk disclosures for the use of companies in providing information to investors, lenders, insurers and other private or public stakeholders (TCFD).

There are a variety of ESG standards and frameworks to choose from. Due to ESG’s subjectivity from company to company, businesses can essentially select the areas of sustainability and climate change they excel in and address. The Task Force intends to provide clarity for businesses on what financial markets and investors want from disclosure of ESG performance in order to measure and respond to climate change risks, but also educate firms on how to align their disclosures with investors’ needs.

Actions

  • Government will expect all listed comps and large asset owners to disclose sustainability and climate change performance in accordance with the TCFD recommendations by 2022.
  • Work with regulators to implement requirements on mandatory reporting.
  • Develop a set of sustainable finance standards.
  • Increase market led action on enhancing nature-related financial disclosures.

The UK’s financial market and private sector need a shared understanding on environmental risks from both a sustainability, and now financial (investment) perspective.

One method is to price risk appropriately to inform efficient allocations of investment. This is only achieved with transparency, which requires standardised climate related data.

 

TCFD Recommendations

 

The government will be creating a task force with UK regulators to examine the most effective approach on disclosure, including exploring how appropriate it is to make reporting mandatory. Disclosure will only be useful if educates and clarifies financial decision making.

Companies must know what financial markets require from disclosure in order to respond to financial risks related to sustainability. This will also support financial institutions and policy makers to differentiate between companies and projects. This creates a cycle whereby the better performers are regularly preferred, thus raising standards for other companies to achieve if they want to gain investment.

We make decisions like this in our everyday lives on a small scale. From where to do our food shops, what make-up to buy, or even who to bank with. One supermarket might facilitate re-forestation projects, pay employees a living wage or have strong equal opportunity policies, whereas another may not. But how do we ACTUALLY know?

posted in News

Planetary Health Diets: The Answer to Sustainable Food Systems?

In the past decade, huge investments have been made in plant-based companies that produce meat and dairy alternatives. Such companies in America alone have had over £12billion pounds of investment in the last 10 years and of course coincides with a rise in the prevalence of vegan and vegetarian diets. But why?

The environmental impacts of the meat and diary industry have been rigorously reported in recent times with documentaries such as cowspiracy exposing the true environmental costs through global multimedia platforms such as Netflix. Previously, the negatives associates with food were dominantly discussed in isolation to health and nutrition, but we are now discussing them in relation to the health of our planet.

Food systems contribute almost 30% of global greenhouse gas emissions and two thirds of these result from producing animal feed for livestock. With global population ever increasing, we must take stock of our food systems and extent of our demand for certain food groups. It is estimated between 1800 to 2500 gallons of water are required for one pound of beef. Of course, there are also negative externalities involved in establishing mono-culture crops for the purposes of plant-based substitutes which we also need to accept. However, it is widely accepted the intensity and pressure on our natural systems to produce livestock in comparison to plants is far greater.

The point here is to consider how we can make small changes to how and what we consume. The key challenge we are faced with is to provide an increasing global population with nutritional diets from sustainable food systems, it is too simplistic to focus on one food group, although reducing meat consumption will play a big role. A sustainable food system is not only one with plenty of supply, but one in balance with the ecosystems it operates within.

Our current systems make truly sustainable diets difficult to achieve. A new report from the LANCET Commission Food Planet Health released in 2019 put forwards their concept of planetary health diets, to guide international restructuring and decarbonising of food systems. A planetary health diet describes behaviours of food consumption that are both healthy and environmentally sustainable, measured using scientific targets for intakes of specific food groups. It essentially concerns the health of humans and the state of the natural systems on which the health depends on.

Some strategies to be implemented across the globes food systems at local, regional and international scales are:

  • Reduction in yield gaps – a crops ‘real’ yield is regularly far less than its actual potential yield. – sustainable intensification.
  • Educating farmers on the emissions embodied in different feeding regimes and feed production systems.
  • Realigning land management processes whereby reducing emissions is a central strategy.
  • International agreements on targets for healthy diets and sustainable production, based on unanimously accepted science.
  • Use of technology to optimise water and fertiliser usage.
  • Land use for agriculture to become a net sink of carbon instead of a net source.
  • Reduce food waste within production by 50%.
  • Improve information on plant-based food, reduce their costs and improve their accessibility.
  • Agricultural and marine policies on production should be orientated around nutrition rather than quantities.
  • Redistribution of global use of nitrogen and phosphorous.
  • Only use land already allocated to agricultural to meet demand from growing populations through zero-expansion policies at international and national scales.

Click on the Infographic for a closer look at how you could contribute through different consumption habits!

Infographic from LANCET suggesting the balance to a achieving a planetary health diet.

Infographic from LANCET suggesting the balance to a  achieving a planetary health diet.

 

Why this new approach ?

We should always consider different cultural context and give consideration to the role animal based foods have in people’s diets across local and regional geographies. It is therefore arguably impractical to target one food group, but instead far more pragmatic to improve food systems as a whole, albeit a significant task!