The pandemic certainly seemed to breathe new life into ESG investing. Perhaps it was the absence of cars from the streets and planes from the sky – but protecting the planet became a priority again.
NN IP believes five trends will shape the future of responsible investing in 2021 and beyond.
Trend 1 – More focus on financing true impact
Adrie Heinsbroek, chief sustainability officer at NN IP suggests the guiding questions for clients in the years ahead will be: “How can we ensure that the money we put to work in the financial markets has a positive impact in the real world?
“Covid-19 has led them to focus even more on the fundamental issues that are affecting human life in every corner of the world. We are seeing increased demand for green bonds, sustainable equity strategies and other products that let clients directly contribute to environmental or societal change.”
He adds: “Investors are also asking for more transparency on the impact of their portfolios. This trend will only increase.”
Sandra Crowl, stewardship director at Carmignac takes a similar line. “I agree that investors want to make sure their own investments are contributing positively to the environment and society. This is why ESG thematic funds are popular with retail investors as they are easily understood and tell a story on how investments can make a tangible impact within a certain sustainable objective.”
Trend 2 – Increased recognition of need for climate action
The 2021 United Nations Climate Change Conference will increase the sense of urgency to tackle climate issues. As Heinsbroek explains: “Images of clear blue skies in the pandemic’s initial phase opened people’s eyes to what can be achieved, so I think there will be even more pressure on governments to step up their efforts.”
As companies transition to a more climate-friendly business model, they will also face social challenges relating to job security and the skills gap. Heinsbroek insists long-term investors have to remain invested and support businesses as they take difficult but necessary decisions. “If we ask them to change, we also need to finance the change. We expect asset managers to adjust their policies to take this into account more in the future.”
David Czupryna, head of ESG development at Candriam, agrees that the pressure on governments to step up their efforts will intensify.
“With the Taxonomy entering into force on 1 Jan 2022 and COP26 this year, the next 12 months are going to be important for the climate agenda. The US re-joining the Paris Agreement will definitely help recreate the momentum that has been a bit lost since 2015. China will also play a big part here – it’s 2060 commitment to carbon neutrality still leaves much to be desired in terms of a tangible target for peak emissions”.
Trend 3 – Cross-country collaboration on specific issues will increase
Heinsbroek predicts that asset managers will increasingly join cross-industry coalitions to drive change through engagement and dialogue. “Europe is taking the lead on this, but we are also seeing the first initiatives on diversity in the US. By teaming up with social and governmental organisations, investors can have more impact on concrete topics that reflect clients’ priorities.”
Crowl points out that as collaborative engagement becomes effective, there is more interest to participate actively in company engagement to push through certain large initiatives such as the United Nations Principles for Responsible Investment (UNPRI).
Trend 4 – Investors will use more tools to influence companies
“ESG will become an integral part of the stewardship role of asset managers. So far, it has been difficult for investors to use voting to influence ESG policies, but this is set to change. In the coming years, we expect the first companies to enable investors to vote on their sustainability policies at the annual general meeting,” Heinsbroek argues.
He adds that similar to the ‘say on pay’, companies will start including a ‘say on climate’ or a ‘say on diversity’ as a standard item on the AGM agenda. Investors will also have more ways to influence ESG policies through engagement.
Crowl echoes the view that we are at the start of fundamental change. “This is just beginning, proxy voters are busily increasing the E and S related coding to accommodate new sustainable resolutions,” she says.
Czupryna thinks trends 3 and 4 are closely related. “Investors have become more vocal on the ESG front. After Say on Pay, now enshrined in the EU legislation (SRD II), Say on Climate will be next on investors’ wish list. Investors need to follow companies with global operations and act globally as well. We are already seeing coalitions of shareholders spanning continents.”
He adds: “Where we expect a big push is in the willingness of bond holders to exert more influence on company managements on ESG issues. This will affect not only corporate issuers, but also sovereign issuers. For example, at Candriam, we are part of an engagement campaign with the Brazilian government to address deforestation. You can expect similar initiatives in the future.”
Trend 5 – Regulatory action will reshape the industry
The EU’s renewed Sustainable Finance Action Plan will require investors to show how they integrate ESG and how their investments contribute to sustainable change.
According to Heinsbroek this trend will mostly focus on Europe for now, but it will also affect companies elsewhere as European investors demand more disclosure from their investments around the world. “Clients will benefit because it will be easier for them to compare products and gain more insight into how their money is being used. In addition, we expect asset managers to introduce more investment products that let clients directly participate in positive change.”
Czupryna is cautious about pinning too much hope on SFDR (part of the EU’s action plan) reshaping the industry for the better over the short term.
“It is our hope it will, however the obvious struggle of this EU regulation is to squeeze in between regulatory initiatives at a country level (France, Belgium, Germany, etc) to define their own sustainability standard. This results in a very cautionary approach. If not defined, a standard is instead limited to a vague definition.”
He concludes: “It is still too early to tell how SFDR will end up impacting sustainable product offerings. We will also need to see how Mifid is going to address Article 8 and 9 products. The impact of the Taxonomy and the Ecolabel on fund offerings will also be key.”
Looking across the pond, Greta Fearman, responsible investment officer at Actiam, believes the US under its new political leadership will start to play catch up on regulation.
“This month we have seen the first signs of regulation in the US to prevent greenwashing by investors, with the SEC announcement about a taskforce for identifying ESG-related misconduct.”
She adds: “Overall, regulatory action is ramping up globally, with the bulk of ESG related measures being targeted at institutional investors rather than companies. We are also seeing more and more collaboration among asset owners and asset managers like Climate Action 100+ in order to really make an impact.”