the global movement towards responsible investment · reed smith what is responsible investment?...
TRANSCRIPT
The Global Movement Towards Responsible Investment
Peter Zaman, Partner
5 March 2020
Reed Smith
What we will cover
2
• What is responsible investment
• Drivers behind responsible investment
• International Trends (ex. Europe)
• Where are we going and what does it mean?
Reed Smith
Why responsible investment?
Because our current economic model is not sustainable.
• IPCC report states that we have 12 years to limit global warming to avoid 1.5 °celsius’ change.
• We need to reduce our emissions by half in circumstances where our population is growing and people are getting wealthier and therefore,
more emission intensive.
• Our approach to generating economic growth has a disproportionate impact on our social structures and the planet. For example, we
consume roughly 170% of Earth’s natural resources every year and yet our growth will add another 2b people by 2050.
• We require a shift in the way we deploy our capital in pursuance of our economy.
It’s no longer theoretical
• 17 of the 18 warmest years on record have taken place since 2001.
• In 2018, extreme drought + poorly maintained power lines = California wildfires and bankruptcy of Pacific Gas & Electric Corp.
• Volkswagen has been fined more than $49bn worldwide as a result of its emissions scandal.
• In 2017, $43b estimated cost of impact of Hurricane Maria on Puerto Rico’s economy.
• In Davos 2020, the environment filled the top five places in the list of concerns likely to have a major impact over the next decade in WEFs’
annual risks report.
.
3
Reed Smith
Global Climate Risk Index 2020
4Source: Germanwatch e.V.
Reed Smith
What is responsible investment?
ESG“Responsible investment is an approach to managing assets that see investors include
Environmental Social and Governance (ESG) factors in:
• Their decisions about what to invest in, and
• The role they play as owners and creditors.” (PRI)
Socially Responsible Investment (SRI)This approach encompasses all financial products that have a specific socially responsible
(SRI) investment strategy. The investor understands ESG criteria is a tool to ensure that the
investments he/she makes reflect his/her moral values. Consequently, he/she wants to align
investment with ethics, social or environmental purpose in order to improve the sustainable
impact of investment decisions.
5
Reed Smith
Approaches towards responsible investment
ESG Incorporation ESG Stewardship
Integration Screening Thematic
Explicit and
systematic
inclusion of
ESG issues in
investment
analysis and
decisions to
better
manage risks
and improve
returns.
Use filters to
rule
companies in
or out of
contention for
investment,
based on
investor’s
preferences,
ethics or
values.
Combine risk
return profiles
with intention
to contribute to
specific
environmental
or social
outcome (e.g.
impact
investing).
Engagement Proxy Voting
To engage with
companies on ESG
issues to improve
their handling of it
(either individually or
via forums).
Formal expression of
approval/disapproval
through shareholder
voting on specific
resolutions on ESG
issues.
6Source: PRI
Reed Smith7
Recommendations of the Task Force on Climate-related Financial Disclosures
Extracted from: TCFD Final Report
Reed Smith
Use of ESG reporting standards
Plenty to chose from.
Sustainability Accounting Standards Board
Conceptual Framework (2017)
• Tailored to U.S. corporations and SEC
filings
SASB
International Organization for
Standardization (ISO 26000 Guidance on
social responsibility)
ISO
The International Integrated Reporting
Council (IIRC International Framework)
IIRC
Global Reporting Initiative (GRI
Sustainability Reporting Standards)
GRI
The Organisation for Economic Co-
operation and Development (OECD
Guidelines for Multinational Enterprises)
OECD
UN Global Compact (Communication on
Progress)
UN
8
Reed Smith
Sustainability Reporting Cycle
Asset managers, asset owners and others have encouraged greater corporate disclosure. Third-party
organizations have then created guidelines on sustainability standards and ESG metrics that reinforce
the cycle.
9
Reed Smith
Drivers behind responsible investment
The Paris Climate Change Accords • Commitments from 195 countries
• Goal to keep emission increase well below 2°celsius’
• To do that, we need to be limiting our average CO2 output to 14 GT p/y for next 20 years (currently 36 GT p/y)
UN PRI• Now more that 2500+ signatories representing $80tn of assets
• Made it mandatory for 2085 signatories to report against TCFD indicators
• Had placed 10% of its signatories on a watchlist for failing to meet ESG targets
UN Sustainable Development Goals (2015)• Globally agreed sustainability agenda for implementation by 2030
• 17 Sustainable Development Goals with 169 associated (aspirational) targets
10
Reed Smith
UN Global Goals for Sustainable Development
11
Reed Smith
Drivers behind responsible investment
Investor pressure• Increasing awareness and acceptance of the link between ESG information, a
company’s purpose, values and strategy and its performance
• Companies with sustainable practices outperform companies that have not integrated
ESG considerations into operations
Fiduciary duty rules • The rise in ESG is happening in tandem with a heightened regulatory environment
• Increasingly mandating or strongly advising consideration of ESG matters in institutional
investments
Regulatory Drivers• Asset owner regulations (e.g. disclosure requirements for pension funds)
• Stewardship codes
• Corporate disclosure requirements (e.g. governments, stock exchanges, TCFD etc.)
12
Reed Smith
International Trends
Broad developments
• Banks are committing to stop funding
coal plants
• Investment funds are divesting fossil
fuel assets
Screening of investments
• Increasing demand for supply chains
to be transparent and sustainable
• Development of sustainable
commodity products
Influencing supply chains
• Conflicting ESG ratings due to different
weights and evaluations
• Greatest disparities observed in:
Governance > Social > Environmental
Low correlation
• National Plan on Implementation of the 2030 Agenda for
Sustainable Development
• Green Industry Guidance Catalogue (2019) is a directive
of 6 categories of green industries, as areas for local
government to form supportive policies that are eligible
for green bonds
China
• Lack of consistent, verifiable and
comparable ESG date
Consensus on barriers
• Increasing numbers of ratings service
providers
• Credit ratings agencies acquiring ESG
ratings businesses
Ecosystem is adapting
13
Reed Smith
International Trends (ex. Europe)
Central Bank leadership
“Climate-related risks are a source of financial risk and it therefore falls squarely within the mandates of central
banks and supervisors to ensure the financial system is resilient to these risks.” (NGFS Call for Action Report)
• 50 central banks are now part of the Network for Greening the Financial System (NGFS) (launched in
Dec17)
• Link between financial stability in insurance and banking and (i) natural disasters, and (ii) the changing
price of carbon relative to renewable energy supplies.
• Recognition of the need for greater quality of information
• ECB is very concerned about the impact of extreme weather events on global commodity prices and the
impact of migration triggered by climate
• Better understanding of the exposure of a company’s operations to physical and transition risks related to
climate change
14
Reed Smith
NGFS Recommendations Call to Action Report 2019
Integrating climate-related
risks into financial stability monitoring and micro-supervision.
a) Assessing climate-related financial risks:
b) Integrating climate-related risks into prudential
supervision:
• Engaging with financial firms:
• Setting supervisory expectations to provide guidance to
financial firms as understanding evolves.
Integrating sustainability factors into own-portfolio management Central banks to lead by example by integrating ESG into their
own operations.
Supporting the development of a taxonomy of economic
activities
A taxonomy would:
• facilitate financial institutions’ identification, assessment and
management of climate and environment-related risks;
• help gain a better understanding of potential risk differentials
between different types of assets; and
• mobilise capital for green and low-carbon investments
consistent with the Paris Agreement.
Bridging the data gaps Public authorities should share data of relevance to Climate Risk
Assessment and make them publicly available in a data
repository.
Building awareness and capacity, encouraging technical
assistance and knowledge sharing.
Build in-house capacity and to collaborate to improve
understanding of how climate-related factors translate into
financial risks and opportunities.
Achieving robust and internationally consistent climate and
environment related disclosure.
• Pledge support for the recommendations of the Task Force
on Climate-related Financial Disclosures (TCFD)
• Urge policymakers and supervisors to consider further actions
to foster broader adoption of the TCFD recommendations
15
Reed Smith
Mapping physical risk transmission channels
16
Reed Smith
Mapping transition risk transmission channels
17
Reed Smith
International Trends by numbers
“I believe we are on the edge of a fundamental reshaping of finance”
Larry Fink, CEO BlackRock
Some numbers• BlackRock, world’s largest fund manager with $7tn under management, joins the Climate Action 100+ initiative in
January 2020
• 33 Global Banks financed fossil fuel companies $1.912t between 2016-2018 (Banking on Climate Change Report,
2019)
• 24 ESG related controversies for S&P 500 index companies in 2019 wiped of $534b in market value for those
companies involved, relative to the index over the following 12 months (BoA study)
• $250b of bonds were issued in 2019 with the environmental, social or sustainable label (led by European issuers)
• 8 out of the 16 stock exchanges with compulsory ESG reporting requirements located in Asia (UBS report)
18
Reed Smith
Where are we going …
• SEC announced “particular interest” in
disclosures by registered investment
advisers on ESG strategies
• Leading to mandatory disclosures
Greater regulation
• Standards and ratings will continue to
be diverse to cater for different
industries
• More methodology disclosures on how
disclosures are used
Disclosure overload
• Increased recognition of environmental
risks on businesses
• Leading to more divestment of
potential stranded assets and
investment arbitrage
Environmental significance
• Greater disclosures by
corporates looking to raise
funds
• Consideration of ESG
factors in investments and
ratings
More ESG integration
• Development of awareness
and expertise
• Greater availability of
information
More adoption in Asia
• Increase in product
offerings with ESG label
• Growing AUM in ESG funds
More ESG products
19
… what does it mean?
Reed Smith
Increased recognition of Environmental impact
20 Source: CFA Institute and PRI, “Guidance and Case Studies for ESG integration: Equities and Fixed Income”.
Reed Smith
Growth in corporate sustainability disclosures
21
Reed Smith
Growth in ESG funds (USD)
22
Reed Smith
Continued adoption of ESG in AsiaPac
23
Reed Smith
Your Speaker‘The "extremely competent" Peter Zaman maintains his position as one of the eminent
practitioners in the climate change field.’ Chambers and Partners Global 2020
20 years of practicing as a transactional lawyer in the UK, EU and, most recently, in Asia has
left Peter with a broad base of experience which allows his practice to be multi-faceted. He
has practiced as a partner for 10 years and regularly draws on his experience to help guide,
support and collaborate with his clients to enable them achieve their commercial objectives.
Peter firmly applies the mantras “variety is the spice of life” and “there is no such thing as bad
experience” to embrace work opportunities as they present themselves for his clients. The
breadth of his practice covers transactional and regulatory work in respect of carbon finance,
commodity derivatives, derivatives and structured products. His carbon specialization extends
to all aspects of carbon finance (CDM, JI, Green Investment Schemes), emissions trading,
carbon funds and the voluntary markets. He is a recognised and established authority on
legal issues relating to emissions trading and has been involved in the area since the
inception of the EU Emissions Trading Scheme in 2005.
Peter is a familiar name in the legal directories and has been ranked as a Band 1 lawyer for
Climate Change by Chambers and Partners Global for many years. He continues to be
recognized in Who’s Who Legal: Environment, and in 2018 he won the Client Choice Awards
for Singapore Derivatives..
His clients include industry leading names who are commodity merchants, miners, utilities,
investment banks, multilateral development institutions, corporates and fund managers. Since
moving to Singapore, his practice has increasingly focused on China and, in particular, on the
on-shore and offshore commodity derivatives business opportunities relating to China.
Peter is also a contributor and author of the legal critique chapter in Michele Stua’s book
titled, “From the Paris Agreement to a Low-carbon Bretton Woods –Rationale for the
establishment of a Mitigation Alliance” (Springer 2017)
Peter Zaman
PartnerSingapore
+65 6320 5307
24
Reed Smith
ABU DHABI
ATHENS
AUSTIN
BEIJING
BRUSSELS
CENTURY CITY
CHICAGO
DALLAS
DUBAI
FRANKFURT
HONG KONG
HOUSTON
KAZAKHSTAN
LONDON
LOS ANGELES
MIAMI
MUNICH
NEW YORK
PARIS
PHILADELPHIA
PITTSBURGH
PRINCETON
RICHMOND
SAN FRANCISCO
SHANGHAI
SILICON VALLEY
SINGAPORE
TYSONS
WASHINGTON, D.C.
WILMINGTON
reedsmith.com
This document is not intended to provide legal advice to be used in a specific fact situation; the contents are for informational purposes only.
“Reed Smith” refers to Reed Smith LLP and related entities. © Reed Smith LLP 2020
Reed Smith is a dynamic international law firm, dedicated to helping clients move their businesses forward.
Our belief is that by delivering smarter and more creative legal services, we will not only enrich our clients’ experiences with us, but also support them in
achieving their business goals.
Our long-standing relationships, international outlook, and collaborative structure make us the go-to partner for the speedy resolution of complex disputes,
transactions, and regulatory matters.
For further information, please visit reedsmith.com
.
25