London conference hears that portfolio decarbonisation should be a collaborative venture.
Aligning investment portfolios with the goals of the Paris Agreement requires engagement with the real economy, said Claudia Bolli, Head of Responsible Investing, Swiss Re. Speaking at the City Week financial services symposium in London, she echoed the views of the UN-convened Net Zero Asset Owner Alliance (NZAOA) that 1.5°C alignment requires asset owners to engage with corporate value chains, policymakers and asset managers.
Patrick Arber, Group Head of Government Engagement on Sustainability at Aviva, agreed. “None of us alone can make the impact we desire. The industry needs to recognise that achieving Paris portfolio alignment is not only about our own portfolios, but also about aligning the real economy,” he said.
It is “incredibly important” that investors work with governments, he added. Many governments around the world “want to make a difference” on climate “but time is ticking” and the entire financial system needs to be brought into play. Arber cited the UK’s newly unveiled Transition Plan Taskforce, which is bringing experts from academia, industry, NGOs and governments together to set out what a commitment to net zero should look like.
“It is up to investors to engage with governments, helping them and praising them when they get it right,” he said. “Sometimes, relations between the financial industry and regulators and governments are combative and that gets in the way of progress. It’s the wrong way to look at it. As investors, we need a sensible regulatory system.”
The financial industry should “embrace” regulation, said Joseph Pinto, CEO of Natixis Investment Managers and Head of Distribution for Europe, Latin America, Middle East and Asia Pacific. “We operate in a varied regulatory landscape and adopting regulations always takes time and money, and we have to educate both internal teams and our customers.”
Investors should not be “cynical” about regulation but should recognise the time it takes to see regulation through. Large investment companies are challenged by the divergence of regulations globally and should become involved in encouraging “some form of convergence”.
Earlier at the conference, Zheng Zeguang, Ambassador from the People’s Republic of China to the UK, observed that the two countries should “step up policy coordination” on green finance and support green and low-carbon development.
Alignment of investment portfolios with the aims of the Paris Agreement is not just about divestment, said Bolli, but about a “collaborative mindset” that uses engagement to steer investee companies on the right path.
“Engagement is just one piece of the puzzle. Swiss Re has committed to reduce listed equities and bond emissions by 35% by 2025. If you know the starting point and where you want to be with regards to emissions, you can identify which companies to engage with first.”
Rather than pursuing divestment, which “doesn’t help”, Bolli said Swiss Re works with investee companies on changing their business strategies, extending infrastructure loans or ESG bonds to finance the transition companies may have to make.
Engagement is not a one-off practice, but a continuous process and “the first step to collaboration”, she said. If engagement isn’t working, Swiss Re will use its voting rights.
“This year we have seen across industries many more shareholder resolutions on Paris being accepted or voted for.”
Only if engagement and voting don’t work would there be a need to divest, given the risk of stranded assets on the balance sheet, she noted.
Luke Ellis, CEO of Man Group, observed that too often engagement encourages companies to sell parts of their assets that are considered “bad from an ESG viewpoint”. Rarely, he said, “do I see engagement that cares about who the asset is sold to.”
If public companies are pushed to sell assets in order to get them off balance sheets and hence gain a better ESG score, there is a danger that those assets fall into the hands of a private company with less interest in reducing emissions or other ESG risks.
“Recognise the journey”
David Blood, Founding and Senior Partner at sustainable investment manager Generation Investment Management, raised the issue of which metrics investors should use to align portfolios to the goals of the Paris Agreement.
“Alignment isn’t always about a temperature rise. The most basic tool for us is carbon intensity – we must understand the CO2 exposure of our portfolios because Paris comes in two parts: net zero by 2050 and limiting temperature rises to 1.5°C,” he said. Portfolio alignment comes down to capital allocation and while analysis tools help, they don’t necessarily identify what will happen to a portfolio over the next 20-30 years.
“As investors, we need to find the tools to help us recognise the journey that the businesses we invest in are on. But the data is not very good and we need to continue to improve the data and the tools around it,” he said.
There are many different approaches for investors to align portfolios, said Blood. Setting a framework for best practice and encouraging others, particularly data and tool providers, to drive towards “some sense of best practice” will hopefully drive convergence, he added.
“There’s no one size fits all though. It depends on what the financial institution is trying to accomplish in aligning with Paris.”