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Time for Asset Owners to Ask the Tough Questions

Training courses and resources filling skills gaps on path to net zero. 

There is always more to learn. For asset owners looking to understand their exposure to climate-related and other ESG risks, there is an increasing appreciation of the need to invest time and resources into developing the right skills to affect the transition to a low-carbon world.

“Looking at the direction the industry is headed, the demands of beneficiaries and the wider public, and the wave of changes being brought in by governments, there is clear demand for asset owners to incorporate sustainability factors into their investment strategies,” says Rhodri Preece, Senior Head of Industry Research at the CFA Institute, the global association for investment professionals.

As well as ensuring they have in-house resources and expertise to understand climate science, asset owners also need the skills to monitor – and, if necessary, influence – how their asset managers and investee companies are managing the transition to net-zero greenhouse gas (GHG) emissions by 2050.

“At this point in time, investors know exactly what it is they don’t know. Ensuring they are educated on these issues will serve as one of the main drivers that will bring about rapid improvements to responsible investing,” says Anthony Roberts, Director of the UN-convened Principles for Responsible Investment (PRI) Academy.

Despite 69% of respondents to a 2020 CFA Institute report saying that ESG analysis forms part of their job role, just 26% said that they have sustainability-related experience, thus indicating that there is a huge skills gap that needs to be addressed.

The PRI, CFA Institute and US investor network Ceres are among the organisations offering training programmes and guidance to make the skills transition easier.

Hard data and soft skills

Both to reduce climate-related risks and meet evolving disclosure requirements, asset owners want to know: whether, and to what extent, their financed assets are decarbonising; what kind of progress can and should be expected from an investee company, according to sector; and how to effectively escalate engagement with laggards.

This requires a comprehensive understanding of ESG-related data and transition plans, as well as well-rounded communication-based soft skills, experts say.

The various issues with ESG-related data are well-documented; data “isn’t accurate and reliable”, which makes mapping out progress towards net zero all the more challenging, says Preece.

Even when asset owners do have the required data, they then need the analytical skills to “utilise that information and embed it into their investment processes”, Preece adds.

Understanding the context around the data, and reflecting it in any analysis, is therefore vital. For example, while a more carbon-intensive company, such as an oil and gas major, will clearly struggle to cut emissions as quickly as a tech firm, asset owners need to be able to track its sector-specific progress.

Qualitative data is just as important as the quantitative, which is why asset owners are also looking to develop the soft skills involved in engagement with both investee companies and their asset managers.

“Asset owners understand that they need to learn how to be more actively engaged,” says Laura Draucker, Senior Manager of Corporate GHG Emissions at Ceres.

But engagement should go beyond ensuring net-zero commitments are made, she tells ESG Investor.

“They need to be able to have the right conversations, in which they can make sure that an investee company is prioritising the transition to net zero across their whole business, and that its governance structure supports those changes. Asset managers also need to be held accountable if climate goals are missed.”

Plugging the gaps

To meet demand, qualifications, training courses and climate-related guidance are being developed and upgraded to help asset owners develop the real-time skills they need to mitigate climate risks and transition to net zero.

The CFA Institute offers its global Certificate in ESG Investing, which has been designed according to the educational demands of its members. The syllabus covers: engagement and stewardship; ESG analysis; valuation and integration; ESG integrated portfolio construction and management; and investment mandates, portfolio analytics and client reporting. It remains broad so as to give all applicants a full overview of all the different strands ESG entails, says Preece.

Since its inception two years ago, there have been more than 11,500 global registrations for the certificate, largely spanning the UK, US, Switzerland, France, Hong Kong and Singapore.

The curriculum of the qualification is reviewed and revised annually to ensure it remains relevant to investment professionals. It was most recently updated this month by the institute’s ESG Panel, which is made up of experienced practitioners from across the investment profession.

The Pensions and Lifetime Savings Association (PLSA) also recently published a series of real-world case studies to help demonstrate how UK workplace pension providers can put their climate policies into action. The case studies cover setting climate goals, gathering data and reporting against standards set by the Task Force on Climate-related Financial Disclosures (TCFD).

The PRI has also recently updated its Academy’s course offering. The Academy is the education arm of the PRI and provides practical and applied online responsible investment training, including updates on key regulatory developments, such as the EU Taxonomy Regulation, and what it all means for investors. The courses will be updated to reflect the shifting regulatory landscape as often as possible, Roberts notes.

It has introduced three new courses for applicants with varying levels of expertise: Understanding Responsible Investment (for those who need a working understanding, such as client-facing staff); Applied Responsible Investment (the practical application of ESG concepts in investment and ownership decisions); and Advanced Responsible Investment Analysis (how analysts and portfolio managers can use sustainability data in fundamental analysis).

“Ultimately, the PRI understands that investors will be taking different approaches to incorporating sustainability into their business and investment processes,” says Roberts. “Before signing up, asset owners need to ask themselves what their core priorities are – who will be enforcing their ESG-related priorities? – and therefore which course would best suit their needs.”

Comfortable with being uncomfortable

In response to the growing need for scrutiny of net zero strategies, Ceres has published practical guidance to help investors evaluate and strengthen corporate climate commitments and effectively engage investee companies on increasing their ambition and action on the climate crisis.

“When we talk with investors, they tell us they don’t always have the confidence to ask companies probing questions about how they are transitioning, and sometimes don’t know what questions they need to be asking,” says Draucker. “This guidance aims to give them something to refer to throughout the engagement process, outlining broad and sector-specific questions to ask during their progress meetings with investee companies, as well as red flags to watch out for.”

It includes a standardised set of climate-related criteria to compare against investee corporate commitments, including plans to reduce Scope 3 emissions, transition to clean energy and implement interim science-based emission reduction targets.

“Just like companies, investors need to get comfortable with being uncomfortable when engaging on climate-related issues, and become more confident asking the tough questions,” Draucker adds.

It’s not just asset owners that are recognising skills gaps. The development of training and guidance is accelerating across other financial sectors. In the summer, international financial organisations partnered with central banks and supervisors to form the Climate Training Alliance (CTA) ahead of COP26. The CTA aims to enhance the availability of training resources for authorities responding to climate risks around the world, thus building the global financial system’s resilience to climate risks. Members include the Bank for International Settlements (BIS), the Central Banks and Supervisors Network for Greening the Financial System (NGFS) and the UN-convened Sustainable Insurance Forum (SIF).

Recognising the skills gap, government agencies are also taking action. For example, last year, Thailand’s Securities and Exchange Commission consulted on a proposal to include compulsory ESG training for investment analysts and fund managers, in order to promote awareness of ESG principles among capital markets professionals, for the benefit of asset owners and the wider market. The new rules will enter into force next year.

Widening the training pool

In the longer term, sustainability-related issues will not be the sole responsibility of designated ESG teams, but will permeate all corners of institutional investment firms. Everyone will need at least a basic understanding of what responsible investing entails.

“Asset owners are now realising that ESG-related issues such as managing climate risk cannot be confined to small, isolated teams,” says PRI’s Roberts. “A wider range of employees across the firm need to be trained.”

The CFA Institute’s ESG Investing Certificate and PRI Academy courses are open to a wide range of investment firm employees, thus ensuring that all professionals can develop, at the very least, a broad understanding of environmental, social and governance issues that will be even more important ten years from now.

“Irrespective of their role within an investment firm, every individual needs to have a grasp of the key concepts of ESG. There’s no one size fits all solution to building out sustainability capabilities within an organisation, but it starts with the people,” Preece says.

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