Green and environmentally responsible investing is no longer a conscience-salving fringe activity; it’s now very much in the mainstream, and its importance is only likely to grow in the coming years.
“Regulations are driving it, the EU net-zero 2050 target is driving it, institutions are driving it, and society is driving it, with kids going on climate strikes from school and so on,” explains Prof Andreas Hoepner of the UCD School of Business.
“Climate change and technology is transforming a lot of industries,” he adds. “NextEra, the renewable energy company, is now the biggest energy company in the US. Elon Musk of Tesla became the highest-net worth individual on the planet in January. The transition to a low-carbon economy is real and that is what is shaping demand.”
Richard Kelly, head of client business with Legal & General Investment Management, has seen a pronounced shift of late.
“Environmental, social and governance [ESG] investing is now coming to the fore,” he says. “It was seen as too expensive and there was no proof of outperformance over other funds. They were seen as barriers to entry. But that has changed.”
Not only have the performance issues been addressed, but pressures from a variety of quarters are driving up demand. And that pressure is both top-down and bottom up.
“There are regulatory pressures and not just from the EU,” says Kelly. “Pension fund trustees are also looking at ESG issues. We are seeing a groundswell in support from pension scheme members. Millennials in particular want to see their investments have a low carbon footprint.”
There is an increasing drive into green finance across the board, he adds.
“The European Commission Green Deal is seeking to move €1 trillion in assets into green portfolios. It is happening much quicker than we would have expected. Fires in California and Australia and floods in the UK are bringing it home to investors that climate change is real. If someone has a major oil company stock in their portfolio they’re going to ask why. People are saying they don’t want fossil fuels, they want renewable energy instead.”
And there are natural consequences to that growth in demand. “Investment managers need to have products to offer clients who are looking for green investments. I’m quite proud to work for a company that has had ESG values at its core before they came into vogue. It’s great to see it come to the fore now.”
On the regulatory front, the European Commission’s action plan on sustainable finance is tilting the playing field further in favour of green investments.
“It is bringing in three key regulations on taxonomy, disclosures on low carbon and positive impact, and benchmarks,” explains DMS Investment Management Services director Vanora Madigan. “The EU taxonomy is a classification system establishing a list of environmentally sustainable economic activities. The disclosure regulation is already in force, but it will apply from March 10th, 2021.”
Tara Doyle, head of the asset management and investment funds department at Matheson, is also chair of the Irish Funds Industry Association working group on ESG. “The working group was established in 2019 in response to the growing industry and market trend which saw the industry creating products that addressed people’s desire for environmentally responsible and sustainable investments,” she explains. “The investment markets can have a significant role to play in driving behaviour. If you want to inform behaviour you can create rules or incentives, but you can also use the markets to create changes in the real economy.”
Up until now, investors needed to consider if climate change is going to impact on the company. Now they have to ask if the company is going to impact on climate change
The disclosure and transparency regulations being introduced under the EU action plan will amplify that impact.
“From March 10th, 2021, every fund in Europe will have to disclose information on its ESG impact regardless of whether it is a green fund or not,” says Doyle. “Covid may have paused a lot of activity, but ESG is still going full steam ahead. The environment is too pressing an issue. The new rules creates a dynamic for the sustainability of investments to be taken into account. This will help drive a move away from short-termism and towards long-term sustainability.”
Change in thinking
It may also result in a change in thinking, she adds.
“Up until now, when you were investing in something, you needed to consider if climate change is going to impact on the company. Now you have to ask if the company is going to impact on climate change. The market was moving there anyway and the action plan is pushing it to move faster.”
ESG investing doesn’t begin and end with the environment, however. “It’s not just about climate change,” says Kelly. “Covid has shown the importance of the social aspect in how companies are run and how they treat their employees. Thus far, the emphasis has been on the ‘E’, but the ‘S’ and ‘G’ shouldn’t be left behind. We will be launching a fund that looks at the UN Sustainable Development Goals [SDGs] and the Paris Agreement objectives. Clients want to invest in the journey to carbon neutral, but they don’t want to invest in bad labour practices. We are increasingly seeing the SDGs being brought into investment decisions.”
The action plan measures will assist that process, according to Madigan, who says the social and governance aspects of ESG investing can be a bit harder to measure in a tangible way.
“It can be difficult to compare like with like,” she says. “Sustainability means so many different things to investors. This can lead to confusion in the investment process. The EU taxonomy has put common definitions in place. This helps make ESG products more attractive and easier to understand. The disclosure and taxonomy will make it easier for investors to compare products.”
James Casey of KPMG’s asset management practice agrees.
“The immediate future will see a more formal approach taken to measuring and monitoring green investing,” he says. “Up to now, there has been no single definition as to what constitutes a green investment, and it has been possible to badge a product as being environmentally focused without having to back that claim up with hard data. The Sustainable Finance Disclosure Regulation, which takes effect shortly, is a key step in formalising the disclosures funds and asset managers must give in respect of green investments.”