Is Sustainable Finance Going Mainstream?

By
Earlier this month, CDPQ's Kim Thomassin and OTPP's Barbara Zvan wrote a comment for Benefits Canada on why it's time for sustainable finance to go mainstream:
As members of the federal government’s expert panel on sustainable finance, we recently published our final report on how to mobilize Canada’s financial sector in the transition to a low-carbon, climate-smart economy.

Our recommendations seek to connect the dots between Canada’s climate objectives, its economic ambitions and its investment imperatives. At its essence, if Canada is to meet its long-term environmental and economic objectives, sustainable finance needs to go mainstream.

As stewards of Canadians’ retirement and long-term savings, our role is to promote stability and sustainability. This entails designing portfolios that will respond to evolving climate risks and profiting from new clean growth opportunities over time. Yet, as a whole, climate change remains a fuzzy notion in asset management. Why?

Because market factors need certain economic basics in place to reach mainstream, and we are not there yet on climate risk. These basics define how markets understand, price, measure and manage risk and opportunity. They are essential to sound and informed long-term investment decisions.

We dedicated the second pillar of our report to these Foundations for Market Scale, recommending the following:
  1. Issue a statement from the Minister of Finance that the consideration of climate factors is firmly within the remit of fiduciary duty, and consider judicial guidance to that effect. At the market level, we ask government and industry to collaboratively explore a Canadian stewardship code outlining principles for climate risk management.
  2. Establish a new Canadian Centre for Climate Information and Analytics as an authoritative, interoperable portal to Canada’s consortia of public and private climate-related and financial data centres. The C3IA will curate user-based data sets and decision tools, bridging the gap between data and intuitive analysis. This is a powerful step and a potential competitive edge for Canada.
  3. Implement a mandatory ‘comply-or-explain’ approach for adopting the recommendations of the task force on climate-related financial disclosures in Canada, phased in by organizational size and content complexity. Investors can’t make informed decisions about the security of their investments without knowing their degree of exposure to the costs of climate change.
  4. Promote a climate-savvy financial support ecosystem. The financial sector relies on a professional network for specialized business intelligence and consultation. We recommend targeted funding assistance for these businesses to build capacity on key climate themes. For example, we specifically call on the Chartered Professional Accountants of Canada to develop a climate lens for Canadian accounting practices.
  5. Embed climate risk into the supervision of the financial system, including monitoring, regulation and legislation. Climate change will have transformative economic impacts and requires close assessment from both a prudential and systemic risk management perspective.
  6. Convene a taxonomy technical committee to develop sustainable finance standards for a resource-based economy like Canada. Similar taxonomy efforts are underway around the world, and early precedents have emerged. The rub — most energy- and carbon-reduction initiatives in emissions-intensive sectors fail the existing ‘green test,’ even if their reduction impacts are significant. We recommend designing a ‘transition bond’ to finance these essential activities and introducing a range of temporary fiscal incentives to accelerate the supply and liquidity of these and other ‘green’ fixed income products in Canada. Our asset managers can invest directly in these bonds, use them as a cost-effective debt-financing source for portfolio companies or issue their own.
  7. Offer an incentive for Canadians to invest in accredited climate-conscious products through their individual registered retirement saving plans or pension contributions. It would include additional contribution space and a ‘super deduction’ (>100 per cent) for every dollar invested in eligible investments. This would give individual investors a tangible stake in financing the transition to a low-carbon economy.
  8. Finally, the asset management community should reflect on its current climate change competency and fill in necessary gaps. Investors have an instrumental role to play in changing the climate change narrative while investing directly to address it. Asset managers should also work collaboratively to engage our country’s largest emitters. Similar global engagements, such as Climate Action 100+, have been successful, but its Canadian coverage is limited.
With the emissions-intensive nature of Canada’s economy, we can’t ignore the challenges that climate change poses to our financial system. Nor can we overlook the immense opportunity for competitive advantage in new, cleaner growth markets and the jobs that advantage could yield. In either case, success will require committed investment, financial ingenuity and leadership — the cornerstones of our world-class financial sector.

Our long-term investors manage trillions of dollars, with assets and influence around the world. How these players navigate the nexus of climate change and institutional investment will influence our country’s transition journey and future economic playing field. We have the opportunity to leverage these institutions’ resources and reach to tackle some of the world’s defining issues in a manner that benefits society and the bottom line.

As a matter of good governance (and business), climate change should be on high on the radar of our boards. It should be core to our investment, governance and risk strategies and an active, non-negotiable conversation topic with portfolio companies, policy-makers, regulators and peers. It is time to take a long view, ask tough questions and invest our way toward a sustainable, resilient and competitive economic future.

Kim Thomassin is executive vice-president of legal affairs and secretariat of the Caisse de dépôt et placement du Québec and Barbara Zvan is chief risk and strategy officer of the Ontario Teachers’ Pension Plan. They are both members of the federal government’s expert panel on sustainable finance.
I thank thank Geoffrey Briant, President & CEO of G2 Alternatives, for sending me this comment.

Earlier this week, Kim and Barb delivered the keynote address at the CAIP Quebec & Atlantic conference in Mont-Tremblant. I covered this entire conference in detail here.

Below, my coverage of this keynote:
Special Keynote | Canada's Expert Panel Report on Sustainable Finance: What's In It For Asset Owners?
Tuesday, September 24, 2019, 8:30 AM - 9:30 AM

This special keynote will be of immense and necessary value to every pension fund in Canada — because the future investment portfolios of every single one of them will be affected by it.

In April 2018, the Government of Canada announced the formation of the Expert Panel on Sustainable Finance to consult with Canada’s financial market participants on issues related to sustainable finance. The panel released its final report on June 14, 2019. These findings will significantly impact the investment decisions of every pension plan in Canada.  In this interactive keynote, hear from two of the four members of that panel. They are, as Pension Pulse has noted, two of the most powerful women in Canada’s pension field in an elite club dominated by men.  This is a not-to-be-missed special keynote!

Moderator: Gordon R. Power, Owner & Chief Investment Officer - Earth Capital Ltd;
Speaker: Kim Thomassin, Executive Vice President, Legal & Secretariat - CDPQ
Speaker: Barbara Zvan, Chief Risk & Strategy Officer - Ontario Teachers' Pension Plan

Synopsis: This was the opening presentation and the most important one in terms of material. Gordon Power moderated and Barb and Kim took turns to go over main points from the Final Report of the Expert Panel on Sustainable Finance.

Barb Zvan kicked things off by stating Canada is known for "hockey, maple syrup, and cold winters." We are also known to be big polluters. We are the fourth largest oil and natural gas producer. She also noted Canada is the 2nd highest GHG emitter per capita in the G7.


She said the Canadian financial sector is very concentrated, with 5 big banks, 5 big life insurers and the 8 largest pensions account for 3/4 of the assets.


She noted the complexity of the regulatory system -- the Bank of Canada, OSFI, provincial regulators -- has not made change very easy.


Kim Thomassin discussed the process of writing the Interim and Final Report with over 200 consultations in Canada and abroad, 11 thematic round tables and 57 written submissions:


They then went into the three pillars of the report, focusing on the 15 core recommendations:


I highly suggest you take the time to read the Final Report of the Expert Panel on Sustainable Finance. I asked Barb and Kim to send me some of the main points they wanted me to cover.

Barb was kind enough to send me this:
Some thoughts
  • It would be great to set the stage that this is not just an environmental report. This is a finance report written for the finance / investments community.
  • Also important to note that finance is not going to solve climate change, but it has a critical role to play in supporting real economy through the transition
  • To do so we really need to channel the financial sector expertise, ingenuity, influence towards challenges and opportunities posed by CC
  • The report is a PACKAGE of practical & concrete recommendations - addressing both adaptation and mitigation
  • We thought of it as a systems approach - multiple things need to happen - by multiple groups - government, companies, investors & citizens
The 3 three themes of the report
  • First our environmental and economic aspirations need to become one in the same because ultimately they are indivisible - we need to address climate change and live up to our international commitments to deliver our share of the global effort to reduce GHG emissions, but (and even more so) we also need to address climate change to remain competitive in a world that is increasingly concerned about environmental footprint
  • A second theme is that we have some catching up to do, but we think Canada can be among the leaders in the global transition to a low emissions future as a trusted source of climate smart solutions and expertise - important for Canada to position itself as a decision maker rather than simply decision taker in the global market for sustainable products, markets and growth
  • Third, if Canada is to realize its environmental and economic goals, sustainable finance needs to go mainstream. Sustainable finance needs to become simply finance.
The 3 pillars noted and the recommendations that you think may be of interest to your readership.

Under Pillar 1 - switching orientation from burdens to opportunity
  • Mapping Canada’s climate goals into clear industry competitiveness vision - in short help spell out the the size and horizon of the investment opportunities (I guess you can’t make a link to McKenna’s speech today)
  • Additional tax deduction to provide opportunity for Canadians to connect savings to climate objective (also will spur providers who will increase their expertise).
Under Pillar 2 - building the foundations
  • Data & Insights - most pervasive issue across sectors. Biggest challenge, data & translation of data from climate insights to financial and business insights - thus recommendation to create a hub - Canadian Centre for Climate Information and Analytics. You may want to insert Joy’s point re not waiting for perfect data - it is a valid one.
  • TCFD - ultimately better information and insights will support better decision making, better pricing of risk. But another benefit of TCFD is that is will spur organization focus. Also an opportunity to change the conversation in some key sectors. We recommended a comply and explain approach, ensure implementation is paced and staged for complexity and size of firm, consideration of safe harbour rule re scenarios when a thoughtful approach has been taken.
  • Fiduciary Duty - really about ensuring clarity that climate change consideration are aligned with an investor’s fiduciary duty. We also note in our report that Canada should create a stewardship code like many other regions.
  • Ecosystem - in addition to ensure that the experts, that many investors rely on, accelerate their learning and engagement, we did note our support for CPA to look at climate considerations in fair value of an asset.
  • Regulation and Supervision - first it is great that Bank of Canada has taken first step and joined the Network for Greening the Financial System. We did note that we need more clarity from regulators on their role in the oversight of climate change. Also for them to support financial innovation.
Pillar 3 - specific products and markets
  • Supportive Of Transition bonds to help access the deepest, pool of capital (fixed income market). Context that many of the green taxonomy (e.g. Europe) is based on what they need to do to become Green. Canada will have other needs not covered. Thus where we saw transition taxonomy fit in, an opportunity for Canada to lead. Assuming it is implemented, it is another way for a company to illustrate its commitment to transitioning.
  • CleanTeach, Oil & Gas, Retrofit, Infra, Electricity - not sure how much detail you want to go into here, but the recommendations were all targeted to what we believed was holding back that specific market - some recommendations focused on removing barriers, creating new groups to fill in a gap (e.g. green bank) or changes need to have a supportive policy environment and ability to attract the capital needed (e.g. securitization in real estate, pipeline in Infrastructure etc).
  • Asset Management - a key recommendation was for asset managers to assess their internal capabilities - as I noted, this could be around education (board or teams), thinking about the governance process, skills needed, tools already available that can be utilize in your investment process (whether to decide when to buy/hold a position but also while you own it (e.g. engagement and voting)). Commitment to TCFD for their own organizations as it will spur organizational focus as well as supporting initiatives that is asking for enhanced climate change disclosures by companies. This assessment would be specific for each company. They could also help by writing to government and saying they are supportive of the recommendations! 
For her part, Kim sent me a few key takeaways:
The role of financial markets in driving this change/transition has yet to be fully leveraged.

While finance alone is not going to solve climate change, it has a critical role to play in supporting the real economy and foster innovation thru the transition.

Our goal and wish is that sustainable finance in a short term is purely and merely finance.

One thing I did not stress enough was how the consumer preferences and behaviors are relevant - indeed, they are increasingly looking for services and products with a smaller environmental footprint. We (long term investors) feel that climate-smart innovations constitute massive global market opportunities and that they will yield high quality jobs.

Also, how both CDPQ and Teachers' are integrating sustainability into their investment strategy. As long-term global investors, we know that our performance will only be as sustainable as the world in which we invest.

At the end of their presentation, I asked them why they didn't recommend that all of Canada's large asset managers adopt hard targets on addressing climate change.

Barb noted "regulatory complexity" made it hard to make such a recommendation and that it's up to each organization to tackle this issue on their own.

Kim noted that the Caisse has met and exceeded its targets which are laid out in its 2018 Stewardship Investing Report. She went over these four pillars:

.
Following the conference, Barb Zvan sent me an important message for everyone:
It was nice to see you at CAIP earlier this week. Kim & I have another important initiative milestone that we wanted to highlight to you. A group of 12 institutional investors (representing over $5T USD) - known as Investor Leadership Network (www.investorleadershipnetwork.org) came together and created a TCFD handbook about our learnings as we worked on our TCFD reporting. We are hoping that other institutional investors will benefit from our diverse approaches taken, the challenges faced, and the reasons behind the choices we made.

We launched this handbook this week during climate week at an event at the UN. Please feel free to share this handbook with your network. An overview of the content included in the handbook can be found here.

I hope you find this handbook to be a valuable resource. Please let me know if you have any questions or wish to discuss.
I thank Barb and Kim for sharing this with my readers. You can track the latest news from ILN on Twitter here.



Barb was actually at the UN yesterday introducing the ILN report on implementing TCFD:



It's clear that climate change poses serious long-term risks to pensions and other asset managers and investors need a framework and solid advice to tackle this issue.

I highly recommend my readers read the entire TCFD handbook here or at the very least, glance at the overview of the content included in the handbook here.

Below, you can view the TCFD Implementation Document Highlights:


The other big panel discussion at the CAIP Quebec & Atlantic conference earlier this week was the last one on "The Trillion Dollar Shift":
“The Trillion Dollar Shift”: 5 Key Trends Changing the ESG Investing Landscape in 2019 - 2020

Wednesday, September 25, 2019, 11:00 AM - 12:05 PM

The “Trillion Dollar Shift” is the winner of the Gold Axiom Business Book Award for 2019. And for good reason: natural disasters triggered by climate change have doubled since the 1980s, violence and armed conflict now cost more than 13% of GDP, social inequality and youth unemployment is worsening around the world and climate change threatens the global population with tremendous environmental and social problems. Opportunities now abound for business and capital to unlock markets which offer endless potential for profit while working towards sustainable development goals. Astute institutional investors realize this is the way of the future — and that ESG is an essential component of every investment decision. In this session, learn:
  • Why has sustainable finance become such a front-burner issue across the global financial community? 
  • What are the 5 key trends changing the ESG landscape in 2019 to 2020?
  • How are institutional investors - both large and small alike - successfully Integrating ESG considerations into their portfolios?
  • How ESG considerations can mitigate risk - and provide higher ROI?
  • What does every institutional investor need to do to understand and integrate ESG into its portfolio?
  • The unique sustainable bond issue by Concordia University- and what every investor in Canada can learn from this ground-breaking development?
Moderator: Deborah Ng, Director, Strategy & Risk - Ontario Teachers' Pension Plan
Speaker: Marc Gauthier, Treasurer & Investment Officer - Concordia University
Speaker: Erica Barbosa, Director of Solutions Finance - The J. W. McConnell Family Foundation
Speaker: Katharine Preston, VP, Sustainable Investing - OMERS
Speaker: Hannah Skeates, Global Head of Environmental, Social & Governance - Wells Fargo Asset Management

Synopsis: Lastly, the big panel discussion on the trillion dollar shift moderated by Deborah Ng of Ontario Teachers'. It was the first time I met Deborah and Katherine Preston and was extremely impressed, they are both super nice and very dedicated and smart professionals.

I was also impressed with Marc Gauthier who spoke eloquently about impact investing and governance. Hannah Skeates also raised great points but I didn't get to chat with her befor eor after the panel discussion.

Katharine began by stating OMERS decided to take sustainable investing seriously because it realized it represents a major headline risk and there is a cultural shift going on driven by millennials and Gen Zers.

Marc Gauthier said "divesting is backward looking" and sustainable investing is forward looking. He talked about "sustainable investing bonds versus green bonds but said the market wasn't there yet".

Katharine said the traditional approach to sustainable investing was fulfilling PRI framework and being an active investors on proxy voting. She said "sustainable investing 2.0" is evolving now where investors are taking a deep dive looking at how trends impact companies "and how do you think about these issues". Adaptation is critical, understanding these risks through an enterprise risk management framework.

Hannah said it's about looking at these risks and beyond these risks.

Marc then went on to discuss Responsible Investing focusing on two issues:
  1. Governance: increasing standards you expect from managers incorporating ESG
  2. Allocation: increasing impact investing diversifying based on all 17 UN principles, not just climate change.
All the panelists agreed measurement is a challenge and you need to balance returns and addressing members' concerns.

In terms of trends that will change the ESG landscape over the next few years, Katharine said what about the "S" in ESG? The transition to a lower carbon economy can displace jobs, we have to think about addressing the social consequences. She gave the example of coal workers in Ontario which lost their job and had to be retrained.

Marc said "impact investing is still in its infancy" and "TAA will need to integrate ESG". He also talked about due diligence and co-investments.

Hannah talked about decarbonization goals and "more diagnostics which will hopefully lead to more action."

I asked the panel of the politicalization of sustainable finance at public pensions and their fiduciary duty. Katharine said it's not a violation of fiduciary duty to think about ESG.

Deborah Ng chimed in and stated: "We are fiduciaries to all our members across all generations. It's all about how to sustain a pension plan over the long run."

I will leave it on that note. Once again, I thank all the participants who attended this CAIP conference, I really enjoyed meeting them and hearing their views and great insights. I’d also like to thank Charles Quintal for doing a superb job chairing this conference.
It's too bad this was the last panel discussion as many attendees had already left the conference by then. I didn't do this panel discussion justice as they went into the issues in more detail but it's clear that what Katharine Preston calls "Sustainable Investing 2.0" is taking place across the investment universe.

And while Canada's large pensions are among the world's most responsible investors, I think it's fair to state some of them (AIMCo, BCI, Caisse, CPPIB, OTPP, OPTrust) are ahead of others (HOOPP, IMCO, OMERS) but all of them made the list (Katharine Preston's job at OMERS will be bringing that organization up to par with its peers on sustainable investing and she will do a great job).

But I'm known to be brutally blunt and honest on my blog comments, and in my opinion, the Caisse is way ahead of everyone in Canada at Responsible Investing and even the Caisse lags its large European counterparts (ATP, ABP, PGGM) on sustainable investing.

What else? Earlier this week, I spoke about the push for investors to decarbonize the global economy, and provided a guest comment from Joy Williams, a senior advisor at the climate change service provider Mantle314 who also chaired the Decarbonization Advisory Panel for the New York State Common Retirement Fund (see full report here). Joy shared her thoughts on last week's PRI in Person conference:
Last week, I had the opportunity and privilege to address a theater full of finance professionals at the annual PRI in Person conference. The PRI stands for the Principles of Responsible Investing and is an investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact. Its signatories number over 2250 financial firms representing just under $90 trillion USD AUM. The theme of the conference this year was “Responsible investing in an age of urgent transition” and the sense of urgency was very prevalent in discussions around the conference venue.

This year’s conference hosted over 1700 people in Paris. Topics ranged from broad issues such as policy to very specific issues such as reporting under the TCFD (Task force on Climate-related Financial Disclosures). Here are the key themes I took away from my 4 days there:
  • Responsible investing in real assets has gone global. Here in Canada, where direct investing into infrastructure is more common, I’m used to having these discussions because the long life of these assets fit naturally with ESG topics such as climate change. However, this was the first year at PRI for an entire day on real assets and shows the growth of interest in responsible investing for this asset class. Some key touch points were investing for impact with infrastructure, social license and climate metric challenges.
  • Climate change is both urgent and mainstream. Having the conference in Paris, the city where the historic climate agreement was created, made climate a natural topic. The depth and breadth of this discussion has matured substantially from even three years ago when people still weren’t sure whether the new G7 climate task force would produce anything meaningful. Today, we were debating options on how make useful decisions across portfolios that will have meaningful outcomes. Also, the PRI introduced a new climate tool in the Inevitable Policy Response – a forecast of the necessary policies that governments will need to meet the agreed upon targets. My own panel showcased three examples of investor action happening already.
  • The overall tone was to move past “process” and to outcomes. The theme of focusing on outcomes was a general one across all ESG topics. Some speakers went so far as to propose that the focus on ESG data is not useful and in some cases, a misdirection. Rather, understanding the direction of trends and then managing for desired ESG outcomes was more useful and that data was not necessary to drive action towards those outcomes.
  • Europe is making a significant headway on issues of global importance such as taxonomy, but it may not be fit for purpose in Canada. The EU Action Plan for Financing Sustainable Growth is a hot topic and will drive responsible investing to the next level. However, key actions such as setting an environmentally sustainable taxonomy do not appear to include any transitional fossil fuel activities such as switching to natural gas. Canada’s own expert panel on sustainable finance (ably represented by Barbara Zvan at this conference) has pointed to the need for tools that work for Canada in order to support a move to a green economy.
The PRI has come a long way from the high level discourse in the early years. I found there was value in detailed discussions among front line investment professionals and grains of wisdom from thought leaders pushing the boundaries, but at the end of the day, it will be up to individual organizations. There was an urgent call to practice responsible investing and it’s increasingly clear that responsible investing is becoming table stakes and investors may have to explain when they don’t practice responsible investing rather than when they do.
I thank Joy for sending me this brief synopsis of last week's PRI in Person conference in Paris. She covers the main points and I encourage my readers to contact her at Mantle314 for further information and expert advice.

After I posted that comment, however, Leo de Bever, AIMCo’s former CEO, shared these insights with my readers:
Trying to get investors to sign up for a less carbon-intensive world is still an uphill battle. That is only changing slowly. The spirit may be willing but the flesh is weak. Lots of reasons for that.

Decarbonization is still mostly a passion of entrepreneurs in small companies.

Canada has a big shortage of capital to take these companies to scale.

Conservative silos within investment firms and pension plans make them hesitant to take risks on small companies.Big investment entities take comfort in working with well-known companies that can deploy large amounts of capital, i.e. the modern equivalent of not getting fired for buying from IBM.

The notion of ‘moving the needle’ also keeps cropping up, i.e. why bother with small investments that do not affect your immediate return?

The answer is that a well-structured portfolio of investments in small companies will move the needle in the long run, as some become successful and large.

However, the long run is still mostly talked about, instead of applied to investment allocation of risk capital.

 It is tough to make investment decisions that are good for your investment entity, but may not pay off during the ~4-6 years you expect to be there.

I have been trying to make innovative lower carbon investments look more like lower-risk infrastructure in terms of reliable contracted cash flows, but you run into the greenfield issue, i.e. the risk of first having to build on time and on budget whatever you are investing in.

Large pools of capital should arbitrage their low cost access to information on the technology of decarbonization (or anything else that is new). The payoff can be very significant, but you will stick out from the crowd.

With hindsight, I wished that as a CIO and CEO I had focused more on attracting real engineering expertise, and evaluation of executive team capacity to carry out their strategy, as opposed to just relying on spreadsheet models.

The ‘tyranny of Excel’ facilitates getting to ‘no’ just because you did not invest in access to the right information.
At the CAIP conference, I told Deborah Ng that Leo de Bever is easily one of the smartest people I've met in the investment industry (the greatest intellectual tour de force I ever encountered in my life was Charles Taylor, McGill's preeminent political philosopher so forgive me if finance people don't impress me as much).

Anyway, Deborah told me "Leo is exceptional, he brought me into OTPP and he also brought Ziad Hindo into the organization." She also told me that even though OTPP's new CEO Jo Taylor isn't well known in the pension world, he will build the organization's global brand and "lean on Barb and Ziad" to help him run this massive pension (as he should).

Deborah is also a huge fan of Olivia Steedman who is now heading up Teachers’ Innovation Platform (TIP). The TIP will focus on late-stage venture capital and growth equity investments in companies that use technology to disrupt current players and create new sectors (see here and here).

Jo Taylor is lucky to have Barb Zvan, Ziad Hindo, Olivia Steedman, Deborah Ng and many other great professionals at OTPP helping him run a great pension plan.

Anyway, is sustainable finance going mainstream? Yes, it most certainly is and Barb Zvan and Kim Thomassin (I call them the dynamic duo) have done their part spreading an important message.

Still, as Leo de Bever reminds us, there's much work ahead of us and it's important to maintain a healthy dose of skepticism and always think outside the box, especially if you're a long-term investor.

Below, OTPP's Chief Risk & Strategy Officer Barbara Zvan discussed the Interim Report back in March going over some key points.

Also, Earth Capital (EC) was founded in 2008 and is part of Earth Capital Holdings, which was founded by Stephen Lansdown and Gordon Power. Its constituent firms manage over $1.6bn in Sustainable Private Equity assets with offices in Barcelona, Beijing, Botswana, Guernsey, Hong Kong, London, New York and Rio de Janeiro.

Watch their corporate overview. Like I said, I like the people, process and performance and think they're way ahead of their larger peers in terms of sustainable investing in private equity.

Third, Victoria Leggett, head of impact investing at Union Bancaire Privee, discusses the UBAM Positive Impact Equity Fund and the themes that the fund is focusing on. She speaks on “Bloomberg Daybreak: Europe.”

Fourth, Vikram Gandhi, founder and CEO at VSG Capital Advisors, and Peter Boockvar, CIO at Bleakley Advisory Group, join "Squawk Box" to discuss why investing for impact seems to be growing and why investors should approach it with caution (July 2019).

Lastly, the prominence of impact investing has risen steadily in the last few years, finding its place alongside traditional investing. But more effort is required to truly meet the UN's Sustainable Development Goals, so what can be done to move impact investing from niche to mainstream? Find out on The CNBC Debate from Davos (2018).

Update:  Benefits Canada reports that Canadian DB pensions share ‘behind the scenes’ look at implementing TCFD recommendations. I will let you read the entire article here but here are some key points:
The handbook digs into the areas of governance, strategy, scenario analysis, risks, metrics and targets, and demonstrates what institutional investors are doing on these fronts.

One topic is the role financial incentives play. “We have debated whether tying performance on climate change to financial incentives drives accountability and results,” it said. “Perspectives are mixed. A few of us have set clear climate change targets for our teams, linking them directly to financial incentives. Holding our teams accountable in this way has resulted in more engagement — provoking a greater level of interest. Others among us feel incentives can be stifling and may not always drive the right behaviours.”

On the topic of scenario analysis, the institutional investors noted they’re at different stages of the journey and it isn’t easy. “Scenario analysis is perhaps the most technically difficult and complex of the TCFD recommendations,” the CPPIB said. “This is why, for the initial phase, we wanted to leverage the expertise of an external provider to really get on with it, see the validity of the results and go from there.”

The Ontario Teachers’ provided an example of its narrative-based scenario analysis and low-carbon transition framework, while the OPTrust shared information about its top-down macro-economic approach.

“It’s crucial for investors to consider the macro-economic and systemic implications of different global warming pathways,” the OPTrust said. “Our main goal is to understand the impact on the funded status of the portfolio.”

Yet, the key is getting started, the handbook noted. “Despite the data limitations, it may be necessary for investors to become comfortable with less robust climate data and disclosure for the time being. The state of disclosure should not drive decisions to do or not to do scenario analysis. It’s about starting the journey to explore how your organization fits into the transition to a low-carbon future.”

While the handbook shared many practical examples of work being done and successes to date, it also acknowledged there’s a long way to go.

“As we move forward, we plan on continuing to share our journeys and to collaborate on our respective approaches to measure, track and disclose climate risk.”
Also, Geoffrey Briant, President & CEO of G2 Alternatives, sent me this MIT article on why impact investing is hot right now. I will let you read it here but these are the interesting points I noted:
Underlying that philosophy is the belief that private capital is critical to tackling the world’s most pressing environmental, social, and governance (ESG) problems, an ethos echoed in the Business Roundtable statement of purpose, which said, “We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment, and economic opportunity for all.”

----

For all its appeal, the concept can be hard to nail down — the phrase “impact investing” itself is ambiguous, said Gita Rao, a member of the MIT Sloan finance faculty who teaches a class on social impact investing.

“In a sense, the term ‘impact investing’ is an oxymoron, because all investing is inherently impactful: you are investing with a specific objective,” said Rao, who is the faculty advisor for the Impact Investing Initiative and has managed socially responsible portfolios for two decades. “That's why my course is titled 'Social Impact Investing,' because we're focusing on the impact that investing has beyond financial return. In addition to financial return, you're hoping to generate an environmental or other impact.”

----

There is a distinction between impact investing and ESG-based investing. Investing for impact is often described as investing with a “double bottom line” — that is, financial return and a clear, well-articulated set of impact goals often, but not always, aligned with the United Nation Development Programme’s 17 sustainable development goals.

ESG-based investing evaluates companies on a set of criteria defined by the investor, and the business model of the company need not explicitly incorporate social impact.

ESG investing typically has a strong shareholder advocacy component, with what Cambridge Associates’ Ma called “a cohort of thoughtful investors” actively work to influence companies’ direction. “It’s not just a matter of excluding the not-so-responsible companies, but of engaging them,” said Ma. “Some clients may still have mining, oil, and gas in their portfolio, for example, but they will be asking those companies where they can make improvements.”

-----

For all their virtue, impact investments are still subject to the rules of the marketplace, which poses some distinct challenges. First and foremost, it’s not easy to find companies that meet stringent impact requirements while still providing market rates of return. “Achieving these twin goals is not easy or straightforward. It requires additional resources to measure impact and may involve greater risk,” said Rao.

----

Finally, there’s the question of investment horizon. Impact projects by their nature tend to need long development cycles to come to fruition. Investors may have much shorter time horizons and lower risk tolerance. “The market punishes or reward stocks based on whether they can meet or beat earnings,” Rao said. “Impact projects involve upfront costs with the benefits often accruing over the long term. Investors need to be patient.”
I thank Geoff for sending me this comment. take the time to read the entire article here.




Comments

Post a Comment