The Rise of Constructive Capital?

The Investor Leadership Network (ILN) took further action in the fight against climate change today, releasing its latest report Climate Change Mitigation and your portfolio:

The Investor Leadership Network (ILN) today released its latest report Climate Change Mitigation and your portfolio: Practical Tools for Investors. The report provides detailed guidance for investors on strengthening climate-related disclosures, focused on decarbonization scenarios in line with the Paris Agreement.

The report has been developed as part of the ILN’s climate change initiative, which focuses on developing tools and resources to help investors understand climate change risks and opportunities across diversified portfolios. It provides information to support investors in evaluating the maturity of companies’ decarbonization scenario analysis and how it aligns with the Paris Agreement and a pathway to limiting the increase in average global temperature to 1.5°C.

As investors work to improve their climate change risk analysis, there is a need for a credible, consistent fact-base. The ILN recognizes that climate scenario analysis is a relatively recent practice and that it is challenging. The new report aims to address some of these challenges and offers a structured approach for investors to evaluate the scenario analysis disclosures of companies.

In addition, this guidance provides a sector-level 1.5°C scenarios across ten sectors including Oil & Gas, Mining, Food and Agriculture, and Transportation.

Amy Hepburn, CEO of the ILN Secretariat, commented: “Creating an ecosystem of stronger climate-related disclosures and recognition of climate risk requires close collaboration between investors, companies across sectors, and regulators. As institutional investors managing over US$5 trillion in assets around the world, ILN members are committed to supporting the ongoing efforts of investors and companies in their goal to fight climate change.” 

The ILN hopes to increase the maturity and standardization of the climate data landscape, drive more effective climate-related engagement between companies and investors, and ultimately improve climate resiliency. The ILN believes that investors can lead our economy and society towards better understanding and management of climate risk, enabling action on climate change, and that enhanced disclosure will enable the investment industry to accelerate recognition of climate risks, and the transition towards a more sustainable economy. 

This report follows the TCFD Implementation, Practical Insights and Perspectives from Behind the Scenes for Institutional Investors report published September 2019. 

Access the full report.

Access the executive summary.

Access the investor guide.

Take the time to read this report here, it isn't too long and very well written, packed with great insights.

If you think climate change is all a big hoax or a man-made conspiracy, let me bring to your attention something that caught my attention earlier today:

There's a reason why an enormous chunk of Greenland’s ice cap has broken off in the far northeastern Arctic, and it's not because planet Earth is cooling down.

Those of you who have read my blog over the years know my cynical thoughts on climate change: humanity is screwed, we are past the point of no return, and the biggest problem is there are too many people wanting to be part of the middle class, buying cars, flying off to trips, and just polluting our planet.

I also agree with a friend of mine, the most important thing we can do to combat climate change over the long run is close coal plants for good and switch over to nuclear power:

Of course, the Lefties and the Righties don't like the "nuclear solution" so it will never see the light of day, which is another reason why I think we are screwed.

Anyway, let me spare you my opinions on climate change and get into an interesting panel discussion I saw earlier today.

It featured:

  • Charles Emond, President & CEO, CDPQ; Co-chair, ILN CEO Council
  • Amy Hepburn, CEO of the ILN Secretariat
  • Jean Raby, CEO, Natixis Investment Managers; Co-chair, ILN CEO Council
  • Moderator: Tracey Flaherty, SVP, Head of Diversity and Inclusion & Public Affairs, Natixis Investment Managers

Here is a brief description:

In a climate of growing political polarization, people are increasingly asking the private sector to tackle the world’s greatest challenges. Asset managers and asset owners are well-positioned to influence the global business agenda, but how can they really move the needle on important societal challenges such as diversity, climate change and sustainable infrastructure? And how can those efforts best complement the efforts of other stakeholders, such as corporates, governments, supranationals, and NGOs? Our panel of CEOs will discuss their own approach and the role of industry coalitions such as the Investor Leadership Network (ILN) in advancing economic and social change.

The ILN, a G7 initiative, is a coalition of 14 leading global investors that is partnering with governments, multilateral institutions, philanthropic organizations and other groups to advance sustainability and long-term global growth. Its three major initiatives are centered on diversity in investment, climate change disclosure and sustainable infrastructure.

Now, before I give you my coverage of this panel discussion, please refer back to two earlier comments of mine on how G7 investors unite on global initiatives and when Canadian pension CEOs met in Davos in 2019. It provides a good background to situate readers who don't know why the ILN was started in the first place.

You should also note that Barb Zvan, the former Chief Risk & Strategy Officer at OTPP who was recently named the inaugural President and CEO of the UPP, did a lot of the heavy lifting to set the ILN up and give it a purpose and direction. It's fair to say she was instrumental to laying the foundations of this organization.

A brief recap of the ILN's mission and mandate:

For a background on this meeting in Davos, I refer you to a comment I posted last June on how G7 investors unite on global initiatives. The focus is on three initiatives:

  1. Enhancing expertise in infrastructure financing and development in emerging and frontier economies;
  2. Opening opportunities for women in finance and investment worldwide; and
  3. Speeding up the implementation of uniform and comparable climate-related disclosures under the FSB-TCFD framework. 
If you go to the ILN's website here, you will read the following
The Investor Leadership Network is an open and collaborative platform for leading investors interested in addressing sustainability and long-term growth. A direct outcome of Canada’s 2018 presidency of the G7, the ILN focuses on concrete actions and global partnerships (click on image).

Now, as stated in the press release above, ILN comprises a group of twelve leading institutional investors, representing over $6 trillion of assets under management working together to facilitate and accelerate collaboration on key issues related to sustainability and long-term growth.

This morning's panel discussion which took place over the web focused on these areas and more.  

Charles Emond, CDPQ's President and CEO, talked about "doing the right thing" and moving from "capital to being constructive capital". 

In light of events since the start of the year, he emphasized the need to focus on the "S" in ESG investing and said social justice will be a big theme for years to come as the pandemic accelerated certain trends like the rise of inequality with wealth being concentrated in technology industry, and protectionism which can breed nationalism and a turn inward.

Amy Hepburn liked the rise of constructive capitalism which Charles referred to and said the ILN needs to bridge the gap between research and practice to offer real, measurable ways to move forward on the three themes the ILN is focused on. 

Charles Emond, however, was careful to state the purpose of the ILN isn't just to benefit society, there are also opportunities for global allocators in climate change and investors and companies can contribute to their bottom line if they do the right thing. 

Jean Raby discussed the need to deliver "tangible results" on the three broad themes the ILN is focused on. 

Charles Emond also discussed concrete needs, concrete projects and concrete results, mentioning these examples:

  • IDBs in infrastructure
  • Diversity in the curriculum of the CFA Institute all over the world
  • PwC's work on climate risk and how to measure it

Partnerships were discussed at length because they are instrumental to this organization.

Jean Raby said asset managers can learn from asset owners who have a long tradition of working together on big projects. 

Charles Emond discussed how engaging companies in a way that shows it is beneficial to them.

He warned that as the private sector assumes more responsibility in these areas, it doesn't mean others (like governments) should abdicate their responsibility. 

There was a good discussion on having the right standards and metrics to work toward a collective solution.

They also discussed the need to broaden out diversity past gender diversity.

Amy Hepburn said the last ILN meeting between CEOs took place right after George Floyd's death and the BLM movement was on everyone's mind.

Charles Emond referred to the BlackNorth Initiative and said the three areas of focus of the ILN are "now more important than ever".

He said "COVID will hopefully last 18 to 24 months but climate change will last for decades".

Importantly, and quite tellingly, he warned investors: 

"We are standing at the edge of a cliff. Climate change has become a risk management issue and now more than ever, we need to focus on investing in a sustainable way. Markets are not fully efficient to capture all these risks and those who ignore them will be left behind."

I really liked those comments and he's absolutely right. He also discussed this:

  • Thinking in a bold manner
  • Leveraging off of partnerships as "we don't have a monopoly on truth"
  • The worst thing that can happen is members abandon now

Jean Raby discussed diverse approaches but the need to maintain focus and the need to "track and measure success."

Let me end it there and say while I thoroughly enjoyed this panel discussion, I was deeply disappointed that it was not recorded and posted on the Investor Leadership Network's Vimeo site here.

I reached out to Charles Emond earlier to ask him if it was posted and he was kind enough to get back to me and tell me his team is looking into it.

In my opinion, it defeats the purpose of the ILN if these great exchanges are not posted on the web so everyone can get to know the ILN, its mandate and its evolution in an open and transparent way.

Like I said, I really do hope they post this great exchange online for the benefit of all.

Luckily, I have another great clip to share with you. 

Below, Mark Machin, President and Chief Executive Officer, CPP Investments; and Christopher Ailman, Chief Investment Officer, California State Teachers’ Retirement System speak with Bloomberg’s Sonali Basak at the Bloomberg Green virtual event about how they are approaching sustainability in their portfolios and what they see as the most significant developments over the past few years.

This is a thirty minute discussion and I urge all of you to please take the time to listen to Mark and Chris, they offer so many invaluable insights here as they discuss their approach to sustainability in their portfolios. This is really a great discussion which took place on Monday, September 14th.

There is also an older ILN clip on the Sustainable Infrastructure Fellowship Program seeks to enhance the expertise of emerging market leaders in developing sustainable, investment-ready infrastructure projects, and to give them concrete exposure to the criteria used by institutional investors to evaluate infrastructure investments. 

Unfortunately, the ILN isn't very social media friendly and I can't embed this clip below (they need to get up to par on these clips and make them easy to embed). 

Lastly, Natixis Portfolio Manager Amber Fairbanks discusses ESG integration, impact investing and Mirova’s global sustainable equity investment strategy.

Come to think of it, Natixis sponsored today's event so they should post it on their YouTube channel and then I can embed it here. 

Update: On September 24th, Ted Mayer of Natixis was kind enough to share with me the webcast. You can view it here

Here are some excerpts from the talk.

Asset managers and asset owners have always played a role engaging with companies they invest in. But it seems that activity has increased. What has been the driving change?

Jean Raby: Many of the common themes that are underpinned under the banner of ESG (Environmental, Social, Governance) are concepts that are very much part of investment analysis, and the role of active investors for years. It’s not anathema to good investment practices to focus on strong management teams that behave with integrity, corporates that take into account the consequences of their actions on the environment, a good governance to avoid conflicts of interest, or legal and regulatory issues. So in many respects, these considerations have been part of investment analysis over time. What probably has changed is increased scrutiny on these issues.

I also think we have to recognize that the increased scrutiny comes from the fact that certain issues have come to the forefront, because of the passage of time. The most vivid one is climate change – with increased intensity over the past few years. Now, investors cannot do everything but we all have a part to play.

Charles Emond: The financial sector is aware that by doing the right thing, it can actually foster stronger performance. Coupled with that desire to do the right thing, I think the asset managers and asset owners are realizing that these major issues, such as climate change, are also important risks that need to be factored. They’re real risks. We see them every day on our screens as proof points of these risks, whether it’s wildfires, social unrest in many countries, or lack of access to clean and sustainable infrastructure, which is limiting growth in some countries. So there’s increasing demand from our stakeholders to get involved.

Also, it’s important to remind ourselves that this COVID crisis is accelerating these trends. I mean social injustice became even more obvious. I think the E and the G were a bit more present. Now I think the S is going to the forefront. Also, this crisis is accelerating a lot of trends like technology and protectionism. So technology’s always great, but at the same time, it accelerates wealth concentration, leaving some people behind.

Amy, what are you hearing from players that aren’t in the financial services sector on how we can all work together?

Amy Hepburn: I love the phrase “constructive capital” that Charles uses. I think that’s really the unique opportunity that we have here, and I think it’s what you were stressing as well, Jean – the unique role that investors play. The opportunity really lies for us as investors to come together through this engagement.

It’s around this constructive capital. It’s around values and value. It used to be back in the day, we felt like we couldn’t make that argument on some of these issues. And now, I feel the research is keeping pace. It’s catching up with us, and so we’re able to make this argument quite conclusively. And whether it’s our civil society partners or government partners, they’re looking to us for leadership in this space, because it’s a unique role that investors play through our engagement with our companies.

What’s been the response from companies to this heightened engagement? Are they welcoming it, or are they pushing back?

Charles Emond: I don’t know of any company today who genuinely doesn’t want to be part of the solution. And so when we raise some of these topics with them and engage with them, I think they’re all ears.

It’s not an agenda that we impose upon them. I think if you go back to ESG, their customers, their suppliers, and their whole set of stakeholders actually have the same expectation that they have for us. So it’s a way for them to actually make sure they keep that license to operate in a certain way. I think from that perspective, we sense there’s an important pivot actually being undertaken globally, and a lot of that, companies actually get it.

Jean Raby: I think we’ve made a lot of progress as investors in developing a common language. At least, there’s more commonality around standards, definitions, and metrics. It’s not perfect. It’s still a work in progress.

How much can the financial community really be expected to do, realistically?

Amy Hepburn: I think the expectations are high, and they should be high. But I think the word of caution here is that, as the private sector assumes responsibility, it doesn’t mean other sectors abdicate their responsibility. I think sometimes that’s how it gets set up in the conversation, and I think that’s a false dichotomy. I think it’s that as we assume leadership, we bring others with us.

Charles Emond: Obviously there’s a lot of expectations on the financial community. But just tagging along doesn’t mean other stakeholders actually abdicate. Like governments are good at certain things, not as good on other things. That’s where we can actually help. I mean, governments are usually best suited to set conditions and remove hurdles. But maybe it’s not as easy for them to drive real change super fast on global issues.

Jean Raby: When I think about areas where governments, asset owners, and asset managers can actually be brought together into a concrete solution, it’s in the area of blended finance.

We’ve seen this really at an increasing pace in the field of natural capital, ocean preservation, land restoration, Amazon protection. I’m confident that if we think collectively about putting together these types of solutions and approaches in other areas, we can expand the scope of investment opportunities.