“We haven’t yet seen the transition necessary,” says Will Martindale, head of policy and research at campaign group Principles for Responsible Investment, (PRI) reflecting on the investment industry and its relationship with sustainability issues.
Martindale is speaking ahead of the Global Invest Forum conference in Paris which will see investment managers and asset owners gather from around the world to debate the biggest issues affecting the investment industry.
At the top of the agenda is the effects of Brexit, but Martindale will be attending to explore the conference’s other big topic: environmental, social and governance (ESG) investment.
He says there is now “widespread” commitment and “awareness” among investment companies, or intermediaries, for responsible investment topics, which is underlined by the number of companies now signed up to abide by PRI’s core values.
However, he adds that capital markets “remain unsustainable”. Governments and regulators have moved to support sustainability but it is not as deeply embedded in “portfolio construction” as it should be.
“The obvious example,” says Martindale, “is around degrees of warming. We have governments around the world that have committed to the Paris Climate Agreement to run below two degrees of warming. And yet we know that capital markets are financing 3.5, sometimes four, degrees.
“We believe responsible investment is one of the ways that can be addressed, but we’re not seeing the depth of commitment that we think is necessary to achieve that transition.”
Aside from the efforts of organisations like PRI and national governments, perhaps the biggest project around to integrate sustainability thinking into the investment chain is taking place in the European Union. The EU’s Technical Expert Group on sustainable finance this year delivered a number of critical reports offering guidelines on climate-related information reporting.
Martindale describes the advice as “one of the best innovations that we see at a global level on sustainable finance topics”.
He says others countries, such as Canada, are moving in a similar direction. He also praises new investment disclosure rules, which he says have provided “clarity” and remove “any ambiguity as to whether or not ESG issues should be a component of investment decisions: they absolutely should be.”
The thrust of European rule making is also taking investors towards a “new paradigm”.
“The regulators are not just regulating the financial activities of investment practice but also beginning to regulate the real economy outcomes,” says Martindale.
PRI recently published figures revealing that the world’s 50 largest economies have put in place more than 500 policy instruments and 730 hard and soft law revisions to back investors in using ESG factors.
In a recent white paper PRI found 80 new policy instruments introduced across the 50 countries so far in 2019, showing that policymakers had responded to the “urgency” of sustainability issues.
Martindale says there is “increasing recognition” that investors must act within policy and regulatory frameworks and are therefore increasingly “engaged” with public policy development.
More regulation is “inevitable” adds Martindale. “And that’s because we have a capital market…that is a long way from a 1.5 degree trajectory. And at some point that’s going to require policy action in order to change that.”
And while this discussion may seem to involve investment managers and asset owners, Martindale agrees that it does have implications for corporate boards and their companies. They can expect “further dialogue”, he says.
“Investors generally want to be part of supporting the companies that they invest in to make the transition.
“Perhaps, from a competitive perspective, we’re going to see investors increasingly cognisant of a company’s ability to navigate this transition as part of how they will allocate their capital and deploy their stewardship rights.”
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