Until then, investors should broaden their understanding of ESG
Without a common global language – a shared set of standards on what ESG data companies should disclose to investors – progress towards sustainability will continue to struggle.
In the 2000s, those investors interested in sustainability realised, by clubbing together, they would have more bargaining power to influence company management teams to operate with more responsibility, particularly concerning disclosure. The Principles for Responsible Investment (PRI) – a UN-supported network of investors founded in 2006 – was really the beginning of this organised movement to understand the implications of sustainability for investors and help support the development of a more sustainable global financial system.
In 2018, we saw another powerful body come together. Climate Action 100+ is the world’s largest investor-led initiative to ensure the largest corporate greenhouse gas emitters take necessary action on climate change. Coordinated by five partner organisations – some of the largest asset managers in the world – almost half its focus companies have now established commitments to reach net-zero emissions by 2050 or sooner (Climate Action 100+ 2020 Progress Report).
Despite these moves in the right direction, there is still no global language in which to report disclosures or come together to interpret information. The Task Force for Climate-related Financial Disclosure (TCFD) has probably made the most progress in this area. Established in 2015, with the goal of developing a set of voluntary climate change-related financial risk disclosures, the TCFD has achieved the most buy-in from companies in both developed and emerging markets.
This sort of joined-up approach is a start. It makes it easier for investors to understand the nature and scale of climate change issues. There are so many ways, though, that big data and intelligence can tell us more.
It can demonstrate the risks from flooding to companies, cities and entire regions around the world. It can model the way climate change will disrupt food chains or affect the global movement of people including the impact on different urbanisations. In other words, we are starting to model what the future might look like. This has changed things immeasurably, making conversations about risk management far richer and more relatable.
Through the Paris Agreement, countries across the world agreed to a goal of limiting temperature increases to 1.5 degrees Celsius above pre-industrial levels to mitigate global warming. As a population, we have a lot of work to do.
The market, however, has opened up over the last few years. Time was, discussions around climate change focused mainly on renewable energy. Today, there are many more themes for investors to participate in to help tackle climate change.
Take agriculture and food production, which are responsible for 19% of carbon emissions, for instance. Or the construction industry, where cement is the source of about 8% of the world's carbon dioxide emissions, according to think tank Chatham House.
In the absence, yet, of a global common language for ESG, individual investors should be more activist in their approach. By broadening their horizons and talking to their portfolio managers about considering these growing non-financial risks they are more likely see them incorporated into the investment process.
Mona Shah is Head of Sustainable Investments at Stonehage Fleming. Read more articles from her here.
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