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Will Climate Change Navigates The Massive Investment Shifts?

by Kannan R. Nair - 6 April, 2020, 12:00 775 Views 0 Comment

The increasing innovation in the financial sector embraces the need for sustainable finance and investment patterns to adhere to the obligatory duty towards the environment and society. A survey conducted by HSBC across market investors and issuers in September 2019 shows the changing orientation of market competitors towards environmental and social issues. Notably, ninety-four percent of the participants opined that considering investment patterns related to the environment and society as ‘very important.’ Incidentally, the discussion on sustainability in investment patterns ignited in the contemporary debates by an American businessman, Larry Fink, who is the CEO of BlackRock (One of the largest asset management firms in the world).  In his letter to the investors in 2020 he stated that ‘sooner than most anticipate, there will be a significant reallocation of capital.’ He also announced to the clients to diminish the scope of invest designs which fail to accommodate the risks raised by climate change. He also voiced his concerns about selling capitals of companies that develop more than 25 percent of revenue from thermal coal production by 2020.

So climate change is navigating the investment patterns to value-laden models. Contextualizing this, increased prioritization of sustainable investment showing the direct correlation between the environment and business operations. The basic standards where investors are looking for are market shares, cash flow and financial status. But the alarming climate change effects to rethink the investors to look into the performance metric which compacts with sustainability practices of the establishment.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS

Indeed, sustainable investment is an approach which concerns Environmental, Social and Governance (ESG) factors that helps the companies to invest with values that match their own. The environmental aspect of ESG is ranging from pollution to energy management. That also evaluates the diligence of the businesses in the direction of environmental risks. The social element is to analyze the human capital, employee relations, business relationships, worker’s rights and even human rights. For example, Facebook getting a low ESG score in the last couple of years is due to its controversies with the State on issues on data protection and privacy. The governance aspect ensures proper administrative practices and accounting which holistically covers the pillars for the smooth running of the organization. Importantly, ESG can be seen as the yardstick to measure sustainability. According to Chris Mcknett, ESG factors plus financial factors constitute sustainable investment. 

This investment pattern emerged in the last decade where a substantive increase in sustainable investment practices is visible. Taking the United States of America’s (USA) annual ESG flows of the last ten years shows ups and downs and with a sudden change in 2019. This indicates increasing concerns over climate change of the corporate class considering essential practices to cope up with changing environment.

Source: Morning Post Direct, Data as on 11/2019

The changing shift happens now is due to the change in approach by the sizable number of capitalists from a short-term approach which highlighted profit maximization to a long term approach which gives prominence to the benefit of the society. In fact, Larry Fink in his annual letter to clients to change their strategy to more sustainable investment methods can be cited as the societal-benefit approach with a firm belief in science.

Region-Wise Growth of Sustainable Investment Assets in Local Currency (2014-2018)

Source: Global Sustainable Investment Review Report, 2018

Global Sustainable Investment Pattern

As far as different regions of the globe are concerned, the figure shows an immediate change of configuration in investments due to climate change and its after-effects. The sizable number of changes shows that the very idea of responsible investing is increasing across boundaries. The global sustainable investment review also shows that the proportion of total managed assets to sustainable investments is very high. For instance, in the USA 25 percent of the total assets are invested as sustainable investments and in the case of Canada and Europe, the sustainable investment rates in proportion with total managed assets are 50 percent and 48 percent respectively. This growing inclination is more transparent because about 345 asset owners have already signed the United Nations Principles for Responsible Investing (a framework for integrating ESG metrics to investment practice). An industry-led organization called the Task Force on Climate-related Financial Disclosures (TCFD) which works on reporting climate-related risks also stated that by 2019 about 833 organizations supported the goals of TCFD. Business coalitions like RE100 which works on hundred percent renewable energy by asset holders are constructive actions in this regard, about 150 firms announced their will to transfer to fully renewable energy sources.

Even though there are measures to compromising investments for an impact in societies, the longstanding hurdles are the absence of official mechanisms which meant to regulate proper ESG strategies. There is no conclusive framework to define the parameters and metrics for evaluating ESG in the investment sector. Interpretations of ESG are different across investment communities.

In the case of India, a country with vast human capital and investment capabilities is now turning into an ESG hotspot, while three TATA group executives started working together with International asset manager Quantum advisors to invest an amount of 1 billion USD as ESG fund. They target the mid-cap companies to invest with about 8-9 percent stake. In April 2019, Kotak Mutual funds were the first firm to sign the UN Principles for Responsible Investing. Later on, four more Indian companies joined the apparatus. The change of SBI Magnum equity fund to SBI Magnum equity ESG fund in May 2019 shows that emerging patterns of investment in compliance with ESG criteria.

In summary, climate change as reality is being accepted mostly by the corporate class, and interestingly the change in general investment patterns in the last decade shows the growing awareness of the business class. As far as the strategies of ESG, sustainable financing and impact investing are concerned about the lack of standardized coordination and regulations that are missing in dealing with long-standing climate risks in a more comprehensive approachable way.

Kannan R. Nair
Kannan R. Nair
Author is working as an advocate for the Global Schools Programme, He also worked as a research intern at the National Institute of Advanced Studies, Bengaluru. Currently, pursuing his postgraduate degree in Political Science from the Department of Politics and International Studies, Central University of Pondicherry.

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