Aligning investment with the UN’s SDGs brings challenges, said investors gathered at Sustainability in Practice at Cambridge University. For instance, it is easier to align pension funds fiduciary duty to climate goals rather than some of the targets of the 17 SDGs. Elsewhere, because SDGs often overlap with ESG integration it makes it hard to see the difference between the two frameworks.

Investors explained how it is difficult to score managers on SDG alignment, raising the risk of SDG washing; data is more readily available in listed equity markets, yet investors could have a more genuine impact in private and credit markets. In another challenge, investing for impact and meeting the SDGs requires more capital flowing to the global south and frontier markets, but most of the capital going into the SDGs flows into listed companies in the global north.

Despite the challenges, many investors seek to align their investment with the SDGs. The SDGs provide the most compelling blueprint for those seeking to achieve real world sustainable outcomes; they are truly global and all encompassing, said Jan Anton van Zanten, SDG strategist at asset manager Robeco which began developing a bespoke SDG framework in 2017. The framework quantifies and scores the impact of the products and services of the companies in its portfolio. “With these scores we can invest in those companies that invest in solutions and avoid those that score negatively,” he said.

Netherlands-based asset manager APG has also forged ahead, creating tools to support SDG investment. Together with PGGM it has developed a sustainable development investment (SDI) Asset Owner Investor Platform  driven by AI technology. It sifts through reams of structured and unstructured data to gauge the extent to which companies’ products and activities meet the SDGs. “The goal was to set a standard with like-minded parties to drive capital to the SDGs,” said panellist Claudia Kruse, managing director global responsible investment and governance, APG. “Existing data sources didn’t enable this; we needed a dedicated data source.”

Kruse said the platform has a growing subscriber base and is evolving to encompass data detailing companies positive and negative contributions to the SDGs as well as incorporating a forward perspective. She said the tool is a way of engaging with companies. Importantly, it also analyses companies in the public and private markets, enabling investors to steer capital into SDG outcomes in private markets which is more difficult. APG has recently invested $750 million in an SDG-focused private credit fund. “It’s very important we can steer capital into this space,” she said. She also noted the platform allows a nuanced approach – by focusing on the core business, product or service of a company rather than its conduct.

A point expanded upon by van Zanten, who explained that Robeco’s data is structured around some 200 KPIs based on publicly available data and revenue streams reported by companies. Reflecting on the difference between SDG and ESG scores, he noted that SDG scores are better at integrating impact. Research shows that some companies with poor SDG scores can secure good ESG scores. ESG ratings can also struggle to reflect positive impacts: ESG scores reflect a company’s financial risk from ESG issues while SDG scores incorporate impact in a double materiality. “We look at this double materiality,” he said.

 

Rising inflation will make it more challenging to meet the £4 billion Cambridge University Endowment Fund’s 5 per cent return hurdle, said Tilly Franklin, CIO, speaking at Sustainability in Practice. Franklin oversees a multi asset, diversified portfolio that is managed externally. The fund has significantly outperformed over the long term (10-year returns are 11 per cent) but rising inflation poses a new challenge to performance, essential to finance a wide range of academic and research projects across the university. “There is a huge responsibility,” says Franklin.

Able to lock up capital for the long-term, the endowment is comfortable in illiquid asset classes. It enables Franklin to back contrarian managers and take advantage of dislocations, doubling down with managers that underperform in the short-term. And because the endowment is relatively small and doesn’t need to deploy large ticket sizes, it can access an array of opportunities.

Franklin has rebuilt the investment team over the past two years, alongside adjusting the asset allocation. Around half of the endowment is in public equities with the other half in alternatives comprising allocations to absolute return, private equity, and real assets. Each element of the portfolio plays a particular role: public equity is tasked with delivering returns, and she says private equity’s role is to add a super-charged element to performance. Absolute return has a low correlation to equity, providing ballast to the portfolio and liquidity so the endowment is positioned to invest in a dislocation.

Net Zero

Two years ago, the investment team announced plans to divest all the endowments direct and indirect investments in fossil fuels. The fund’s timeline for withdrawal included divesting from conventional energy-focused public equity managers by December 2020; building up significant investments in renewable energy by 2025 and divesting from all meaningful exposure in fossil fuels by 2030. The overarching aim is to achieve net zero greenhouse gas emissions across its entire investment portfolio by 2038, in line with the broader targets of the university.

Franklin said that divestment has been the subject of extensive debate at the university. “We are not going to solve the climate crisis through divestment as others will own the assets we sell,” she said.

She noted that divesting over time rather than in a hurry has been an important tenet of strategy. The endowment owned illiquid investments in the energy sector that it needed time to exit while the absolute return allocation also had energy in the portfolio. Rather than force managers to divest – and threaten to terminate the mandate if they didn’t – strategy has involved discussing different approaches that included options like fossil fuel screens specific to the endowment’s portfolio.

She also noted gradual but significant investment in renewable energy where the fund invests with two private renewable energy infrastructure managers.

Private equity

Despite today’s changing economic landscape Franklin still sees opportunity in private equity where she said the endowment’s managers continue to outperform benchmarks, and public equity. She also noted opportunities in private equity around sustainability. Often criticised for a lack of transparency, she said private equity investors’ ownership and control enables them to take a proactive approach to net zero. “Managers can implement new plans in a short period of time,” she said. The endowment’s VC allocation does invest in ideas spun out of the university, but only via funds. Some of the businesses in this portfolio have a connection with the energy transition, she said.

Managers

Franklin said the investment team are in constant dialogue with managers about the energy exposure in the portfolio. Requests that managers measure emission in their mandates with the endowment will now be rolled out to real assets and private equity. “If we are going to achieve net zero, we need to measure,” she said. Elsewhere, the endowment has adapted an executive education program with the Cambridge Institute of Sustainability for its fund managers to increase their sustainability knowledge and expertise.

She also noted the importance of focusing on sustainable integration outside climate. Diversity in the internal investment team and within the endowment’s manager cohort is a key focus – Franklin founded GAIN, Girls Are Investors, a community of investors set to change the lack of gender diversity in investment management. She is encouraged by managers improving diversity, noting more shortlists with diversity targets as managers increasingly mandate head-hunters to put diverse candidates forward. Still, one of the challenges is the fact many managers are small boutiques with little churn.

Other exciting trends include embedding technology into the portfolio and traditional companies rolling out digitization plans, she concluded.

 

 

 

 

BA, Shell, and Arcelor Mittal have set 2050 net zero pledges but neither company is likely to meet them because they have no recourse to the renewable energy sources required. Speaking at Sustainability in Practice at Cambridge University, Julian Allwood, Professor of Engineering and the Environment, University of Cambridge, and director of UK FIRES said that these companies are just some of many corporates where investors need to be wary of the gulf between promises and reality.

Urging investors to test the rhetoric, he said the three most important prerequisites for negative emissions are companies access to biomass, carbon capture and storage and non-emitting electricity. Investors should ask companies how much they need and how much of these green resources they’ve secured. “These three resources are the route of all climate mitigation,” he said. He urged investors to ask companies difficult questions around their security of non-emitting electricity in the future. “Have BA secured access to non-emitting technology to deliver their plans?”

Shortfall

Companies’ ability to access biomass and carbon storage is highly challenging. Installed carbon storage is a fraction of what is needed; increasing global production of biomass won’t be possible given current land restraints which leaves non-emitting electricity our future energy supply – of which there isn’t enough to implement the plans being discussed at COP26.

Allwood stressed the most critical consequence of climate change will manifest around a global food shortage. “If we continue growing emissions, by the end of this century people will die from starvation.” He said starvation will occur because despite increased efficiencies in agricultural production, temperature rises will cause crop yields to plummet. Countries near the equator will run shortest of food, leading to mass migration, starvation, and war.

Red herrings

Making much of the importance of truth in the climate debate where celebrity and the quest to be interesting often divert from the facts, he discounted as red herrings many of the touted solutions. For instance, he said negative emissions technology is a bad use of renewable energy; geo-engineering that interferes with the ecosystem could have unexpected and dangerous consequences; trees will take too long to grow to be an effective offset and direct air capture involves huge amounts of electricity that would be better used in power stations. “We need to act now or face the consequences,” he said.

Electrification is key to reducing emissions and energy use needs to change across the transport sector, in our buildings, industrial processes and our use of land. The transport sector can be decarbonized via battery powered vehicles charged with renewable energy, already proven in the car industry (where he said progress needs to now extend to reducing the weight of cars) and which will soon progress to electrification of trucks.

He said it could also be possible for the shipping industry to decarbonise with battery powered technology but said flying will be impossible without emissions. Nor will it be possible to produce cement without emissions.

Opportunities

Electrification presents a huge opportunity for investors, as does retrofitting houses with insulation to lower energy bills and save emissions. In the UK he expects that gas boilers will soon be phased out, backed by new regulation. “In most northern European climates, we have to retrofit houses but there are no entrants in this market.” Citing the need for an Ikea of the retrofit sector, he said the market opportunity ran to millions of houses every year and predicted that planning restrictions that pose a barrier to retrofitting would soon ease. Allwood cited Tesla’s journey from 18 years of unprofitability to today’s valuation as an example of the power of innovation and entrepreneurship.

ZERPAs

Allwood proposed a new model structured around Zero Emission Resource Procurement Agreements, ZERPAs, whereby suppliers agree to deliver a certain amount of renewable energy to companies over a period of years. The users, who promise a set price over that period, then have a secure supply and a verifiable transition plan that they can show climate-wary investors.

Today’s finance providers cannot assess the climate risks of investments; ZERPAs, or some equivalent mechanism, would allow them to separate credible commitments from promises that undermine the transition to a net zero economy. “You need a financial way of verifying the rhetoric is underwritten.” Under the system, companies can either wait for the spot market or secure future agreements now for supplies in future. “We need a financial way of verifying the rhetoric,” he said.

It is not only companies that are unrealistic about their net zero promises. He described the gap between the UK government’s ambition and commitment to cut emissions as yawning. “I am amazed at how long independent bodies in government have been allowing them to get away with this nonsense,” he said. Allwood concluded that it will be possible for humanity to live well on much less electricity than what we currently use.

 

 

 

 

Private credit will play a vital role in accelerating the transition to a low-carbon economy.

According to Rob Horn, global head of the Blackstone Credit Sustainable Resources Group, this role is set to get a whole lot bigger.

Horn believes that credit will eventually supply as much as 60 per cent of the estimated $100 trillion needed to decarbonise economies around the world providing for a particularly attractive investment opportunity for private credit.

An opportunity to drive attractive risk-adjusted returns, while potentially improving societal outcomes.

In this exclusive fireside chat with Fiona Reynolds, chief executive of Conexus Financial and former head of the UN-supported Principles for Responsible Investment, Horn outlines Blackstone’s view on energy transition as a key investment theme for the firm; its approach to sustainable finance; and what is needed to encourage more institutional investors into this rapidly evolving space.

Investors are coming together to push investee companies to act on biodiversity in the same way that they have collaborated to put pressure on the biggest polluters to reduce their emissions. Nature Action 100, a collective engagement programme on biodiversity aims to replicate the impact Climate Action 100+ had on collaborative climate engagement with companies.

Speaking at Sustainability in Practice at Cambridge University, Peter van der Werf, senior manager, engagement at Netherlands-based asset manager Robeco said Nature Action 100 is putting governance structures in place and selecting partner organisations for coordination and operational support ahead of its launch. Noting that it took over a decade for investors to coalesce around climate issues, he urged investors to sign up for the NA100 platform. Halting the decline in biodiversity requires urgent action now otherwise millions of species are in danger of becoming extinct.

Engagement will be a central theme on the platform, and van der Werf noted an increasingly strong recognition amongst soft commodity companies of the biodiversity challenge. He said attention in biodiversity is growing and the UN Biodiversity Conference (COP15) in China later this year, postponed again, will increase investor focus.  As part of NA100, investors will engage with both companies and policymakers deemed key to achieving the goal of reversing nature loss by 2030. This is a key difference with Climate Action 100+ on which it is modelled.

TNFD

Other initiatives to build investor awareness and action include the Taskforce on Nature-related Financial Disclosures (TNFD), a 35-member steering group mirroring the work of the climate-focused TCFD. TNFD’s objective is to develop a risk management and disclosure framework for organisations to report and act on nature-related risks. Swedish fund AP7, a universal owner where strategy is focused on trying to create biodiversity integration across the whole market, is working to help drive international standards. “TNFD looks at double materiality as well as the dependence of companies on natural resources and the impact on natural resources they can have,” said Emma Henningsson (pictured above) who heads up AP7’s active ownership strategy.

WWF

Elsewhere van der Werf outlined Robeco’s work building a biodiversity investment framework. The asset manager is working with the World Wildlife Fund, using its expert biodiversity knowledge in Brazil and Asia to add local, granular expertise to its research processes. “For biodiversity, local knowledge is really important,” said van der Werf. The partnership aims to develop a biodiversity investment framework and policy for Robeco and co-develop biodiversity investment strategies. The framework will create more awareness of the issue and inspire and activate investors to integrate biodiversity into their policies.

At Robeco, strategy is increasingly focused on integrating biodiversity in every company the manager invests to the extent managers now make nature-positive investment cases. Elsewhere, the asset manager runs an engagement programme particularly focused on commodity related deforestation. van der Werf told delegates that reversing biodiversity loss carries the same urgency as mitigating climate change. “We are seeing such a deep decline it calls for concerted action across all members in the room,” he said.

Biodiversity is an increasingly important element to sustainability at the Church of England Pension Board. The pension fund owns large amounts of UK farmland in its allocation to real assets. “We actively encourage change of use,” said Tom Joy, CIO, Church Commissions for England. In 2020 the fund measured and gathered data on the value of its natural capital held in strategic land and timber portfolios that account for about 15 per cent of the fund. The investment team is developing a net zero strategy for these assets that will leverage and protect natural capital and encourage collaboration with tenant farmers via initiatives including measuring soil quality to drive better long-term value.

 

 

 

The burden of sustainability reporting was a cause of consternation amongst investors gathered at Sustainability in Practice at Cambridge University, but new standards promise to streamline the process.

Set up last year, the International Sustainability Standards Board (ISSB) aims to achieve a single, global standard that sets out the risks and opportunities of investing in a company, said Sue Lloyd, vice chair of the ISSB which was set up by IFRS Foundation Trustees, the body responsible for international accounting standards.

Lloyd said that today’s confusing landscape needs to be replaced with transparent information on sustainable risks and opportunities that doesn’t preclude supporting impactful investment. “Things that a company does to the planet effect its value,” she said. “Corporate actions that effect value is information we are interested in.”

Lloyd stressed the importance of companies combining sustainable reporting in their financial statements because of sustainability’s link to financial outcomes. And she noted how ISSB standards have drawn a great deal on TCFD recommendations but also taken them up a notch, seeking more quantitative detail that explains different outcomes and impacts. Companies need to explain how they will achieve their carbon targets; how they will use offsets and the standards will detail what certification they require, she said.

Harmonisation

Lloyd also stressed the need for regulators to work across jurisdictions to coordinate legislation. The ISSB is working with the EU and the US’s SEC; although different regions are not on the same trajectory, harmonisation around mandatory requirements is important because it reduces the risk of greenwashing. “Markets are not served by having choices and alternatives,” she said. She added that from a cost and efficiency perspective, it is in the interests of investors to have a streamlined process; once standards are in place, the arguments can stop and the focus turn to solving the problem at hand.

PRI

Fellow panellist David Atkin, chief executive of the PRI, noted the reporting burden on PRI signatories did require revision. He told delegates the PRI plans to revise and reduce the workload for asset owners regarding their reporting requirements – releasing its findings on the issue shortly.

Investors face a myriad of challenges understanding new regulations and reporting standards; accessing data, shaping their net-zero commitments and holding corporates and fund managers to account in a bid to wipe out greenwashing. He noted how rules on climate related disclosure from the EU and US will bring down barriers to sustainable investment. “Our investors want the SEC to do more,” he said. Elsewhere, the UK’s Roadmap to Sustainable Investing that requires large pension funds to report in line with climate change regulations, is driving a new regulatory awareness.

Hélène Bussières, deputy head of unit at the European Commission, picked up on the importance of regulatory alignment. One of the main objectives of the sustainable working finance group is interoperability between jurisdictions, although she noted different regions have different priorities.

Cop 27: what to expect

Frances Way, executive director, Climate Champions team supporting the High-Level Champion for COP26, looked ahead to the expectations of COP27 in Egypt. She said the focus will be on the need to finance lower income countries, providing projects that can be scaled. Mobilization will be a key theme, focusing on how policy makers can unlock finance and solutions like, for example, using multilateral banks to catalyse private investment, a policy that has struggled. “If we don’t invest in [emerging economies] we all suffer and return to square one.”

The PRI’s Atkin noted the critical importance of a legal framework. He said that sustainable standards are a noisy and crowded field and that data needs streamlining. “This is something that will continue to be a major focus for the PRI. No one can solve it on their own,” he concluded.