As impact investing gains momentum, the winning entries of a McGill University international investment challenge have shown the pension industry a thing or two about how to holistically tackle a triple mandate that includes impact.

The McGill International Portfolio Challenge, judged by a team of practitioners that includes representatives from the Canadian pension funds Caisse de dépôt et placement du Québec, CN Investment Division, CPP Investments, OTPP and PSP Investments, attracted students from 93 teams from 18 countries and asked them to solve a complex portfolio construction problem.

This year, the competition’s fourth, posed the question: How can the finance industry address the rise of social inequalities and protectionist tendencies?

The competition is run by students, and the case is devised by students, under the watch of Associate Professor of Finance at McGill, Sebastien Betermier.

It involved the establishment of a fictious sovereign wealth fund in the UK, The British National Strategic Fund, and asked students to devise an optimal investment strategy and asset allocation framework for the fund to best serve the UK’s economic interests following withdrawal from the EU. The first injection of £20 billion would be available by the end of the first quarter in 2021, with a total fund AUM of £50 billion.

The complication in the case comes from the fact that the BNSF has a triple mandate to both the government and the citizens of the UK, which is to:

  • promote economic independence by investing to support economic stability, growth and self- sufficiency within the UK;
  • promote the long-term well-being of the British population by addressing socio-economic issues such as income inequality and unemployment through investments;
  • maximise risk-adjusted returns to ensure the fund’s long-term sustainability.

Betermier said that all teams tackled the triple mandate in some shape all form, but not all tackled it holistically.

“Dealing with a triple mandate is difficult. This led many teams to construct the portfolio with a little bit of each mandate. But that wasn’t going to win because there was no integrated vision where all the pieces work together,” he said. “What led judges to the winners was where there was a clear top-down approach. And that every decision was not just good for one dimension but a positive impact on every aspect of every pillar. The winners had a strategy that was balanced so no pillar was being disadvantaged but it was a very integrated strategy, a real win/win.”

“We see it many times from social impact funds, where the social impact is separated from the rest of the fund. Providing an entire strategy to combine social and profitability that is integrated is powerful.”

This year there were joint winners – a team from Nanyang Technological University in Singapore and a solo entry from Bocconi University in Italy – and both provided a structure on how to think about the multiple dimensions that was easy to understand and easily communicated.

“Many student teams have a tendency to want to impress and will show you everything they have done. The winners had really simple presentations so you can get every stakeholder on board. Both winners made it look easy,” Betermier said.

Delivery of the content was an important consideration in selecting the winner and the team at McGill communicated that to the judges. But the most important consideration in picking a winner was that the proposal actually had a chance of succeeding. Students were also judged on the analytical rigour of the exercise.

Asset allocation

Both winners had significant allocations to infrastructure, particularly in under-resourced areas, with a focus on renewable energy. And they both also focused on SMEs partly because they will be most obviously cut from EU funding, but also as a way of future-proofing the economy and creating future champions.

The team from Nanyang Technological University, Ryan Matthew Heng, Joey Ong, Lee Chin Ann and Jiehui Tan whose presentation can be viewed here, allocated 50 per cent to an international portfolio group which invests in fixed income and equities with an emphasis on offshore investments and active management; 30 per cent to the infrastructure group; and 20 per cent to an enterprise development group which invests in private equity and venture capital.

The team looked at the fund’s returns over various Brexit eventualities including a no-deal scenario, and estimated returns from 2.9 to 5.2 per cent depending on the scenario.

The Santiago Principles were also mentioned in this presentation, showing the team’s attention to detail. And it also aims to make a £50 million donation to charitable causes each year.

The presentation by Laura Alb from Bocconi University showed an investment strategy through three phases with robust scenario analysis and backtesting. (Her presentation can be seen here.)

The first, stabilisation, phase focuses on supporting industries most impacted by Brexit in the short term and those that are most important according to their contribution to GDP including manufacturing, financial services, retail and healthcare. This phase invests in public and private equity as well as government and corporate bonds and private debt. The second phase takes more of an advancement approach and invests in industries to reduce structural unemployment and inequality including transportation infrastructure, industries with high employment and local businesses. Phase three called future proofing looks to a sustainable future by investing in technology and renewables, with venture capital added to the asset mix.

The expected returns from each phase is between 7 and 7.8 per cent.

Eyes on the prize

The competition awards $50,000 in prize money across multiple dimensions including quantitative analysis and storytelling, in addition to the overall prize.

But perhaps more importantly the competition gives the students exposure to executives at pension funds and fund managers who sit on the judging committee, which Betermier said is a two-way street.

“These managers recruit all the time but it is difficult to recruit just from a CV. Here in three hours they get to see who can come up with a creative proposal, pitch it, think of quant analysis and respond to Q&A. For sponsors it’s a matchmaking process where they can spot talent.”

For McGill it is part of experiential teaching which can generate better results for students.

“When you do experiential teaching right, the students learn on their own with the professor playing the role of coach, and it can be very powerful. The students need to have initiative and share with others, there’s a collaboration and they are much more proactive in class than just learning from a text book.”

How much of the climate problem does the investment industry own?

Assessing how much of the annual global greenhouse gas emissions the investment industry ‘owns’ feels like a necessary first step towards addressing the climate problem.

Finding the investment industry’s ‘ownership’ of emissions requires some assumptions, which can clearly be challenged. Arguably, a more accurate way to quantify the investment industry’s emissions would be bottom-up, aggregating all the emissions from all the assets owned. However, there are substantial data challenges with this approach, including the problem of cross ownership of shares. For this we tolerate some rough justice implied by simplifying assumptions and assume:

  • The investment industry owns the entirety of all listed companies (it is actually a large subset, so we are over-counting)
  • Corporate bonds are only issued by listed companies (this assumption allows us to ignore corporate bonds; we do not know in which direction the inaccuracy of this assumption would affect the results)
  • Lending money to sovereigns (buying their bonds) does not make the investment industry responsible for public sector emissions
  • Allocations to real estate and private equity are relatively small and therefore the emissions can be ‘covered’ by the over-counting within assumption #1.

In short, these assumptions allow us to proxy the investment industry’s emissions by simply considering a global equity index, for which aggregate data exists. If we consider the MSCI All Country World Index, then current ghg emissions (scope 1 and 2) are currently around 6.4 billion tonnes.

Another heroic assumption is that the scope 3 emissions (largely attributable to the use of sold products) are the same size as the scope 1 and 2 emissions. From informal conversations with industry peers it appears that the range of estimates for the size of scope 3 emissions is wide, from the lowest being around 50 per cent of scope 1 and 2 to the highest being in excess of 100 per cent. I’ve assumed something at the upper end of the range.

It follows that public investor-owned companies produce around 12.8 billion tonnes of annual greenhouse gas emissions. Total greenhouse gas emissions are around 50 billion tonnes (source: ourworldindata.org) and investment is therefore responsible for 25 per cent of all emissions (12.8/ 50 = 25.6 per cent).

Relying on assumptions is more comfortable the more confident we can be that they are reasonable. To this end, we looked for evidence to corroborate this result and used a CDP report from 2017. Using data for 2015, CDP attributed 30.6 billion tonnes of greenhouse gas emissions to 224 fossil fuel extraction companies. This is approximately 60 per cent of total emissions (30/50). In essence they have attributed back emissions from all other sectors (ie scope 3 activity). This is very pragmatic in terms of simplifying the number of companies to engage with, but is it reasonable? We can check in two ways:

  • Getting close to the 25 per cent number derived from the MSCI ACW Index
  • Satisfactorily explaining the ‘missing’ 40 per cent of emissions.

CDP state that of the 30.6 billion tonnes, 30 per cent came from public investor-owned companies, 11 per cent from private investor-owned companies and 59 per cent from state-owned companies (2015 data so pre-Saudi Aramco’s IPO). I assume all of the 11 per cent private sector is attributable to institutional investors, but this is likely an overstatement. It follows that the investment industry is “directly” responsible for about 25 per cent of annual emissions [(30 per cent + 11 per cent) of 60 per cent].

The second test relies on us combining other data sources, as illustrated in the table.

Allocation Source
Investment industry 25% CDP Carbon Majors Report 2017
State-owned fossil fuel companies 35% CDP Carbon Majors Report 2017
Agriculture 15-25% Food Climate Research Network
Post-farm food system is a further 5-10% but a proportion of this is likely accounted for in top 2 rows
Wildfires 5-10% inside climate news
Figure for 20 years to 2017; new records for wildfires have been set over the following years
Other 5%+ A catch-all covering waste, deforestation, melting permafrost and other activities

 

I am satisfied that the missing 40 per cent of emissions is sufficiently explainable and conclude the CDP approach is very reasonable. However, I readily acknowledge the inaccuracies in this approach; the data is not as certain as we would wish.

Does owning a problem lead to solving the problem?

What the investment industry does with the conclusion that it owns 25 per cent of the problem is far from certain. It will depend on a number of considerations:

  • What capacity do industry organisations have to contribute to a solution? (ability)
  • What should be the extent of the contribution – minimum, fair share, generous? (extent)
  • Do industry organisations have a moral incentive to contribute? (intrinsic motivation)
  • Is the solution likely to be profitable, reducing fiduciary duty concerns? (extrinsic motivation)

So what should be the extent of the contribution? Is the minimum contribution to do nothing, and leave the problem for governments and investee companies to sort? Is the investment industry’s fair share to solve 25 per cent of the problem? Or, given that wildfires and melting permafrost are not going to amend their ways and provide their fair share of the solution, is it a higher number? And is being generous even possible when bound by the requirements of fiduciary duty? All of these questions imply autonomy, but that is not a given.

The inevitable policy response could introduce compulsion, and if that is combined with cynicism regarding the realism of required actions, we could find ourselves in a pretty toxic industry culture. Better, in my opinion, to get out ahead and start on some meaningful actions while they remain voluntary.

Tim Hodgson is co-head of the Thinking Ahead Group, an independent research team at Willis Towers Watson and executive to the Thinking Ahead Institute (TAI).

A U-shaped recovery is the most likely economic outcome in the US for the next two years, but stagflation has a higher than anticipated chance of occurring according to a new paper about scenario analysis co-authored by State Street and GIC researchers.

The study, which revolutionises scenario analysis by reorienting it towards a path rather than a single period outcome, examines six different economic paths in the US between 2020-2022.

It finds that a U-shaped recovery is most likely with a 30 per cent probability, followed by a shallow V (24 per cent), a baseline V (22 per cent), stagflation (16 per cent), a W-shaped recovery (6 per cent) and a depression (2 per cent).

One of the authors, Dave Turkington who is senior managing director and head of portfolio and risk research at State Street Associates, says the U-shaped forecast is based on about 90 years of historical experience from the US. “Stagflation was a higher probability than I expected going into it,” he added.

The authors propose a new approach to scenario analysis that enables investors to consider sequential outcomes, which it argues is not only more intuitive but provides better predictions.

They define prospective scenarios, not as average values of economic variables but as paths for those variables. So multiple values are given for each economic variable representing the early, middle and late stages of a pattern which might cover multiple months or years.

In order to estimate the relative likelihood of a prospective scenario, the authors work out the statistical similarity of the scenarios to the most recent economic experience using a method called the Mahalanobis distance.

“Effectively, we are asking: given the recent economic experience, how unusual would it be for one scenario to prevail going forward versus an alternative scenario?”

The analysis is progressive because it looks at the path, not just the end of the investment period, which means decision-making about the likelihood of alternative scenarios is more meaningful. By defining scenarios as paths, the relevance of historical observations can be better determined and this is important because the historical data is relied upon to map economic scenarios onto asset class returns.

“When investors focus on single-period outcomes, such as expected return or expected utility, they look beyond the metaphorical storms to the end of their investment horizon, which gives only a limited view of a portfolio’s exposure to loss,” the authors say in the paper, Portfolio Choice with Path-Dependent  Scenarios, which is forthcoming in the Financial Analysts Journal.

Co-author Mark Kritzman says the method shows that sometimes using a smaller, but more relevant sample can lead to more reliable results.

“You can get a more reliable prediction from a smaller sample if you have the right observations, the relevant ones. And the relevant ones are those observations that in past history are similar to what’s happening today and what’s relevant, everyone does that. But what they don’t do is ask how unusual these past observations are; the more unusual, the more informative they are.”

According to the GIC researchers, Ding Li and Grace Qiu who are also co-authors of the paper, defining scenarios as paths rather than single period averages has a number of benefits.

“Traditionally in scenario analysis the emphasis is on the destination – how the market looks 10 years later, or the average output through the horizon they are interested in. It only defines the scenario with one single number,” Li says. “In our discussion we decided the most important and intuitive way is to focus on the path that can lead to the destination. We think it’s very helpful at GIC as a long term investor that we have a better understanding of the past and it can give us some insights. It’s looking at the sequence of economic events to trigger that outcome. The tool is trying to emphasise getting more relevant information from history to extrapolate the future.”

GIC’s asset allocation toolkit

GIC has many tools that it uses for its asset allocation determinations, and is constantly adding to its toolkit. Another recent collaboration, with PGIM, resulted in the development of a sophisticated and timelyasset allocation framework that explicitly models the impact of private assets on total portfolio liquidity, incorporating both the top-down allocation view and the bottom-up cash flow view.

GIC’s Qiu says the main application of the new scenario analysis-based portfolio construction technique, with path dependent research, is part of the toolkit to drive asset allocation decisions and help address the long-term uncertainties.

“We used it in the strategic asset allocation process to help build a portfolio that is resilient across a wide range of potential scenarios, especially given we face more wider, and differentiated outcomes,” she says. “The path information is very informative and important to understand the downside risk of various scenarios and their paths. We look for new vulnerabilities and trends, with discipline to invest when attractive.”

She says one of biggest challenges for asset allocators today is the potential very wide range of outcomes.

“We have high valuations as a starting point, so there is more downside risk and a more volatile path along the way. It’s more challenging so we need better tools.”

Kritzman, who is an MIT academic, has had a long standing relationship with GIC, including previously sitting on its international advisory board, and his research and publications have been an ongoing source of knowledge for the GIC team.

Qiu says the collaboration with State Street Associates is similar to its other research projects in that it is motivated by the challenging and uncertain economic environment.

“With a wide range of potential outcomes and downside risk it is very important for long-term investors like GIC to construct a portfolio that is resilient across a broad range of market and economic conditions,” she says. “‘Prepare not predict’ is one of our investment beliefs.”

In conducting scenario analysis in 2019, GIC applied some of the techniques in one of the earlier scenario papers by Turkington and Kritzman, adjusting  and customizing their process to meet the fund’s specific needs.

“We made some changes and brought our adaption of their technique to discuss with Mark and Dave and this led to the new paper collaboration. One of the adaptions – the main novel contribution we made – was to look at paths rather than a single point.”

Qiu says the benefit of this new technique compared to more traditional approaches is it brings intuition, and while the tool itself is systematic investors should apply further quantitative or qualitative assessments that are suited to their own investment beliefs.

“It includes a nice economic narrative and as a result it can be more intuitive and understood by key stakeholders like board members,” she says.

Similarly, Li says the authors tried to emphasise in the paper that a framework is a starting point for a conversation around different scenarios.

“I think the main contribution of this tool, is it’s the objective opening point for management to debate and make decisions. Rather than say the tool gives us the correct answer, it provides a platform and starting point for the discussion.”

The underlying technique used in this paper was also used to predict the outcome of the US election and correctly predicted a Joe Biden victory. Read the story here.

It is an essential time for investors to be clear about the cost of capital they plug into their valuation models, particularly within the infrastructure asset class, says Nick Langley, managing director and senior portfolio manager at ClearBridge Investments.

With interest rates at historic lows for the foreseeable future, the cost of capital decision is even more pronounced.

“Yes, inflation is key, and most infrastructure companies have a link to inflation in their cash flow, so they get to increase their prices by inflation each year. As a result, the valuations of these companies are positively correlated to inflation,” Langley describes.

Indeed, inflation is just one of the assumptions built into the models that infrastructure owners – both of listed infrastructure companies and unlisted assets – will be keenly watching in a world where bond rates are pinned to the floor by central banks trying to stimulate their economies.

“If you assume inflation is going to be higher in the future, then actually the valuations in this space should increase,” Langley says. “But these assumptions play into cash flows and also into discount rates. So higher inflation should also lead to higher discount rates because your future risk-free rates are going to be increasing as well.”

Discounted cash flow modelling and cost of capital decisions are most pronounced when investors consider the terminal value of an asset, Langley says. He also notes that fast-moving economic and political factors are leading to a constant reassessment of scenarios and sensitivities for cash flows.

Langley talks through some of his insights on the infrastructure universe, valuation risks and the impact of the macro-economic cycle during a podcast interview which you can listen to here.

This nuanced environment for modelling cash flows and discount rates comes at a time when pension funds globally are looking to invest more heavily in infrastructure as the category expands and while demand for yield remains constant in a world where income is scarce.

Witness Canada’s Healthcare of Ontario Pension Plan (HOOPP) as an example of a pension plan looking to increase its infrastructure exposure. HOOPP has been late to the asset class relative to its Canadian counterparts, preferring until now to invest in real estate. The pension plan recently deployed more than C$1 billion to a new allocation that looks to execute large-scale capital commitments and co-investments with a small group of external managers, targeting capital appreciation and long-term cash flow.

“Infrastructure is a key asset that will replace some of those bonds just not yielding us the returns we need right now,” says the plan’s new chief executive Jeff Wendling in an interview with Top1000funds.com.

HOOPP’s infrastructure allocation aims to provide fund security and deliver returns through high-value and long-duration investments in sectors such as communications and data, power generation and transmission, energy, transportation and utilities.

There has never been a better time for pension plans that are maintaining an existing infrastructure portfolio or building new exposure to look to the listed market to understand the interplay between inflation, valuation and the concessional agreements and regulation that underpin the asset class, Langley says.

Then there’s the stakeholder engagement aspect investors in these companies and assets need to factor in, Langley continues.

“That’s how you think about longer-term cash flows and discount rates in the context of the evolution of public policy, regulation, cyclical and structural factors,” he says.

For instance, in the UK water sector, where in recent years regulators have become more proactive setting and policing operational targets, the achieved returns of poorly run companies are a lot lower than efficiently run companies.

In the past, the returns of individual companies had minimal dispersion from the industry average, Langley highlights.

But where the forces of this unique macroeconomic environment collide with regulated returns and concession assets, some “pretty thorny” issues could arise and may need to be factored into investors’ thinking.

“Will regulators allow these companies to earn high returns against a negative real bond yield?” Langley asks.

“If you are running negative real yields for five years and you’re thinking about the customers of a utility that is trying to increase its rates at inflation, you’d have to expect the regulator to say they’re earning too much. The question becomes how do you model for that scenario,” Langley says.

Real-time cash flow modelling

The 30 or 40 years’ worth of cash flow modelling that his specialist investment team runs for listed infrastructure companies is not unlike that which owners of unlisted infrastructure assets will run, but his team’s constant updating of those scenarios likely sets the listed modelling apart, Langley says.

“Once you get out beyond a few years, you’re in a bit of a crystal ball situation. And so you need to break the cash flows down into different components.

“You’ve got to look at how regulation is going to evolve over that time, and what implications it will have for your cash flows, what are the potential cyclical and the larger secular themes. They may be the result of public policy, or technological advances over time, like autonomous electric vehicles, for example,” he says.

Quarter to quarter and year to year assessment and reassessment of scenarios and sensitivities for cash flows make listed infrastructure a valuable accompaniment to unlisted assets within an infrastructure portfolio.

“Valuers in the unlisted world look back on what’s going on in the listed stocks and adjust the cost of capital and EBITDA multiples and growth as they assess values of unlisted assets,” Langley says.

While investors should expect more volatility in the short term in the listed market, there shouldn’t be a trade-off investing in listed over unlisted infrastructure in the longer term, according to Diana Zinurova, who until last month was director of manager research, Australia at Willis Towers Watson.

“’Over the longer-term is an important factor because a lot of investors look in the shorter term and see similarities in equity sectors in terms of volatility of returns,” Zinurova says.

“For global listed infrastructure you should still expect consistent high dividends, long-duration assets with stable cash flows often regulated or backed by monopolistic market positions as you would expect in unlisted as well as lower correlation with equities and other equity sectors over that longer-term horizon,” she says.

Both Langley and Zinurova point out that the specific definition of the infrastructure category will play a role in determining volatility and returns profiles.  So-called ‘core’ infrastructure will have slightly different risk-return characteristics to investments in companies and assets where categories are stretched towards real estate or data centres. Meanwhile, ESG considerations are also shaping the risk-return profiles of infrastructure companies too.

ES & G

In developing its new infrastructure investment strategy, the Canadian fund HOOPP considers ESG matters across all investments, and targeting strong risk-adjusted returns in combination with appropriate ESG characteristics is one of four key elements in its strategy.

“Investors don’t just need to have an ESG policy, it’s a question of whether they are walking the talk and what they are doing to live up to that policy,” according to Cambridge Associates’ global head of real assets, Meagan Nicols who says ESG and impact is most obviously captured in renewable investment.

In recognition of its growing importance, the Clearbridge Infrastructure investment team has just improved its in-house ESG research.

“In the last couple of years, we’ve done a lot more internally to ensure that we have comparability across sectors and regions,” concludes Langley. “A large amount of the current E, S and G issues flow into cash flows where we run scenarios on things like the direction of public policy vis a vis climate change. While cash flow analysis has always been in our ESG framework, we have evolved our process on risk pricing as data sources have become more reliable and companies’ disclosures more transparent in this regard.

“We are now driving this additional layer of risk-pricing from the investment side of the business.”

Infrastructure has a legacy of being linked to both immediate economic growth, in its ability to create jobs and generate earnings, and also longer-term growth.

And as governments and investors look for solutions to “build back better” and stimulate growth in the global economy, infrastructure will play a big part. And according to KPMG the green infrastructure opportunity will be a big feature of that.

Make it tactical

Trading off the volatility of earnings and returns between listed and unlisted infrastructure is purely a time frame consideration, both Langley and Zinurouva agree.

“Through the cycle, you’d expect infrastructure to have more stable earnings and less volatility, that’s what you want from your infrastructure portfolio overall,” she says.

For institutional investors willing and able to take some volatility in the near term, daily tradability can open up more options for tactical allocations through the listed market, Langley points out.

 

 

 

 

 

Last month’s net zero pledge by President Xi Jinping was heralded as a monumental step forward to achieving the Paris Agreement. But can China seriously reach peak carbon before 2030 and net zero by 2060?

The world’s largest emitter of CO2, responsible for 28 per cent of global emissions, will need to radically reshape its entire economy to stand any chance of reaching this target. The financial sector will be a crucial part of this transformation.

If China is to make finance a force for good, it makes sense that all institutions will need strong TCFD alignment paired with capital allocation to low carbon businesses.  However, CDP’s research in partnership with UK PACT (UK Partnering for Accelerated Climate Transitions, funded by BEIS) shows that responding Chinese financial institutions are far behind global peers on TCFD alignment and need to ramp up efforts around disclosure and climate change related risks and opportunities.   

Progress to be made in global rankings

China’s net zero target is laudable but it’s critical that the country’s financial institutions continue to ramp up their efforts in measuring, disclosing, and responding to climate risk. Chinese financial institutions only began responding to CDP questionnaires four years ago. Thus disclosure in the region is still nascent, with only 7 of the 65 (11 per cent) invited Chinese financial institutions responding to CDP’s TCFD–aligned 2019 questionnaire.

Although Chinese financial institutions still have a long way to go to catch up with their European peers, of which 47 per cent disclosed – and most Chinese financial respondents received a D score (which means the respondent has achieved information disclosure) – the country has seen steady progress in promoting environmental information disclosure in past years.

There is cause for optimism however, with one Chinese financial institution receiving a B score (environmental management level), a sure sign of effective identification, assessment, and management of climate-related risks and low-carbon transition plans. A B score1 is an exceptional achievement for a first-time discloser and evidence that there is global leadership potential among Chinese firms.

How can China’s financial institutions catch up?

First and foremost, broader disclosure is needed, and if Chinese institutions are to play their part in the country’s net zero transformation they need to get up to speed in preparing TCFD-compliant quantitative information, particularly around target setting and Scope 3 (indirect) emissions reduction.

Scope 3 accounting for the financial industry is complicated but evolving fast, with guidance on calculating emissions from equity, debt, project finance and managed investments now available.  Having access to this kind of data brings a host of other benefits as well as better environmental performance, helping financial institutions get ahead of regulatory and policy changes, identify and tackle growing risks, and find new opportunities. With 83 per cent of global institutions now disclosing their scope 3 impact, there are few excuses left for those yet to tackle their indirect emissions.

Time to put words into action

China’s announcement to reach peak emissions before 2030 and achieve carbon neutrality before 2060 is a giant step forward in tackling the climate crisis. But actions speak louder than words, and the question now is how Chinese leadership will ensure that its actions match its commitments. The right frameworks and concrete implementation plans need to be put in place.

China’s financial institutions have a vital role to play and TCFD aligned disclosure will be a crucial part of how they catch up with the rest of the world. If the world’s biggest coal producer is to have a serious shot at realising a net zero future, its financial institutions need to act fast and help get the country on track to reach its 2060 target.

  1. According to CDP Scoring Methodology, responding companies will be assessed across four consecutive levels which represent the steps a company moves through as it progresses towards environmental stewardship. The levels are:
    Score A: Leadership; B: Management; C: Awareness; and D: Disclosure.

Antigone Theodorou is regional director, Asia Pacific, Latin America and partner regions at CDP

An erosion in social cohesion, lack of trust in institutions and lack of social mobility have weakened the fabric of society in the US; and it is these issues that are on trial as the country goes to the polls not who wins or loses, according to Stephen Kotkin, the John P Birkelund Professor in History and International Affairs at Princeton University.

Trust in institutions and governments is a key issue, he says. But not only are people not trusting institutions, they are not trusting each other. This is in part due to the concentration of influence and power among the elite and wealthy, and the lack of social economic mobility particularly among the poor.

“Unaccountable elites have led to rage, this is a deep and fundamental problem – how to make the system accountable again. How to make sure that policies work… for larger groups,” he says. “Giving the mass population a boost, the ability for them to be self reliant, to work hard and be rewarded for that, the way we all believe the system should work.”

Speaking to Amanda White in a Fiduciary Investors Series podcast, Kotkin – who is an expert in international affairs and diplomacy – says while the politics can be fake the sentiment is real.

“Democracy is challenged but not doomed. It requires renewal, that institutions and trust renewal and that fairness renewal. That’s within our grasp,” he says.

 

“Broadly the implications of the US election for the world, this is something deeply unfair, the consequences are felt in just about every country but they don’t have a say in the US elections. This is deeply frustrating and fully understandable.”

Kotkin says there is also a change in America’s relation to the external world, with both the Republican and Democratic parties now consisting of certain factions that are nativist, where previously the Republican Party in particular was run by internationalists.

“That means a return to the status quo where America is fully engaged across the world doesn’t look feasible in the short term,” he says. “I predict a continuation of this trend where there’s a lessening of international commitment. America will not and cannot disengage from the world but it won’t be at the height it was under Reagan or Clinton. There is a change in the balance of how dominant internationalism is domestically which effects the role of America everywhere, and this is a healthy debate.”

Kotkin also spoke of the US/China relationship, pointing to Taiwan as the weak point.

“I worry a lot about Taiwan as the place that could unsettle everything, the whole world, all of our lives and all of our portfolios,” he says. But he also points out it is not just Taiwan, but also Hong Kong and the South China Sea that are vulnerable points.

“China is the driver here. China deserves to be recognised but also needs deterrents for some of its excessive and aggressive behaviour.”

Stephen Kotkin will speak at the Fiduciary Investors Symposium digital December 8.