When Ghanaian James Kofi Annan was six years old, he was sold into slavery. He toiled as a fishing slave on Lake Volta for the next seven years of his life. Rising at 3am to work a 17-hour day of unimaginable hardship. Age 13 he managed to escape and returned to his home and in the ensuing years he put himself through education. Speaking at the PRI in Person in Paris in a panel to highlight the role of finance in addressing social issues, he told his story.

“I was born in a small village and was the last of 12 children. In our village every family is affected by trafficking because of the poverty. Families give their children to the fishermen,” he said.

Remarkably, Kofi Annan went on to university and got a job at Barclays Bank. But he was always driven to help other children, unable to forget “where he came from.” In 2003 he founded Challenging Heights, a charity for victims of trafficking. Its focus is on working to prevent trafficking by tackling poverty, naivety and family separation, which he highlights as main causes. The charity is also involved in advocacy, and lobbies to influence national policy.

“We help rescue children from slavery and give them opportunities to be human beings again. We offer programmes of rehabilitation and access income.”

Over 40 million people in the world are involved in some form of modern slavery. That amounts to one in 185 people and of those, 71 per cent are women. Modern slavery is also big business, generating revenues of US$150 billion annually.

“No matter how many times I state these statistics, it still shocks me. It is a growing, global human tragedy,” said Fiona Reynolds, CEO of the PRI, and Chair of The Liechtenstein Initiative for a Financial Sector Commission on Modern Slavery and Human Trafficking. The organization partners with the governments of Liechtenstein, Australia and the Netherlands, and a consortium of banks, philanthropic foundations, and associations. Partners also include trafficking survivors.

“In the financial sector people look at data and don’t always realise there is a human being at other end,” said Reynolds. “When we are trying to find solutions, we can’t say to these people it’s too hard. Once you’ve worked with people and heard their story, it makes a difference to the actions you take.”

The Commission is particularly focused on the role of the financial sector in facilitating trafficking. The banking sector plays a role in helping launder trafficker’s money and institutional investors have a role ensuring the businesses they invest in don’t exploit slave workforces through their supply chains. And better access to insurance and credit can stop vulnerable people being “picked off,” said Reynolds. Digital innovation can help broaden financial inclusion to those who are vulnerable to modern slavery and human trafficking.

“Every time we rescue a child, I feel like I have rescued myself,” said Kofi Annan.

Institutional investors are investing more in emerging markets in line with the SDGs and Denmark’s PKA pension fund (Pensionskassernes Administration A/S) is one fund that is leading the way. The fund targets 10 per cent of its $40 billion assets under management in alternative ESG investments and an increasing portion of that is now invested in emerging markets via allocations to green bonds, infrastructure, microfinance, water sanitation and a specific SDG fund.

“We have been investing in emerging markets for a couple of years; we are relatively new,” says Dewi Dylander, deputy executive director of ESG at PKA speaking at PRI in Person in Paris.

A key priority in the emerging market allocation is to invest alongside partners. This led PKA to invest alongside the Danish government in Denmark’s Investment Fund for Developing Countries. The Danish state bears much of the risk, and under the fund around seven of the 17 SDGs are supported in investments in countries including Ukraine and Pakistan.

The pension fund’s investment in microfinance is a particular “success story,” she said. Microfinance investment via banks in India and Latin America began at PKA with a specific intent by the pension fund’s board to invest to help women.

“When our board discussed which SDGs to support, there was a voice saying why not do something for women,” she said. The microfinance allocation returns around 15 per cent, but the investment isn’t “mainstream.” Microfinance is structured around giving larger loans each time borrowers repay, but she warns it is a complex investment involving thousands of small loans.

“It’s a difficult business case,” she said. “It relies on the loan takers paying back the loans.”

Dylander said PKA has had less success investing in Africa. A long pipeline of projects “hasn’t materialised,” and PKA only has one investment in Nigeria. It has another investment in South Africa in its specific Danish-government backed SDG fund.

More private
Drawing private investment into emerging economies is essential because public finance will never be enough, said Thomas Pellerin, principle investment officer at the IFC, part of the World Bank. He said FDI investment in emerging markets had fallen, but that with low yields in developed markets, emerging markets offer exciting opportunities.

“We don’t see enough institutional investors in emerging markets,” he said. The reasons are complex but include a lack of tools to navigate risk, and understanding of emerging market risk, he said.

Together with partner institutions, the IFC has developed a new tool to help and is using the trust embedded in its strong brand to draw more investors to emerging markets. “We don’t want to be the only ones in emerging market sustainable investments,” said Pellerin.

It is starting to work. Last year the IFC and Europe’s largest asset manager Amundi, announced the successful launch of the world’s biggest green bond fund focused on emerging markets, the Amundi Planet Emerging Green One (EGO). The fund is expected to deploy $2 billion into emerging market green bonds over its lifetime and includes a $256 million cornerstone commitment from the IFC.

“We have found an interesting balance between risk and yield,” said Stanislas Pottier, chief investment officer at Amundi. “It is our duty to find assets where we know we will have a rapid impact. We need yield, and we all have a responsibility to address the SDGs for a just transition. It is a question of how to innovate and find the right products, so money goes where we need it.”

Olivia Albrecht, senior vice president and head of ESG business strategy at PIMCO, said integrating ESG in sovereign bond investment in emerging markets involves various processes.

“Bonds are not like the equity markets. There are no natural levers to pull regarding engagement with sovereigns,” she said.

Regarding corporate bond issuance in emerging markets, PIMCO ensures attendance at roadshows, a natural point for dialogue. The investor’s giant size at $1.8 trillion AUM also gives it an ability to influence corporates around innovative funding, including green bonds, social bonds and SDG aligned bonds.

“We have a seat at the table with issuers,” said Albrecht.

Regarding sovereign engagement, the investor also strives to be as active. Drawing on its expertise in each country (she warns against bracketing emerging markets together in one asset class) direct engagement with issuers is possible, she said.

“You can engage with sovereigns, but it’s a long-term dialogue and we have to go through different channels.” It doesn’t always change sovereign behaviour but PIMCO’s influence is significant. For example, during political upheaval in South Africa under President Zuma in 2015, PIMCO embarked on a “timely visit” to the country where it met key policy makers. From this, the fixed income investor was able to “crystalise” research and “glean the depth of the problem.” It translated into the investor downgrading South African sovereign risk before credit agencies.

In another example, Albrecht told delegates that PIMCO also changed behaviour at an emerging market quasi-sovereign oil company with a lax safety record – following years of engagement.

“Ultimately the company did adopt international standards in 2018 for health and safety,” she said. “SDG frameworks are being built out. Try and link the financing gaps with the SDGs,” she advised.

Rather than a strategic asset allocation (SAA), investors should have a sustainable asset allocation suggested an expert panel speaking at PRI in Person in Paris, tasked with assessing how investors should use the SAA process to adjust their portfolios to plug the SDGs and climate finance gap.
“SAA is the place to start” when assessing how to increase flows to climate solutions, said Craig Mackenzie, head of SAA at Aberdeen Standard Investments. The long-term process can see an investor shift 30 per cent of their portfolio over a five-year period, and involves designing mandates and specifying different benchmarks, he explained. He also noted that SAA is a “fiduciary process,” thereby allowing investors to allocate more to climate issues in a “fiduciary friendly way.”

Energy investment is one asset class particularly aligned to long-term SAA planning. Michael Waldron, senior energy investment analyst at International Energy Agency, outlined the financing gap and opportunities. Energy investment has stabilised, but he noted slight increases last year to investments in coal and oil and gas on previous years. Nor has there been much investment in energy efficiency.

“Energy efficiency spending has been stagnant,” he said.

Although more investment is going into renewables, he said there is a gap between supply and demand and that renewable investment “needed to double” over the next decade.

He noted that the bulk of investment in energy goes to developed countries.

“To meet the SDGs we need more investment in less developed markets,” he said. Investment in renewables and energy efficiency is led by private investment but investment in oil and gas is dominated by SOEs. He also flagged that in line with the PRI’s Inevitable Policy Response (IPR) analysis, governments will “play more of a role” in motivating investment.

“In the power sector 95 per cent of investment is influenced by government policy,” he quoted. Energy investment in emerging markets has a higher investment risk and a higher cost of capital. Meanwhile in mature markets, Waldron flagged that renewables will become more exposed to market pricing.

Helga Birgden, global business leader, responsible investment at Mercer questioned if “SAA is fit for purpose given the urgency of climate change.” Allocating to climate change is a “top down process” that involves looking at different scenarios, and better understanding risks that impact portfolio construction, she said. This could include transition risk, physical impacts and resource availability. This, in turn, will help build understanding around uncompensated risk, she said.

Mercer’s work includes stress testing and looking at re-pricing impacts on an investor’s SAA. Climate modelling and taking a live portfolio to see its response to scenarios, helps measure climate-related impact on returns. This could also involve tilting the portfolio to more sustainable assets – and assuming new risks. “It brings into question the extent to which SAA is able to adequately frame these processes,” she said.

Madhu Gayer, head of investment analytics and sustainability, APAC at BNP told delegates that a SAA is not set for the next quarter, but the next 10 years, holding a long-term view of where markets are going. This means that SAA now holds systematic risk given the impact of climate change, and the need for a just transition in emerging markets. He also noted the importance of choosing the right benchmarks for passive investors.

“Passive investment is driving change,” he said. “The choice of benchmark is critical.” He added: “Who doesn’t want a sustainable portfolio. You can see the convergence happening.”

Helena Charrier, head of responsible investment at CDC also observed the critical role of SAA in targeting the gap in climate funding. Citing recent research among France’s investment community, she said 70 per cent of responses indicated that organisations are beginning to explore ways to integrate climate into their SAA. Factors driving that change included reputational concerns and changing stakeholder expectations. Respondents also said it was a good way to understanding risk in their portfolios.

She added that most respondents agreed ESG integration should begin at a SAA level rather than tactical allocation. Regarding asset classes, respondents prioritise equities because of the availability of data in listed assets, said Charrier. But respondents said real assets were equally important, particularly due to their significance in terms of impact. Obstacles to progress include a lack of data informing integration of climate into SAA. A minority of participants cited materiality as an obstacle, she said.

Current government action to tackle climate change won’t achieve the commitments made under the Paris Agreement that target limiting warming to 1.5C. Indeed, the market’s assumption appears to be that no further climate-related policies are coming in the near-term. But this will inevitably change as the impact of climate change grows and today, the consequences of those strict policies and regulations coming down the line remains significantly under-priced.

It’s why the PRI has developed an Inevitable Policy Response (IPR) that lays out a realistic forecast of how governments will respond with policy to try and navigate climate risk by 2025. Expect a forceful, abrupt and disorderly response the longer the delay, warned Nathan Fabian, the PRIs’ director of policy speaking to gathered delegates at the PRI in Person conference in Paris.

Launched over a year ago with a cohort of advisors the IPR forecast “works up” a granular analysis that provides a detailed and realistic assessment of policy and technology developments, given the world as it is today. It details what could happen, where the policy will come, and how it will be felt. The aim is to reset investors’ forward-looking policy assumptions, and contrasts to other climate scenarios that are reverse-engineered from a predefined temperature goal. The IPRs latest findings and research, drawn from a realistic assessment of international policy developments, reveals eight key policy levers that will likely disrupt markets by 2025.

The PRI predicts considerably greater disruption than many investors and businesses are prepared for today. And the implications of this mispricing go far beyond the energy sector, rippling throughout the economy. “Our forecast is that investors can expect a disruptive and abrupt policy response. Nations will urgently close the gap between emissions and forecasts; there is not sugar coating,” said Fabian. “A net zero economy can be achieved but we need to stretch out ambitions. There is little choice but to act now; waiting puts more pressure on a severe transition.”

The PRI will progressively release details of its latest IPR analysis in coming weeks. This will be followed by asset level impact pricing in the autumn. From this investors will be able to inform their investment activities with a unique tool for navigating complex, evolving policy and the regulatory landscape. Through it they can enhance portfolio resilience and inform strategic asset allocation. “We aim to work with you to prepare for, and reduce the disruption ahead,” said Fabian.

The probably of an IPR is now glaring, argues the PRI. Analysis of public corporate support for the transition shows that over US$39 trillion of public companies by market capitalisation, representing 72% of the MSCI World Index, have publicly expressed support for the climate transition and – or are – taking related action. This public support plays an important part of “why” a policy response to climate change is likely to emerge within the near term, by giving an economic and market mandate to policy makers for more ambitious action.

“The IPR is what we really think might happen; not what we wish to happen,” added Mark Fulton, founding partner, Energy Transition Advisors, who said the IPR a high conviction policy, based on forecasts rather than definitive answers. “It is about what this would that mean to your portfolio and your businesses. If the science is right, there has to be additional policy.”

Innovation
As well as policy, technology is a key tool to transition, said Fulton, arguing that fundamental changes in consumer preferences, an agricultural revolution and dietary shifts will be in the transition mix. Changes that will all hasten with the next generation. “If you are a politician, they are coming for you,” he said, in reference to today’s youth. He concluded that the levers would be pulled “hard and fast” to ensure a trust transition.

At the end of last year, oil major Royal Dutch Shell agreed to set carbon emissions targets linked to executive pay. The ground-breaking move broke the mould amongst oil majors and marked true alignment with the companies’ long-term investors who’d played a key role in pushing for the dramatically different approach. Speaking at PRI in Person in Paris, Sylvia van Waveren, director, active ownership at Robeco, and Adam Matthews, director of ethics and engagement at The Church of England’s Pensions Board sat down with Ben van Beurden, CEO of Royal Dutch Shell to chart their journey of dialogue and evolution.

Shell measures its carbon footprint across its entire operation from exploration through to refining and the cars that run off its petrol and diesel to “holistically measure the company’s impact on society,” explained van Beurden. The company aims to reduce its footprint to 40 grams of CO2 per megajoule from current levels of 80 grams per megajoule by 2050, with 20 per cent reduction targets for 2035 on route. That journey will, in turn, be broken up by specific net carbon footprint short-term targets of three or five years starting from 2020 running to 2050 to create an efficient and flexible transition.

“We need to halve our net carbon footprint,” said van Beurden. Linking the pledge to remuneration still needs shareholder sign off at the company’s Annual General Meeting in 2020.

Delegates heard how meeting those targets involves multiple strands. The company needs to ensure the scope of its products and business model evolves towards green industries. It means spending more capital on electricity infrastructure for car charging, green energy and nature-based solutions, and investing more in carbon capture and storage.

Under investor pressure, the company also pledged to review its membership of industry lobbying groups, criticised for undermining the goals of the Paris deal. Now the focus is on looking at “how well we are aligned with what they put out publicly,” said van Beurden.

Challenges
Much of Shell’s success and progress depends on changing patterns of behaviour within its customer base. “We can’t get there if our customers don’t get there. If we sell products people don’t want, we have a problem. We have to work with the economy, society and our customers to decarbonise the use of energy,” he said.

Getting that message across is one reason why it’s important to work with the wider industry. Following Shell’s own introduction of targets linked to remuneration, van Beurden told delegates he wrote letters to industry peers, urging collective action. “We didn’t want to differentiate. It’s a wider thing and we should hold hands together,” he said. Today he reports “a lot of interest,” but other oil groups have yet to follow suit. “Peers say I can’t be accountable if someone comes in old car and fills up with petrol,” he said.

Van Beurden told delegates of the importance of an enabling policy environment to encourage the transition. The company has a robust public policy position that has advocated, for example, a price on carbon for the last 20 years. But, he said, it falls on deaf ears. “We have to be louder to the point of obnoxious. If it’s not orderly, it will be disorderly,” he said, referencing the PRI’s work on an Inevitable Policy Response IPR.

He also urged that government policy be more precise, stressing that good policy involves more than just putting a price on carbon. In a sector by sector approach, policy needs to list the specific steps to decarbonisation. Moreover, if policy “is too high level” and “generic” it doesn’t work. Instead it leaves a gap between a festival of opinions, and coherence. “We have witnessed this ourselves. I can get very frustrated,” he said, concluding that better policy would facilitate action. “We don’t need more time, we need more action,” he said.

Upholding human rights makes good business sense because societies can’t thrive if profits come at the expense of human dignity. Human rights are rooted in international law and enshrined in frameworks like the UN’s Guiding Principles on Business and Human Rights. Governments and companies are compelled to protect them, but investors could do more to ensure they do, said an expert panel speaking on the role of finance in human rights at the PRI in Person in Paris.

The PRI is busy working to build an understanding across its signatory base about how investors can do more to manage human rights risk. For many, the process begins with identifying where the most serious human rights risk lies in their portfolio; looking at where they can have most impact and where they should prioritise.

“Companies and investors should prioritise the issues they can deal with, but remember they can’t do everything,” said Barbara Bijelic, legal expert, responsible business conduct, OECD, involved in launching guidelines on the roles and responsibilities of asset owners and managers around human rights.

Voting and engagement are significant tools, she said. For example, investor efforts put pressure on pharmaceutical groups to tighten the distribution of their medicines so they were not used in lethal injections in US prisons.

“Investors can make a real difference on the ground,” she said.

Lack of data
A lack of data hampers investors ability to use their capital to safeguard human rights. The panel noted there are few credible organisations publishing reports about abuses on the ground. “Reporting and disclosure means everything to us; without this we can’t prioritise,” said Wilhelm Mohn, head of sustainability in corporate governance, Norges Bank Investment Management. Nor are there coherent frameworks. One solution here could be drawing expertise from policy and regulatory drivers beginning to shape climate policy in Europe. But here experts noted the lag in human rights awareness over climate awareness. For example, the Dutch regulator identifies climate risk as a financial risk, but doesn’t put human rights risk in the same bracket. Moreover, most human rights policy initiatives are focused around disclosure and reporting, but this is only one piece of the puzzle, said Bijelic.

NBIM ensures it speaks to portfolio companies, irrespective of international principles. Investing in around 9000 companies across seven markets the manager says its approach is rooted in the principles held in its mandate from Norway’s Ministry of Finance. Leverage includes engagement and exclusion, but because the organization is a global investor, it doesn’t make sense “to pick some rights over others.” Instead, it tries to map out human rights at a sector level, looking at what companies have most exposure to risk and are in need of engagement, and define clear mechanisms for mediation.

Some leverage points are more effective than others, depending on the sector and the rights. For example, voting is a rarely used tool in the context of human rights, he said. Although it is easy to file shareholder proposals in some markets, in others it is difficult.

“There has been an increase in voting but from a low base,” said Mohn and also stressed the importance of collaborative action.

For example, NBIM has worked with UNICEF to safeguard children’s rights in supply chains. The process involved working with a selection of strong brands, and a reporting mechanism that various experts and companies have fed into. A pilot will follow, making concrete steps and real change possible, he said.

The panel also touched on the materiality of human rights.

“Investors do need to care,” said Seema Joshi, director, global thematic issues at Amnesty International who said when things human rights are neglected, investor returns are hit.

She cited the organisation’s research and analysis into cobalt mining in the DRC in 2015 as an example of how investors can step-in to affect change. Amnesty collectively contacted 30 companies and pointed out human rights abuses in their cobalt supply chains – but got few responses.

“There is a gap between what companies say they are doing regarding human rights and their due diligence, and what the true findings are,” she said. “Investor could play a significant role in bridging that gap to find solutions.” She added that investors have an ability to compel more transparency from companies, and that more regulation would help.

“In my own view, it is in investors’ interest to support calls for more regulation,” she said.

Dutch banking group ABN Amro looks at the human rights risk in its lending portfolio where teams advising on sensitive loans often come across labour and land human right risk particularly. The bank advises on a transaction by transaction basis, however if has multiple clients in one sector, it will talk collectively on human rights risk although client confidentiality does hinder transparency.

“These issues are so complex and integrated, a multi stakeholder approach is best,” said Maria Anne van Dijk, global head of environmental, social and ethical risk at ABN Amro.

“NGOs have the idea that banks have super-powers and leverage over everything, but banks are very hesitant and reluctant to talk about remedy.”

She said that remedy infers compensation. However, it also involves an apology or trying to prevent human rights abuses happening again, she concluded.