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Sammy Cole

“Conscious investment is probably the most powerful tool that we have to change the world” says Emmanuel Faber, ex-CEO of Danone.

In his closing speech at the PRI in Person event in Barcelona two weeks ago, Faber urged the room to stop viewing finance as a system separate from the real economy: "There is no system. We are the system. Each of us." He highlighted the need for us all to take responsibility for our actions and to recognise the power we have to effect change.

Faber was ousted from Danone because he allegedly “did not manage to strike the right balance between shareholder value creation and sustainability”. He is now Chair of the International Sustainability Standards Board (ISSB), which aims to tackle the disconnect between financial and sustainability accounting.

Three key themes underpinned the conference that all act as obstacles to the type of change that Faber was talking about; effective use of ESG data, the disconnect between investors and companies, and divestment.

“We spend 95% of time talking about data and only 5% of time actually using that data”, according to Megan Starr, Global Head of Impact at Carlyle.

The financial sector has consistently bemoaned the lack of ESG data, particularly in public and private debt markets. Starr acknowledges this, but she believes that we need a moment of reckoning; “how do we actually use the data that we have to drive change?”

Another major issue is related to the disconnect between investors and companies. One contributor was concerned that many investors are adding companies to climate indices without providing adequate explanation or engaging with them. They added that companies need to understand what is happening across the financial community in order to work in line with it.

The topic of divestment also proved contentious. On the divestment panel, all panelists were opposed to the idea, whilst 68% of the audience believed that divestment could be a useful tool for achieving decarbonisation. Without the possibility of divestment, some attendees questioned what incentives would exist for companies to take action.

Overall, participants at the PRI in Person event in Barcelona were optimistic about the future of ESG investment. ShareAction CEO Catherine Howarth noted that the industry is starting to see significant progress. She highlighted the potential of the ISSB to provide the comparable, relevant, and consistent ESG data that investors are seeking.

In part, this is due to ISSB’s collaboration with the Global Reporting Initiative (GRI) and alignment with the Corporate Sustainability Reporting Directive (CSRD). The CSRD is set to come into force in 2024 and mandates more detailed ESG reporting for all listed companies but also larger private entities.

However, Howarth emphasised that the PRI signatory base must signal its support for an ambitious and holistic approach to data and standards, in order for the ISSB to achieve its full potential. She outlined that there is currently pressure for the ISSB to take a narrower approach and stressed that this would not be sufficient. She maintained that it was essential for this community to step up and articulate its needs in the coming months.

“Everyone in this room knows we’re heading for 2-3°C”

Sometimes the moments of real insight arose between panels, in the networking hall. The above quote came from a PRI representative, who said that warming is now unavoidable and that we need to focus on physical risk more than anything else.

Although panelists did not point to this explicitly, some did state that current company net zero strategies often remain farfetched and lacking in direction. This echos the sentiment of Alok Sharma, COP president, who explained that the 1.5°C climate target is “still on life support”.

On a net zero panel, David Russell from USS Investment Management stated that a portfolio company, Heathrow, is “net zero” scope 1 and 2. He omitted the mention of scope 3 emissions, despite the requirement of scope 3 in the Science-Based Targets Initiative’s (SBTi) definition of net zero.

Lacklustre “net zero” targets are something we also come across in 9fin’s high yield database; only 11% of LevFin companies have committed to setting a net zero target aligned to the SBTi and just one company has its target verified.

It’s difficult to see how financial firms will reach net zero targets themselves without strict and mandatory net zero standards for companies.

Even more worrying is the low proportion of companies that are reporting the simplest emissions data (scope 1 and 2). David Harris, Global Head of Sustainable Finance Strategy at London Stock Exchange shed some light; for the largest 4,000 listed companies on the FTSE All World index, only 60% report scope 1 and 2. And on the Russell 2000 (US small cap) index, only 10% report scope 1 and 2. Out of 9fin’s current database of high yield companies, 65% report scope 1 and 2.

Harris explains that as a result, all data providers are calculating modelled data to try and fill in the gaps. According to him, this is deeply problematic, as the difference between estimation models are vastly different. Depending on the calculation method, he argues that there is likely to be an average of over 100% difference between estimations. Harris brings home the need to standardise methodologies used in emissions reporting.

“Don’t wait for perfect data, it’s not coming”

Panelists were all in agreement that we are still a long way away from perfect data. A huge number of companies are only just starting out on their ESG journey.

As Jake Barnett from Wespath Benefits and Investments asserts, when considering the clean energy transition, data will always be limited due to its unprecedented nature.

Forward-looking data is vital for high-carbon companies that need to transition, according to Barnett. He explains that this is because alignment data is more transparent about what a company is aiming for; backward data doesn’t reflect where companies are planning to go.

However, Barnett acknowledges that data challenges with current, more backward-looking metrics remain and that it is even more challenging to acquire data for more forward-looking metrics.

“But we do need to be moving in that direction,” he said.

Passive investment as responsible investment: For or Against?

The passive investment as responsible investment panel took the form of a debate, with two panelists arguing for, and two arguing against. In an audience poll, 55% voted that passive investments could be considered as responsible investments, highlighting the contentious nature of the debate.

Lucy Thomas, head of sustainable investing at UBS, argued that a lack of consideration of passive investing means “put[ting] your head in the sand and ignor[ing] the trend”.

Solactive’s representative, Jennifer Steding, likewise argued that there are a wide range of products available, including broad benchmarks with ESG screening, best-class approaches and concentrated ESG thematic exposure. According to Steding, it is also possible to create bespoke indices.

On the other hand, Brian Minns from University Pension Plan Ontario opposed this notion and argued that active investing gives you time to engage with companies, as well as a greater incentive to help them perform better, as they are a larger part of your portfolio.

Minns referred to passive investing as “robotic through a rules-based approach with no discretion”. With such a large number of companies being held in indices, “how can you know what they are all doing?”

We found a similar issue when analysing SFDR Article 8 and 9 funds for 9fin’s SFDR Webinar (replay here). One fund we analysed tracks an MSCI emerging market low carbon index, however, it is a synthetic fund so it doesn’t actually hold the assets that comprise the index. In fact, the collateral being held by this fund are fossil fuel companies, such as Total, Fortrum and Heidelberg Cement.

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