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A month ahead of the COP26 climate change conference, delegates gathered at the British Chamber of Commerce for Luxembourg’s annual leadership forum, a week-long series of online webinars, and physical seminars and events, featuring financial experts from across Europe. This year’s theme was Building a Sustainable Future, and Bradley Davidson, ESG Lead at RBS International, and Caroline Haas, Head of Climate and ESG Capital Markets at NatWest Markets, joined as guest speakers.
- Investors are placing more emphasis on the environmental, social and corporate governance credentials across their portfolios
- The EU’s new Sustainable Financial Disclosure Regulation is a “step in the right direction” to classify funds according to their ESG credentials, but there still needs to be “a common framework”
- Smaller organisations aren’t yet reporting on ESG but will need to do so in future to attract investment
Today’s investors are placing more emphasis than ever before on sustainability – and they are increasingly demanding that financial institutions have a strong ESG ethos in how they invest their money.
But while all organisations have broadly similar sustainability goals, ESG can still mean different things to different individuals, institutions, and sectors. So what does the finance industry need to do, both for itself and its customers, to help build a sustainable future?
“Investor demand has changed,” Davidson told delegates at a webinar entitled ESG For A Better Tomorrow, But What Does It Mean Today?
He went on: “The regulators and policymakers are examining their own ESG targets and looking to private markets to understand how they can leverage expertise to get there. Investors are understanding ESG is no longer a niche subsector – they’re looking to their portfolios to deliver environmental and social benefits alongside their financial goals. As a result, we’re seeing investors scrutinise ESG practices.
“Meeting financial goals while delivering environmental social benefits to society is quite a compelling message to the investor.”
But panellists across the different seminars agreed there was widespread disparity over how people and organisations define ESG – and while many organisations understand the “E” element, there is more uncertainty over setting and achieving social and governance targets.
“The environmental aspect is definitely at the forefront,” said Annick Drui, Co-fund manager at Banque de Luxembourg Investments. “It’s easiest to implement on investment strategies because immediately we think about renewable energies, which are easy to explain. But the EU is now focusing on the social aspect, which is much broader and demands different competencies and capabilities.”
Nadia Humphreys, Business Manager, Sustainable Finance Solutions, at Bloomberg, agreed: “You’re not directly investing in a company that has anything to do with human trafficking, but it could happen within their supply chain, so are they auditing that? Unravelling that is harder.”
Davidson suggested social progress requires more collaboration between public and private investment. “Social development usually falls within the public realm –education and healthcare are political topics,” he said. “How does private investment work alongside public investment on this? Environmental aspects have seen lots of collaboration, but we haven’t seen that on the social side. This is where investment should be directed.”
The panel also discussed the EU’s new Sustainable Financial Disclosure Regulation (SFDR), which classifies funds according to their ESG credentials. Davidson said: “We’re seeing a lot of hesitancy in going for Article 9 [defined as ‘where a financial product has sustainable investment as its objective’] just because of the complexity of completing the submission, and the fear of being seen to greenwash.
“Customers are grappling whether it’s worth the risk of going for Article 9. But going for Article 6 [which covers funds that ‘do not integrate any kind of sustainability’] potentially makes them stand out as a laggard, so we’re seeing a tendency to Article 8 [‘environmental and social promoting’].
“We’re not asking funds or investment companies to change what they’re looking at. We’re just asking them to use ESG as a new lens on the sectors they understand and identify where they can have the greatest impact”
Bradley Davidson, ESG Lead, RBS International
“Ultimately, the aim is to create a common standard across the market that allows comparability,” Davidson added. “However, there are an awful lot of other things to base a company’s ESG on, and we just don’t have that common framework yet. But SFDR is a step in the right direction.”
The complexities of ESG definition make it difficult for investors to know what they’re buying, agreed the panel. “One of the most important things is that participants are able to identify where they don’t have the data,” said Davidson. “Identifying where they have gaps across their portfolio and looking to fill them is better than simply not looking.
“We’re not asking funds or investment companies to change what they’re looking at. We’re just asking them to use ESG as a new lens on the sectors they understand and identify where they can have the greatest impact.”
Walking the talk
At another webinar – this one entitled Walking The Talk: Are Financial Services Meeting Their Sustainability Goals? – delegates heard the progress NatWest Group is making.
“[NatWest Group CEO] Alison Rose has climate as one of the main strategic pillars of our organisation,” said Haas. “This is mobilising operational, front office and all the different elements within the organisation around that goal of not just reducing our own emissions' footprint but also supporting customers along their journey.
“We’ve put targets within our own mortgage book. We’ve publicly said we expect the oil and gas majors to have credible transition plans by the end of 2021. We’ve limited our coal exposures. Our intent is to support SMEs as they decarbonise. And we are a principle partner of COP26 in Glasgow in November.”
But Haas agreed with Davidson that data was a challenge to responsible ESG investment. “Regarding stress testing, we’ve had to look at the emissions of our portfolios corporate by corporate,” she added.
“It’s easier with those already reporting, but it’s more complicated with SMEs. It hasn’t been a necessity, so they don’t have that in their BAU [business as usual], and they realise they need to consider this for their whole journey. They may in future need the information for venture capital or private finance partners, and – if they ultimately list – for equity investors and fixed income public market investors.”
Another problem, said Haas, is that even existing data can be out of date. “There’s physical risk, flood data, drought, fire, subsidence and how that impacts physical assets. If you renovated your house, you didn’t need to update your EPC certificate, so that means you may have old data that may not be representative of the housing stock.
“We’re trying to fill the data gaps. We won’t have perfect data for a long time but we do need to start, and then go back into the systems and try to get new data as it develops. We need consistent data standards, which will make it easier to use as we feed it back up through the system.”
Haas also addressed the recurring question of whether investors will need to compromise on returns to provide sufficient levels of financing needed for the world to become a low-carbon economy.
“We talk about responsible investing and responsible returns but we’re not quantifying a lot of the benefit,” she said, “and we’re basing returns on quarterly results versus the tail that’s required to get the inevitable long-term returns.
“A lot of equity investors are starting to track ESG,” added Haas. “If you treat your employees well, chances are they’ll work harder, especially in volatile times, which enables you to continue having returns. Is there a return element? There definitely is – we just need a longer vision or horizon in how we measure that.”