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December 7, 2023

Collaboration along the investment value chain will bolster effective ESG strategies

At times of economic and geopolitical flux, it can be easy to lose sight of complex ESG priorities, risks and opportunities. Systematic, constructive collaboration across the investment value chain is essential for investors to retain a clear picture of priorities, bridge knowledge gaps and ensure they are making the most informed decisions possible.

Global investment in the low-carbon energy transition stood at an all-time high of $1.1trn in 2022. Maintaining an upward trajectory in the face of challenges such as the ongoing war in Ukraine, spiralling inflation, and growing politicisation of the ESG space, made this a particularly welcome milestone, demonstrating the growing robustness of sustainable investing.

The need for collaboration along the entire ESG investment value chain is a crucial component on the path to net zero. (Image by metamorworks via Shutterstock)

But there is also an acknowledgement among those who have long been at the forefront of its development that more is still needed to bridge the trust and funding gap if net-zero targets are to be met.

Roelfien Kuijpers, DWS’s global ESG client officer, is one such ESG veteran, able to balance a call for greater urgency with an appreciation of how far the sector has already come. Sustainable investment volumes may be at a record high, but that’s in large part due to the need for urgent action becoming undeniable. Indeed, if emissions remain at 2022 levels for the next nine years, humanity could lose the opportunity to limit global warming to 1.5°C. Another 30 years will see us breach 2°C. Kuijpers points to another recent record that should help focus minds: July witnessed the hottest day ever recorded globally.  

In a career spanning four decades, Kuijpers has invested huge time and effort seeking to get investors to recognise the opportunities that sustainable investing presents. During that time, she has witnessed interest in and engagement around ESG change beyond recognition. To illustrate the distance travelled, she recalls her involvement in marketing a climate fund to mobilise capital in the late-’80s.

“We thought the time had come for investors to consider ecological and environmental issues, and embed that into investment propositions,” she says. “We travelled the world, and met with investors everywhere. There was no interest at all.”

A changing picture of ESG investing

Recent developments, such as the US Inflation Reduction Act (IRA), serve as a strong endorsement of the point Kuijpers was trying to make over 30 years ago: get the right ESG initiatives in place and you will be able to “put money in motion”.

The IRA directs nearly $400bn to clean energy, delivered through a mix of tax incentives, grants and loan guarantees. Alongside the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act (IIJA), it speaks to both how much needs to be done and the key roles the private and public sectors have to play in delivery.          

“Not all infrastructure the US requires will necessarily be green, but much of it will be and that decarbonisation comes with a lot of opportunity, whether that’s in transport or the built environment,” Kuijpers says of the IIJA, which includes approximately $1.2trn in spending. “If you look at the three bills together, estimates vary, but we’re talking in excess of $1trn according to a recent study by the University of Pennsylvania’s Wharton School being made available in tax credits and loans to decarbonise the US economy.

“It’s putting money in motion and that means opportunity. Hundreds of new companies have been created since the IRA was passed. The US is a highly entrepreneurial society, willing to put risk capital to work. That’s how the tech sector blossomed and it will be the same with decarbonisation. The US is putting money behind this and that will be transformative for the wider world as everybody else will need to keep up.”  

Money in motion

The idea of getting money moving is a theme Kuijpers returns to time and again – as well as the significant role asset managers can and should play in facilitating its journey.

She traces the roots of climate change being taken seriously as an investment concern back to the mid-2000s, by which point she had moved from investment banking into asset management. “For us, it was clear that climate risks should be taken into investment consideration. Even then, as asset managers, we were being asked: ‘How does climate change have anything to do with what you do?’,” she recalls.

“But we felt, as a global management team, that this was not just an issue for the planet and its people, but also for investors and investments – and it presented opportunities as well as risks. It’s hard to believe, but back then that idea raised some eyebrows.”     

The upshot of that notion was the establishment of a research institute focused on climate research, as well as the beginning of education and collaboration, both internally and across the wider market. “We started educating our colleagues, our clients, but we also worked with the public sector, government officials and regulators, to discuss why climate change matters. We saw a need to engage with all parties and even built a carbon counter in Times Square”

Guiding client needs in volatile markets

The major shift in the years since, Kuijpers says, has been a focus on moving from risk to opportunity. However, the significance of inter-disciplinary dialogue and collaboration has also grown massively. With varying levels of sophistication and requirements across investor types and markets, all participants need to be able to navigate a complex sustainability ecosystem and have access to the requisite tools, expertise and data to drive correct decision-making.

With new regulatory pressures, deadlines and technologies in place, all parties have to account for risks and opportunities that were simply not in consideration as recently as ten years ago. This year has been one of significant climate-related events all over the planet. Risks to investments, whether from wildfires, drought, flooding or extreme heat all impact companies and investments alike.

“If you are in the business we are in, ongoing dialogue is essential,” Kuijpers explains. “Markets are volatile, geopolitical events suddenly occur – who knows what's going to happen next? There’s always a level of uncertainty. We are in constant exchange with our clients and partners to make sure that all the issues they are concerned about are being considered, whether that be decarbonisation, ESG, macroeconomic, geopolitical or so on.

“ESG investing is not easy; it’s very complicated. Clients also vary widely. We offer a range of products for either retail investors or highly sophisticated institutional investors. These need to be suitable by investment type and fulfil our fiduciary duty, both regarding risk, opportunity and investment returns.”

European real estate is one such topic of conversation offering potential for a range of product types. “Buildings account for 40% of European energy usage and 36% of greenhouse gas emissions, with existing stock requiring major investment to move from brown to green. You can create a variety of products for a variety of investor types that invest in today’s real estate, over 80% of which will still be standing in 2050, with the intention of making those buildings green over time,” Kuijpers says. 

Engagement across the board

Dialogue with investee companies is also essential, holding them to account and ensuring good governance. Asset managers should also engage with index providers, Kuijpers says, encouraging and informing the creation of more climate-aware indices, or indices associated with Paris Agreement-aligned benchmarks.

Regular discussion with regulators is another requirement, gaining clarity on the approach and what is or is not effectively working within frameworks such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), setting clear guardrails for investors to abide by, and informing how best to disclose sustainability information.

“We provide feedback to various bodies, while also engaging through other organisations such as NGOs related to climate or the Institutional Investor Group on Climate Change (IIGCC),” says Kuijpers. “Engaging all stakeholders is beneficial too.”

The need to grow data and analytic expertise

Data is another area where external provision has traditionally been required. Net-zero commitments, at both a corporate and national level, have had a transformational impact on this landscape. In many cases, climate reporting is now mandatory – and, even in environments where it is not a legal requirement, failure to disclose is fast becoming a business risk. This, in turn, is having a seismic influence on the quality and quantity of data available to investors.    

In 2008, when DWS became a member of Principles for Responsible Investment (PRI), only one provider, MSCI, provided ESG data. Now there is a plethora of options, but the issues in assessing company data remain. Over the past decade, DWS has built a proprietary ESG Engine to be able to compare and analyse available data in direct response to growing data and analytic expertise in the sphere of sustainable investing, providing assessments on companies across multiple dimensions.

“You can only manage what you can measure,” Kuijpers says. “The nature of the ESG data industry is very fragmented. Smaller investment firms might only be able to afford purchasing data from one provider. ESG data should be more affordable and available at a broader scale. Hopefully, the adoption of  ISSB standards on sustainability disclosures will mean the question of affordability may become less of an issue.”

Growing climate change awareness prompts ESG investment opportunities

The need for asset managers to engage with all stakeholders in such matters, accelerating the speed of travel and acting as a bridge between various participants and providers, is a crucial component of the road to net zero, driving progress, encouraging change, and holding companies to account.

“We’re at a tipping point,” says Kuijpers. “Companies are realising we need to do so much more, and faster, but as a world, we're not there yet. The finance industry is realising that capital allocation can make a meaningful impact on net-zero commitments. We now need to make sure that everyone has a credible transition plan and that people put more ambition into those plans.”

Disclaimer: This editorial contribution has been prepared in partnership with a third party. Despite careful selection of sources, no liability is assumed for the correctness of the contents. All statements and performance data do not constitute financial analysis. They are for information purposes only and in no way encourage the purchase or sale of financial instruments or securities. Historical performance and any awards for it are not guarantees of current or future performance.

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