Less environment, more governance threatens to undermine firms' green credentials
Jayna Rana, Investment Week senior asset management correspondent
It is no surprise the demand for environment, social and governance (ESG)-based investing has sky-
rocketed in recent years.
The combined AUM of global mutual funds with an ESG focus passed
$1trn in October last year, rising by 60% since 2012, and 2018 saw 410
new launches in the space, according to Morningstar.
But until recently the majority of firms tended to focus on the 'G'. Countless reports have shown managers are engaging more with the boards of their holdings, increasingly challenging them on issues such as diversity, executive pay and board effectiveness, which has been hugely beneficial.
But while ensuring companies are implementing appropriate governance within their business is crucial, not giving the 'E' and 'S' the same amount of attention can be extremely damaging.
Last week, Legal & General Investment Management released its eighth annual Active Ownership report that said the world is facing a "climate catastrophe", stating "the effects of climate change will soon be irreversible", while earlier this month, BlackRock warned investors are underestimating the risks posed by climate change.
The group, which is the world's biggest investment manager running $6trn of assets, said investors must rethink their assessment of vulnerabilities such as volatile weather events.
"The trend of rising average temperatures is boosting the frequency at which extreme weather events occur, as well as their intensity," it said.
"Investors who are not thinking about climate-related risks, or who view them as issues far off in the future, may need to recalibrate their expectations."
It is reassuring to see such big players in the industry stepping forward to address these issues and in recent months we have seen a number of environmentally-focused funds launched including the Allianz Climate Transition fund and Fidelity's Sustainable Water & Waste fund.
BMO GAM even said in its annual impact report that "water is the new gold; a scarce resource becoming both an economic and political issue", and increased its weighting towards companies focused on water management and climate change.
But this is still not enough. As global advisory firm Willis Towers Watson, which specialises in risk management, said in its Investor Stewardship - One Hand on the Wheel report, also released last week, the investment community must "redouble" its stewardship efforts and addressing climate risk is a key part of that.
Money makes the world go round, but what happens when that world is no more?
But until recently the majority of firms tended to focus on the 'G'. Countless reports have shown managers are engaging more with the boards of their holdings, increasingly challenging them on issues such as diversity, executive pay and board effectiveness, which has been hugely beneficial.
But while ensuring companies are implementing appropriate governance within their business is crucial, not giving the 'E' and 'S' the same amount of attention can be extremely damaging.
Last week, Legal & General Investment Management released its eighth annual Active Ownership report that said the world is facing a "climate catastrophe", stating "the effects of climate change will soon be irreversible", while earlier this month, BlackRock warned investors are underestimating the risks posed by climate change.
The group, which is the world's biggest investment manager running $6trn of assets, said investors must rethink their assessment of vulnerabilities such as volatile weather events.
"The trend of rising average temperatures is boosting the frequency at which extreme weather events occur, as well as their intensity," it said.
"Investors who are not thinking about climate-related risks, or who view them as issues far off in the future, may need to recalibrate their expectations."
It is reassuring to see such big players in the industry stepping forward to address these issues and in recent months we have seen a number of environmentally-focused funds launched including the Allianz Climate Transition fund and Fidelity's Sustainable Water & Waste fund.
BMO GAM even said in its annual impact report that "water is the new gold; a scarce resource becoming both an economic and political issue", and increased its weighting towards companies focused on water management and climate change.
But this is still not enough. As global advisory firm Willis Towers Watson, which specialises in risk management, said in its Investor Stewardship - One Hand on the Wheel report, also released last week, the investment community must "redouble" its stewardship efforts and addressing climate risk is a key part of that.
Money makes the world go round, but what happens when that world is no more?
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