2020s Will Be Decade of ESG

Shanny Basar

Marie Dzanis, head of Europe, Middle East and Africa for Northern Trust Asset Management, said 2019 was the year that environmental, social and governance strategies came to the fore, but the industry is now entering the decade of ESG.

Marie Dzanis, Northern Trust Asset Management

Dzanis said at a media briefing in London this week that ESG funds have even been gaining assets in the US. “One in five managed dollars in the US were invested in ESG at the end of 2018, and that grew 33% last year,” she added.

Northern Trust Asset Management launched the Emerging Markets Quality Low Carbon Strategy this month, which aims to tackle climate change risk while enhancing performance. The fund gives exposure to emerging markets equities with a carbon intensity reduction target of 70% against the MSCI emerging market index.

Mamadou Abou-Sarr, global head of product development at Northern Trust Asset Management, said in a statement: “The quality of emissions data is constantly improving and this, coupled with the sophistication of our quantitative techniques, means we are in a strong position to combine Northern Trust’s core competency of quantitative investing with climate change investment considerations.”

ESG is also becoming more prevalent in multi-asset strategies which include fixed income and real estate according to Dzanis.

Wouter Sturkenboom, chief investment strategist EMEA & APAC at Northern Trust Asset Management, said at the briefing that the fund manager is including climate change risks in forward looking scenarios.

“Transition risk presents opportunities,” said Sturkenboom. “For example, we are underweight natural resources but there are opportunities in water and timber.”

To finance the transition to a low carbon economy, The European Union this week presented a green deal investment plan to mobilize public investment and unlock private funds.

Valdis Dombrovskis, executive vice-president for an Economy that Works for People at the European Commission, said in a statement: “First, we will use the EU budget to leverage private funds for green projects across Europe and support the regions and people most affected by transition. Second, we will create the right regulatory incentives for green investments to thrive.”

In addition, the EU will help public authorities and market players to identify and develop projects.

Wouter Sturkenboom, Northern Trust Asset Management

Sturkenboom added: “There will be opportunities from the massive investment in infrastructure as there is a wall of money waiting to finance the transition.”

Dzanis continued that there are problems that still need to be solved in ESG investing such as the lack of a standard taxonomy and how to measure ‘social’.

“We are having discussions with clients on whether all ESG is good,” she added.

She agreed that clients also have concerns about greenwashing, where companies say they are green without taking the necessary acton.

Dzanis added: “Northern Trust Asset Management has been doing sustainable investing for more than 30 years so we spend a lot of time explaining our process and how a strategy is implemented.”

Northern Trust Asset Management is also a signatory to the UN Principles for Responsible Investment and manages three of the top 10 largest ESG index funds globally.

Green bonds

Green bond issuance reached a record last year after volumes increased by almost 50% from 2018.

The Climate Bonds Initiative has forecast that global issuance this year will increase to between $350bn (€315bn) and $400bn.

Clean energy dominated overall use of proceeds at 31.5%, followed by low carbon buildings on 29.3% and then low carbon transport at 20.2%.

Sean Kidney, chief executive of Climate Bonds Initiative, said in a statement: “2019 results and 2020 estimates bring the vital international milestone of $1 trillion in annual green investment by 2021/2022 into sight.”

Sean Kidney, Climate Bonds Initiative

However he warned that investment needs to accelerate to support transition, adaptation and resilience.

“We need multiple sovereign green issuances by governments; decisive action from central banks and regulators, institutional investors de-risking and realigning investment strategies towards zero-carbon; banks and insurers greening their portfolios; and global corporations committing to the Paris goals and TCFD,” Kidney added. ”These will be the signs of market maturation and the financial sector driving capital re-allocation in the 2020s to face the climate emergency.”

Social bonds

Japan’s Government Pension Investment Fund (GPIF) and the Inter-American Development Bank are developing socially responsible capital markets through investments in IDB Social Bonds focused on education-youth-employment.

The funds raised will finance projects in Latin America and the Caribbean that promote effective teaching and learning for children and youth, giving them skills needed to enter the labor market and contribute productively to society.

Hiro Mizuno, executive managing director and chief investment officer of GPIF, said in a statement: “GPIF requires our asset managers to integrate ESG into their investment analysis and decision-making. We regard the purchase of green, social and sustainability bonds as one of the direct methods of ESG integration in the fixed income investment.”

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