Climate change represents a systemic risk that cannot be diversified away. Investment professionals have a fiduciary duty to take climate risks into account.

This was the central message delivered at the ‘Sustainability Storm’ seminar in Woerden Castle on 4 July. Foort Hamelink, who is responsible for integrating ESG in bespoke portfolios at Lombard Odier Investment Managers (LOIM) told attendees that a lot would depend on the ability of all stakeholders to work together in a coordinated fashion. Hamelink observed that efforts to address climate change and decarbonization present a number of investment risks and opportunities, but that investors need more and better data to make well-informed decisions.

The afternoon started with a presentation from Dutch astronaut André Kuipers, in collaboration with Manuel Adamini, an expert on climate change, green bonds, and sustainable finance.

 

Vulnerable ball

During his time in space, Kuipers came to the realisation that our home is just a tiny, vulnerable ball, surrounded with just a thin layer of atmosphere. This “Spaceship Earth” is both vulnerable and supplied with limited resources.

Kuipers and his colleagues captured half a million pictures in the 200 days they circled around the Earth, which show the environmental footprint left by human activity. These traces derives from mining, overfishing, deforestation, and melting icecaps.

In spite of these challenges, Kuipers believes that humanity will solve many of these problems through the use of innovative technology. This can be stimulated with investments in promising new sectors, such as research into urban farming and cultured meat.

 

Real-world impact

Don Gerritsen, Head of Benelux for the Principles for Responsible Investments’ (PRI) , then discussed the central role asset owners must play in making the world a more sustainable place.

The PRI has created a five-step plan for investors to establish their own environmental, social and governance (ESG) policy. It begins with discussions aimed that establishing stakeholders’ investment beliefs. The final step is about implementation.

 

Indispensable

During the panel discussion, moderator Marcel de Berg (Strategic Impact ConnActor) spoke with representatives of a diverse range of organizations. Marcel was joined by independent investment expert and internal supervisor Anne Gram; Ortec Finance’s Co-head Strategic Climate Solutions, Willemijn Verdegaal; Head of Carbon Delta’s London Office, Bruno Rauis; and Foort Hamelink. There was a consensus about the role of capital, and the notion that finance is an indispensable means of making the world more sustainable.

However, the extent to which pension funds are able to set ambitious targets around climate change risks, for example, was less clear. Anne Gram said the situation was more complicated than it may appear  due to the abstract nature of good intentions. In her view, pension funds should set clear and concrete objectives in order to bring clarity to the process.

Hamelink warned that excluding whole sectors from the investment process may not be the optimal solutions for all portfolios. For example, it is simply not possible to produce steel and cement without carbon emissions, but this does not mean these companies should be written off. Investors should be aware of the companies in these sectors that are in the process of transitioning to a low-carbon environment, even if they have not yet fully achieved it, and consider implementing a best-in-class approach based on robust data and analysis to reward transition leaders. This is particularly important when integrating sustainability in a holistic way across the portfolio management process.

Ortec Finance’s Willemijn Verdegaal explained the importance of integrating climate risk and opportunity in a pension fund’s asset liability management (ALM) model. Research conducted by the group revealed that a failure to transition to a low carbon economy could have a major negative impact on global equity returns. If an orderly and rapid transition occurs, however, global equity returns could receive a significant boost. This underlines the importance of building different global warming scenarios into the macroeconomic modelling underlying strategic asset allocation and portfolio construction decisions.

 

Taxonomy

European Commission (EC) Policy Officer Maarten Vleeschhouwer explained the role and status of the EU sustainable finance taxonomy. It is one of the tools the EC has developed to scale up private sector sustainable investment. To achieve our global sustainability objectives, like those put forth by the Paris Agreement, more capital has to flow to environmentally sustainable initiatives, which is what the taxonomy aims to clarify. The European Union alone estimates that around €180bn in additional yearly findings will be required to achieve its three primary climate and energy targets by 2030.

The taxonomy is designed to establish a common language to help translate the commitments of the Paris Agreement and the Sustainable Development Goals into the investment landscape. It sets out the conditions under which an economic activity can be considered environmentally sustainable and includes a list of sixty-seven qualifying activities.

In order to qualify, activities must: substantially contribute to at least one of the six environmental objectives; do no significant harm to any of the other objectives; comply with minimum social safeguards and; comply with technical screening criteria.

Vleeschhouwer emphasized that it is not the aim of the EC to pass judgment. Those who claim to invest sustainably will have to disclose whether or not they use the taxonomy. If they do, they have to explain how it is employed.

 

Set a standard

Affirmative Investment Management co-founder and CIO, Stuart Kinnersley, then outlined the impact green bonds have had on the debt market and the role they can play in investor portfolios. For the first time, issuers have to explain exactly what they do with investor capital, which is a critical element in being able to measure the environmental and social outcomes of investing in these structures. Kinnersley hopes and expects this will set the standard for broader bonds and corporate debt markets in the future.

To round off the day, LOIM’s Global Head of Solutions, Carolina Minio-Paluello, explained why integrating sustainable investment is central to fiduciary duty. Companies that are capable of demonstrating sustainable practices or lower carbon emissions can often be linked to better returns for investors. This, Minio-Paluello argues, is a result of the growing awareness of sustainability issues, and expects the resulting rise in the cost of capital will increase the pressure on these companies to transition to a more sustainable operating model in the future.

 

From left to right: Manual Admini, Stuart Kinnersley, Marcel de Berg, Anne Gram, Bruno Rauis, Emma Cusworth, Lisa Eichler, André Kuipers, Carolina Minio-Paluello, Jonathan Clenshaw, Don Gerritsen, Maarten Vleeschhouwer, Willemijn Verdegaal, Foort Hamelink.

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