investment viewpoints

Facilitating an orderly transition

Facilitating an orderly transition
Emma Cusworth - Head of Marketing Strategy

Emma Cusworth

Head of Marketing Strategy

This year’s EU High-Level Conference on Sustainable Finance focused on scaling up investment, particularly, how to better engage the private sector to invest the additional €180bn yearly funding required to reach the EU’s energy and climate goals by 2030.

During the day, experts representing governments, central banks, investors, asset managers, international institutions and charitable organisations, discussed how to better mobilise the public sector to facilitate private sector investment, and the need for greater recognition of the interconnectivity between social, economic and environmental issues.

According to Pierre Heilbronn, Vice-President of the European Bank for Reconstruction and Development: “Climate action is essential. It has to be immediate and it has to be decisive. The public sector cannot finance the volumes of investment needed for the transition alone. The private sector has a vital role to play if we are going to achieve the goals outlined in the Paris Agreement.

“This will have very significant implications for capital flows,” he continued. “We need that flow of capital to drive the most fundamental shift in our history.”

As we are already seeing, a shift on this scale has the potential to create significant risks and opportunities for investors, which urgently needs to be accounted for in the investment process.


The EU’s three climate and energy targets for 2030:



Facilitating private sector sustainable investment

The key question in this debate is how the public sector, including its financial weight, can be leveraged to support greater investment from the private sector in the transition to a low-carbon economy. Panellists suggested a series of measures were necessary to align the interests of the public and private sector to help create this flow of capital towards companies and projects whose business models support the transition. 
Among the measures discussed were the provision of guarantees for long-term yields to shield investors from political instability. Another was the reinvigoration of carbon taxes to create the right kind of price signal to polluting companies. “If there is no incentive for private investors in the price signal,” argued Pervenche Berès, Member of the European Parliament, “then we will continue to see this focus on the short-term.”
Regulation of the investment market is a key lynchpin of the transition. The EU, through its Action Plan for Financing Sustainable Growth, laid out three important pieces of legislation in May 2018 to incentivise and channel private sector investment towards greater sustainability. These measures have since been agreed or adopted by the European Parliament this year.

Increasingly, there is no where left to hide from the risks and opportunities this global regulatory pathway is creating.

EU Action Plan – three key pillars of legislation:


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Speaking after the conference, Carolina Minio-Paluello, Global Head of Solutions for Lombard Odier Investment Managers said: “Regulators have a key role to play in creating the required shift in capital towards companies with sustainable business practices and models. Increasingly, there is no where left to hide from the risks and opportunities this global regulatory pathway is creating. This is particularly the case on climate change today, but we expect it will quickly accelerate to address other areas of the Sustainable Development Goals, particularly around issues like inequality.”

Speaking at the conference, Petteri Orpo, Minister of Finance for Finland, called on finance ministers to support the transition. He pointed, for example, to the withdrawal of subsidies that support the fossil fuel sector. “This has to stop,” he said. Finland has around €4bn in such subsidies. As data has improved, Orpo said, “we now know how our policies affect climate change and we have powerful tools as finance ministers through the budgets and taxes we control”.

The withdrawal of such subsidies could have significant implications for the returns investors can expect from fossil fuel companies. “We are already seeing that companies in this sector are finding it more difficult to secure financing for new projects,” Minio-Paluello said. “The clear path of regulation is affecting the financial viability of these developments in the long-term and we believe companies in this sector need to adapt to the transition in order to continue to thrive. Those that don’t will face existential threat.”


Ensuring a value-generative transition

However, Minio-Paluello also pointed to the important role investors can play in facilitating the transition. “The answer is not necessarily to simply exclude these companies from a portfolio,” she said. “In our view, there is a greater likelihood of creating an orderly transition if we adapt our investment process to favour companies who are transitioning to more sustainable business models and practices, and penalize those who are not transitioning. And the orderliness of the transition is vital if we are going to ensure it is value-generative, not value destructive.

“This approach also allows us to integrate sustainability into passive approaches, which is a vital next step towards creating greater economic sustainability and reducing systemic financial risk,” Minio-Paluello said. “This is the next frontier, especially for institutional investors, and we see increasing demand from asset owners to move in this direction.”


A complex socio-economic interconnection

Speakers at the conference also stressed the importance of understanding and accounting for the highly complex interconnection between the different objectives laid out in the UN’s 17 Sustainable Development Goals. 

Berès pointed out: “If we want to be successful in this transition, we need to account for the social element. If we just focus on achieving the 2°C goal, we are likely to create a social crisis, which will mean we are unable to deliver on 2°C.”

Central banks and other authorities are increasingly recognising that climate risk presents a material financial risk, but this has yet to spread to social issues. Frank Elderson, Executive Director of De Nederlandsche Bank, said: “The Dutch central bank has also looked at issues like bio-diversity and human rights, and we recognise that these factors also create financial risk. We believe it is therefore in the scope of financial market supervisory authorities to ensure financial markets are managing these risks appropriately.”

Transparency is a key point in understanding the complex interplay between externalities. Data on social factors is still relatively limited and often requires an alternative approach to gathering, verifying and standardising raw data. 

“Sustainable investments are only as robust as the data and analysis they are built on,” Minio-Paluello says. “We, as a firm and as an investment industry, need to continue to look for new ways to understand how sustainable companies are across the whole complex web of issues encompassed by the Sustainable Development goals.”

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