As climate change increasingly impacts socio-economic factors globally, investors have a responsibility to contribute to our financial system stability through environmental, social and governance (ESG) integration and regulatory engagement.
At PRI in Person 2023, the necessary shift from ESG commitments to action was clear and resonated with the 1,400 delegates gathered in Tokyo.
Here are our five takeaways from one of the largest responsible investing conferences:
- Moving markets requires coordinated action
Today, over 700 global investors are engaging with the largest emitters to accelerate science-aligned climate transition plans under the Climate Action 100+ umbrella. Two years in, we hear conclusive examples, such as French asset manager BNP Paribas’ engagement with an Asian utility company that resulted in the decommission of 5,000 fossil-fuel generated-assets. Japan’s Sumitomo Mitsui Trust Asset Management is also involved in preventing deforestation through the Investors Policy Dialogue on Deforestation.
Following the footsteps of The European Green Deal, Japan’s GX (Green Transformation) Policy is leading the way, making global sustainability reporting SASB Standards S1 and S2 mandatory from 2025 and developing guidelines on impact investing. Seven public pension funds will also become PRI signatories.
- Investment fiduciary duty will be the end of ESG backlash in the United States of America
Although many US states have drafted legislation to limit the use of ESG data or boycotting investors that are integrating ESG into investment decisions, global inflows are still moving towards “ESG-friendly” investments and EU Article 8 funds, as categorized in the Sustainable Finance Disclosures Regulation (SFDR). If anything, the backlash has brought to light key conversations about the type of data and frameworks that are needed to better report ESG performance and avoid a breach of fiduciary duty. In many cases, considering ESG factors is essential for long-term investors as a part of fiduciary duty.
- Integrating material ESG factors is becoming standard practice
Sourcing ESG data is now becoming key to understanding the impacts of investment portfolios on biodiversity loss or human right abuses. One delegate exposed cases of forced-labour in the supply chain of solar panel manufacturers by conducting ESG materiality assessments. Some of the mentioned measuring tools include the World Benchmark Alliance and Climate Action 100+ indicators. The US Inflation Reduction Act was called out as progressive as it incorporates labour rights and freedom of association making for eligible investments.
- Biodiversity can help boost portfolio performance
Although there has been a focus on investing in decarbonization, investors increasingly recognize the importance of biodiversity. Nature-based solutions are perceived as a key investment opportunity and are critically linked to food systems, climate change mitigation and adaptation. Panelists from Pension Denmark and Sumitomo Mitsui Trust Asset Management encouraged the piloting and wider adoption of the new Taskforce for Nature-related Financial Disclosures (TNFD) to learn about the nature-related opportunities and risks, and new initiatives e.g. Nature Action 100, are emerging. There was also speculation that the global reporting SASB Standards IFRS 3 would address these topics next.
- Contributing to a low-carbon and just transition
Financing the energy transition at the expense of socio-economic equality is not progress. Large owners and managers, especially in Europe and Asia, are making significant effort to advise governments on harnessing the power of private capital to ensure the transition to a low-carbon, fair and inclusive economy. The US Inflation Reduction Act, Invest Europe and Japan’s GX (Green Transformation) Policy, are some examples of regulatory cooperations to help build an inclusive, low-carbon economy through policies such as upskilling of labour, supporting early-stage technologies and mandating corporate disclosures.
ESG integration is now a strategic decision for asset owners and managers to mitigate risks and ensure positive returns.
If you are ready to take the next step on your ESG journey, please get in touch.
We look forward to welcoming the international responsible investment community in Toronto where PRI in Person 2024 will take place next fall.