Will Investors demand Businesses become Net Zero after the devastating UN climate report?
I was intrigued to see an article from Bloomberg on Tuesday (August 10) that explored an angle I am tracking. The evolving perspectives of investors when it comes to capital allocation trends pertaining to ESG and the impact this has on Corporate behaviours.
Ever since Blackrock CEO, Larry Fink’s landmark letter to CEOs in 2020 outlining their view on why they believe climate change has become a defining factor in companies’ long-term prospects. As they expressed in large bold type — Climate Risk is Investment Risk. Plain and simple.
Fink closed his 2020 letter with a warning, stating that Blackrock would not hesitate in voting against management and board directors when companies in their portfolios are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.
This was a powerful statement from the world’s largest asset manager and it felt like a bellwether moment. Like the tides of climate change, pun intended, were about to turn in the earth’s favour.
But how much has changed in the last 18 months? Did it light the blue touch paper and send the ESG investing rocket into orbit? Did corporates drop everything to tackle their ESG strategy and reporting? No. But much progress has certainly been made, and I for one sense a sea-change in attitude gathering pace. We’re not there yet, but more people are definitely realising the gravity of the issue.
Of course, we must allow for the rather large elephant in the room. A certain global health pandemic has derailed many a business and investment strategy. We may have seen a more substantial shift if the coronavirus was not already spreading at the time of his letter, and the global lockdowns beginning only a few weeks later.
That being said, my concern remains that as more people wake up to the need to make business decisions through a climate-focused lens, or rather, realise that they need to demonstrate to their shareholders, customers, and employees that is what they do. Many will scramble to find “green” numbers which they can use to underscore their climate credentials. Any green numbers. “Look at us, we are proud to be green!” many yell through their sustainability reports, press releases, and websites. Showcasing their responsible investments and impact on the environment.
Going green is the number one trend sweeping the planet right now. But how much of this is real and how much of this is greenwashing?
Between 2018 and 2020, for example, in Bloomberg’s article, they noted, European asset managers had to strip the ESG label off US$2 trillion in allocations, as stricter rules were devised. US$2 trillion?! Wow. Let that number sink in. That’s just European asset managers too.
ESG transparency and disclosures remain an issue. We all know this. We need better access to high-quality, consistent and material public data that can be used to make better informed and trusted investment decisions, as well as assess and manage sustainability risks.
Let’s be clear. I don’t think the financial services industry alone can solve the climate crisis. But it does hold tremendous sway over the decision-making of businesses across many different sectors as large shareholders.
We need the financial services industry to recognise its important role in managing through this crisis by being stricter with their investment criteria and tougher in their interactions with the companies in their portfolios.
Moreso after reading the extraordinary and disturbing climate report, published last week by The Intergovernmental Panel on Climate Change (IPCC), the United Nations body for assessing the science related to climate change.
Let’s see what happens.
In the meantime, roll on November and COP26. Hopefully, we will see strong actions spinning out of this vital milestone event.