Environmental and Social Governance (ESG). It’s a term that’s become embedded in the investment world with the urgent need for a financial structure that supports positive impacts. Standards that were once labelled as ‘tokenistic’, or worse ‘greenwash’, no longer stand up to scrutiny. A raft of new ESG regulations is being introduced for large organisations this month. Gaby Amiel, CEO of Sennen, explores the role of fund managers in creating meaningful change through their investment strategies.
The imperative for businesses, large and small, to engage with sustainability is unquestionable. There has been a dramatic increase in accountability in the past 12 months born out of the central idea that climate change presents a financial risk to the global economy. And the legislative grip is only going to tighten. From April 6 2022, UK companies with a turnover of more than £500m and 500 staff will face new mandatory reporting – in line with recommendations from the Task Force on Climate-Related Financial Disclosures. They must now disclose climate-related financial information relating to governance, strategy, risk management, metrics and targets.
It’s a big shift. ESG is no longer a bolt on for these large organisations. Those that don’t embrace the change will at best be left behind and at worst face enforcement action.
Complexity is a barrier
A question for fund managers is how to integrate these sustainability risks and factors in a way that is both practical and meaningful. To avoid accusations of greenwashing, funds must measure their impact and introduce practices and governance to deliver improvements. We know the appetite for change exists. A survey carried out last year by PWC among asset managers found that 81 per cent of respondents said their goal is to drive transformational change rather than simply react to specific drivers, such as new regulations. But it’s not easy. 44 per cent also said that the volume and complexity of regulations is a significant or very significant challenge. Clearly, asset managers need time and support to consider and achieve their strategic goals, which requires engagement from the very top. That means the CEO.
The survey also makes clear the need for simplification. Fund managers need transparent, comprehensive, high quality information on the climate change impacts which will allow them to make strategic investment decisions with ESG principles at their core. This is currently a very real barrier with many asset management firms saying that they experience challenges around data quality, both in terms of cost of access and lack of consistency. Systems must be transparent and withstand scrutiny. It’s risky for asset managers to label their funds as sustainable without credible data to back it up.
Data for decision making
Access to quality data is the central challenge of the drive towards better ESG. Tackling this will determine whether there is lasting change in how capital is deployed or whether the drive to sustainability is just another passing fad.
Funds have an opportunity now to use the new legislation to evaluate their asset management and reporting processes. In the renewables sector, the fund managers seem to be taking very different approaches and it will be interesting to see how each one is tackling the issue when they make their first disclosures under the new regime.
At Sennen, we have seen first-hand how intuitive data systems have advanced the organisations we work with.Sennen has been working closely with asset management firm Foresight Group, which is taking an ambitious approach. They are setting out stringent reporting requirements for each of their assets by investing in technology to help the supply chain to deliver it simply and quickly. It’s delivering results – last year, they were recognised as ESG champion of the year at the Growth investor Awards.
A moral balance
Looking beyond the technological and regulatory factors, there’s also some interesting questions to answer around the principles that guide ethical and sustainable investment decisions. For instance, are renewable energy funds inherently sustainable? I’m not so sure. Having worked for a renewable energy company for 10 years, there was no attempt to measure, let alone limit, flights. It was justified by the belief that ‘the impact of our projects is more important’ so we don’t need to worry about it.
There is a powerful argument that new energy infrastructure is so urgently needed, especially in the developing world, that any delays or restrictions on investment in this segment are counter productive. For instance, is it ok to say that the impact of a new project on an indigenous tribe is a secondary concern in the face of the urgent need for clean power? This is a difficult problem.
My view is that the renewables industry must be at the forefront of ESG best practice. Green infrastructure funds must develop practices to maximise the impact of their capital to enhance biodiversity, promote access to local employment opportunities and bring benefit to local communities.
The final word
Tackling climate change is the defining challenge of our generation. The responsibility of the investment industry cannot be underestimated in its ability to influence and shape the world we live in. Helping fund managers find innovative ways to access the data they need is an important part of the picture which, at Sennen, we are committed to unlocking.
To learn more about how Sennen can help you collect, manage and report on ESG metrics across your infrastructure assets, contact us today.