A screenshot of the participants in the CIIPA and Rewired.Earth NYC Climate Week webinar. Click the image to watch the hour-long webinar titled, Warrior Accountants, Trailblazing Warriors and using the capital markets as a force for good. 

When it comes to sustainable investing, the how is as important as the why

When it comes to sustainable investing, the "how" is as important as the "why."

“We’re past the point of pretending this isn’t happening and that we can’t respond to it,” KPMG IMPACT Senior Manager Staci Scott said of environmental, social and governance and frameworks and issues entities face when it relates to sustainability. 

Scott was speaking late last year during a Climate Week NYC panel discussion organized by the Cayman Islands Institute of Professional Accountants (CIIPA) and Rewired Earth.

“If you ignore this -- certainly as a business or as a fund perhaps -- you do so at the risk of alienating your investors who care very deeply about this, who are very personally invested, particularly if they live in an area that’s vulnerable to climate change or are asking questions about where and how the goods that we’re buying have been sourced.”

Roughly US$50 trillion is expected to be invested in funds and investments vehicles labeled as green or considered to support sustainable companies and entities by 2025. Financial Services professionals around the globe believe the markets can be used as a force for good – using capital to prompt companies to adopt sustainable business practices by aiming at their bottom lines. Yet ideas differ around the way in which stakeholders – consumers, investment managers, investors themselves — can impact market-driven sustainability. 

Panelist Rob Gardner, former Investment Director at St. James’s Place Wealth Management and Founder of Rebalance Earth, believes the most impactful way to drive change with your money is to engage with a company and drive that change from within.

If you’re an investor who cares about environmental sustainability, for instance, he says getting involved with companies that may lack a clear track record of sustainability will drive change in a more significant way than writing them off.

“Divesting doesn’t work,” Gardner said. “Divesting comes from ethical investing and, fair enough, if you have your own values and you don’t want to invest in tobacco and gas, that’s fair enough. But if you want to drive change, you have to use your voting right as a shareholder. It turns out if you’re a bond investor, you have way more influence over the companies and the CFOs than you think.”

Instead of moving your money away from companies that may have a poor sustainability track record, he encourages clients to get involved with that company and push for change from within.

“No company is good or bad in the same way that no human on their team is good or bad,” Gardner said. “It’s understanding what the issues are and how can you engage with those businesses to make them better and, crucially, can you demonstrate that you’ve engaged with it.”

Dan Harris, however, questioned whether that truly was the case. A partner at UK-based law firm Chancery Advisors Limited, Harris said a holistic approach must be taken.

“I want to sound a word of caution,” Harris said during the Climate Week NYC event. “We need to be honest about the role of the financial markets as a solution to all our problems. The idea that enough volume of a stock would be sold to drive the share price down and force a board to change is spectacularly na├»ve. That assumes market participants are rational. If they were, that would make the securities markets perfectly efficient, which they’re not.”

He gave the example of long-only investment managers in the late 1990s who felt obliged to buy overvalued tech stocks because they made up large percentages of the benchmark index. Just a few years later, the tech stock crash hit.

“These managers were forced buyers,” Harris said. “Similarly, for every disinvestment, there is often a buyer on the other side of the trade. One person’s toxic asset is another’s opportunity to buy an undervalued stock. The markets are a game of musical chairs, where securities often function as cash.”

While they do not offer a panacea, Harris did underscore the importance of the markets and said they can play a more powerful role than they’re currently playing.

“It is at this point that we must consider data,” he said.

While the current state of ESG ratings providers leave many wanting more consistency, Harris said the market can take immediate action. Harris said industry bodies should encourage investors to demand more from investment managers on ESG, including due diligence, questionnaires and redemption rights should an ESG policy be breached. He said it can be risky for investment managers to blindly follow claims of sustainability.

“Everyone uses the term fiduciary duty as if it is some sort of magic formula. But not every breach of duty by a fiduciary is a breach of fiduciary duty. If the investment manager fails to act with reasonable skill and care in connection with the appointment and use of an ESG service provider, it’s negligent,” Harris said. “Investors are not bargaining for investment managers to outsource and fetter their discretion. They’re expecting investment managers to be discerning and look behind the numbers.

Data within the Cayman Islands context could be particularly valuable.

“Places like the Cayman Islands, through which a significant proportion of the world’s investable capital flows, have a golden opportunity to capture and collate valuable data,” Harris said.

This type of data might include how much capital is being invested in funds that identify as sustainable, whether investment managers are using negative screening or positive screening, and what types of activities or events alter the level of ESG investing.

At the moment, that type of data doesn’t exist. Globally, a set of several sustainability standards and reporting frameworks have led to a fractured system where standards are not uniform and reporting requirements are, in some cases, non existent.

Rewired.Earth’s David Marriage said this has led to a “broken market.”

“The market doesn’t get a clear market signal from investors and consumers about what they care about,” Marriage said. “So while there is an increasing demand requirement that we’re seeing -- and we know that is only going to increase more as we’re seeing US $30 trillion of assets move from baby boomers to millennials in the next 7 years -- as it moves to millennials, it becomes more purposeful.”

For investment managers, the challenge is to meet clients’ demands of return on investment while trying to do so by supporting sustainable companies and funds as much as possible, given the available information.

“The problem is that capitalism and money is a social construct based on supply and demand and price and nature sits outside of that construct,” Gardner said. “So until we put a price and value on nature and we say, ‘an elephant is not worth $40,000 dead for poaching and tusks, but it’s worth $1.75 million alive because of the value it has, it’s ecosystem services, we won’t change those (consumer) behaviors.

“No one person or company can solve this alone. It requires global collaboration and a financial market that is able to properly value our planet and reward businesses for sustainable action.”

 



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