Expert: Matthieu Mouly, Chief Client Officer, Lyxor Asset Management International and Facilitator: Ralph Jackson, Partner & Director, Lansons
Key Takeaways:
- Climate investing is anticipated to become a significant area of focus for wealth managers and private banks in the next decade
- While currently a complex area, the climate emergency and alignment for all companies and organisation to the Paris Agreement, is driving this imperative
- While ESG is currently widely understood, and increasingly integrated, firms will be encouraged to further develop their strategies
- A clear compelling reason to do so are the global benchmarks and regulations that are driving the climate agenda
Context:
As the UK prepares to host the next UN meeting of countries at COP26 to discuss progress on climate commitments since the Paris Agreement, the ways in which the finance sector, and its clients, are embracing this agenda and responding positively to the climate emergency is a critical focus. Global and domestic regulators are demanding not just attention on ESG but want to see significant examples of action from asset owners and selectors. According to Lyxor, and others, climate investing will become the most important imperative in the whole ESG debate.
1. Climate investing in the next decade
Matthieu Mouly presented a series of slides indicating in his view why climate investing is, and will become, important. In a series of initial poll questions to participants it is clear that all are embracing ESG strategies, but that climate investing is not so embedded across wealth manager and private bank firms.
Matthieu argued in his presentation that the E in ESG is critically the most important element. He explained the current (and still new) EU regulatory landscape for investment where the one that we all understand (disclosure, eg SFDR) as it relates to the finance market and financial advisers and relates to ESG. The other two areas – taxonomy regulation, and benchmark regulation – are more focused on climate investing and impacts both corporates and index firms.
In the discussion, it is clear that wealth managers and private banks are individually and collectively active in embracing and delivering ESG strategies for their clients to good effect. One firm had reduced their riskier investments in portfolios by 19% year on year but suggested that the real challenge is embedding strategies into the main asset allocation process. It is not clear to them yet how climate investing will further accelerate this process.
Other participants agreed, with one indicating that a significant investment in proprietary tools for research and analysis (on ESG) has been for them a key advantage but has been expensive so far. They feel they have already embedded climate considerations into their portfolio assessments, with a clear and comprehensive overarching stewardship policy.
The final poll question, from Matthieu, on whether they agreed that this is likely to be the next big investment priority for the next decade, was agreed by the majority, although only two thirds indicated that they would actually develop specific climate investing strategies and do something to align to the Paris demands.
2. What firms are doing, and expect to do
While this is often complex, expensive, and at the moment (as the poll responses indicate) difficult to undertake now, it is clear that ESG integration and actions on investments are widespread among the participants.
However, there was common agreement that one of the stumbling blocks to progress – and showing transparency and value to clients – is that the underlying data is not always accurate and comprehensive enough to make good decisions. Another manager reflected that the standards (regulations) are also not consistent enough and that providers of ESG scores are not correlated sufficiently. Both agreed that the mechanics of the process (of data gathering for analysis, and scoring) often conflicted with providing them with the right insights for good conversations with clients.
One manufacturer concurred with an understanding that the goal for them is to facilitate information on products so that selectors can have informed conversations with the end investor.
Another manager agreed that while ESG integration is fast evolving for them it is also confusing in its execution. They cite frustration at the speed of uptake of ESG and impact investing among clients at their firm.
So the picture is a little confused on ESG: while most are active, engaged and delivering, some have legitimate concerns around data, execution, client uptake, and cost.
3. Will you do more, including climate investing?
Matthieu Mouly set out in his presentation the guiding benchmarks on climate that will influence the uptake on climate investing. The EU’s Climate Transition Benchmark (CTB) sets out a -30% target for reduction in climate intensity with an annual decarbonisation trajectory of at least 7%. The EU’s Paris aligned benchmark, or PAB, shares that annual decarbonisation goal of 7% but is more ambitious and goes further on carbon intensity (-50%), with some equally challenging exclusions for fossil fuel companies.
The challenge, according to Matthieu, is to be aware and be responsive to the strengthening regulatory benchmarks as according to him ‘you cannot hide any more’. It is about finding and dealing with those risks embedded in your portfolios.
For managers this is clearly not only on their agenda but is an understood part of being a responsible investment management. One indicated that this is very much their mantra, but it does take time to effect change and influence the client. Some asset classes are more difficult to assess and therefore it takes longer to implement effective de-risking strategies. Another indicated that training is a necessary component of progress on both ESG and advancing climate investing strategies, The knowledge is not only important for within their firm, but also for them to educate the client (investor) as to the benefits of such strategies.
4. Regulation is driving the need for change
As indicated on the above learning, managers are clearly struggling to keep pace with existing (domestic) requirements as well as understand how they align with the EU ambitions (CTB and PAB) outlined in Matthieu’s presentation. The underlying frameworks to these, such as CDP (the IFRS of climate, TCFD (the annual report on climate) and the emerging SBTi (guidance on climate) are all key inputs.
Larger groups, of the type that Lyxor are part of, may have an advantage in understanding and developing strategies to stay in step with the need for change, but it is clear that smaller and mid-size UK managers either do not have the resource to do so, or need guidance to do so.
Most however are ambitious to be more progressive with ESG, and possibly, climate investing strategies. The issues around data, complexity, and educating clients are problematic hurdles but according to the bulk of participants, are not insurmountable ones.
One manager identified a classic conundrum in respect of screening portfolios where existing (allegedly bad) fossil fuel companies are actively progressive with transitional policies that are aligning with Paris objectives. Do you replace them? According to the same manager, the same challenge is true on other investments such as bonds, as replacing all with green bonds takes time.
Matthieu in the conclusion to the session, then asked participants for their assessment of the issue with the majority clearer on the role for climate investing, with two thirds indicating some intention to embrace strategies going forward.
Climate investing is a natural evolution of ESG, according to Matthieu, and could be a game changer for our clients. Lyxor’s proprietary temperature tool is one example of how firms are being helped on disclosure regimes. The critical task is to identify those risks embedded in portfolios and have effective strategies to make appropriate change. It is important for all firms and helps meet climate objectives too if undertaken in the ways suggested at this roundtable.
