It takes time to measure the success of environmental, social and governance integration at a portfolio level, said Sam Tripuraneni, head of sustainable outcomes at Aviva Investors, during the Canadian Investment Review‘s 2023 Investment Innovation Conference in November.
As successful ESG integration is purely about process, it’s important that ESG-integrated funds aren’t sold on the basis of leading to better outcomes. This is part of the reason for much of the backlash surrounding ESG. “It’s the consideration. There’s nothing binding there — no intention and because it’s about financial materiality, there is no intention of having sustainable outcomes. It is a reflection of risk and not about [being] green or sustainable in any way.”
Another aspect that needs clarifying is ESG screening, he said, noting these screens aren’t about financial materiality. Part of the backlash against ESG in the U.S. is centred around performance, fiduciary duty and consequences of the underperformance of these assets, mainly because of values-based screens imposed on the energy sector.
“It’s up to you as an asset owner to define what your values are based on [or] who your underlying membership is. But we need to be clear whether these screens are actually because we believe there’s structural decline in these sectors or because they are in fact values-based judgement.”
Over the last couple of years, Europe and the U.K. saw a tidal wave of ESG disclosure regulation designed to combat greenwashing. As a result, new concepts surrounding what qualifies as a sustainable investment, credible ESG standards and what improvements are available in that space have emerged.
According to the EU’s view, a sustainable asset is very binary — it either is or it isn’t. “What the regulation from the EU basically says is if you want to call a fund sustainable, 100 per cent of your security selection, the assets or the investments that you make outside of efficient portfolio management, have to be classified as sustainable.”
Impact investing is also very finite, in terms of the EU’s perspective, as it’s about the intention of delivering real world or real economy change. A U.K. regulation dictates that assets can only claim impact with new capital, which he said has led to hand-wringing from some active equity managers who have been claiming impact for the last 10 to 15 years in secondary markets by using engagement as their primary tool.
The United Nations’ sustainable development framework provides guidelines for how the world can move toward a sustainable economy and many investment managers align their funds to this framework at a corporate level, said Tripuraneni. But to meet those metrics, the industry would need US$5 trillion to $7 trillion annually additional capital being invested in impactful vehicles.
When it comes to the issue of climate change, the goal has never been getting to net zero by 2050; rather it has been to limit temperature rise back to pre-industrial levels, he said, adding trying to de-carbonize the global economy is likely a more productive goal.
Tripuraneni said his clients are more interested in hearing about efforts to reduce deforestation and protect biodiversity, adding responsible forestry is fast becoming its own asset class in private markets and some of his clients are even referring to it as an inflation hedge.
Read more coverage of the 2023 Investment Innovation Conference.