Environmental, social and governance investing is a powerful tool that can reveal systemic issues impacting all parts of institutional investors’ portfolios, said Aaron Bennett, chief investment officer of the University Pension Plan, during the 2023 Responsible Investment Association conference last week.
Some of these issues can accrue over time — and, when they finally manifest, they can be very disruptive to society, the economy or the environment and drive geopolitical risk.
“In my mind, geopolitical risk is driven by scarcity, as well as the resilience to disruptive change or the lack thereof. And when you see those things come to fruition where there’s a scarcity of resources and a lack of resilience, that’s when it becomes a zero-sum game and you see this competition between groups, certainly [between] companies or industries, but also in countries.”
Indeed, the global economy is currently in a period of prolonged geopolitical tensions from self-sufficiency imperatives stemming from the coronavirus pandemic, climate change, the Russia-Ukraine war and the undermining of international norms, said Cynthia Leach, assistant chief economist at the Royal Bank Of Canada, also speaking during the session.
With this type of geopolitical risk environment comes polarization, she noted, and managing this political environment is incredibly complicated for governments, businesses and institutional investors.
The previous economic period saw relatively abundant labour, with global trade ushering in reduced prices and increased growth, said Leach. “Those things led to incredible prosperity. . . . What we’re looking at now is [world economies] not all moving [in] the same . . . direction and some of them are even reversing.
“I think we’re going to see, increasingly . . . strategic competition between countries where they’re fighting, not just for the resources, the people [and] the products that help them deal with those consequences, but [to] also [find] new growth drivers for their economies by being able to celebrate technologies.”
While geopolitical risk isn’t a new concept, it has become more pervasive in recent years, she said, referring to the impact of the Russia-Ukraine war on energy security and independence. “Energy security . . . promotes energy independence [through] the development of renewables, recycling [and a] circular economy — all things that are really positive for the environment. On the other hand, . . . it also makes a compelling case for stable and secure natural gas supplies until we have the technologies ready to completely transition.”
Requesting the disclosure of certain practices should be about more than just classifying something as good or bad, but rather about building awareness of underlying issues, said Bennett, noting that, while all companies should be able to provide some level of disclosure, smaller companies may require some assistance.
He also highlighted the importance of institutional investors’ fiduciary duties including advocating and engaging with governments and policy-makers on a range of topics. “If we’re not in the room, . . . other people in the room [will] be the ones establishing that conversation. And so, I think about things like a climate transition taxonomy and the need for everyone — industry, investments, everyone else — to get in there. [It’s] part of [investors’ duty because, if [they’re] not doing that, then [they] run the risk of not being aware of geopolitical risks.”