People are increasingly viewing the world with a lens that incorporates environmental, social and governance factors, said Andrew Parry, head of sustainable investment at Newton Investment Management, when speaking at the Canadian Investment Review’s Investment Innovation Conference in November.
Climate change is a prominent issue with extreme weather events becoming the normal, he said, noting these events have economic costs. “No longer is climate change an abstract future event,” he said. “It’s actually a real financial event here and now in our daily lives and in our portfolios, which is a really important consideration when we begin to think about managing risk.”
However, environmental challenges can also present significant opportunities, Parry noted. “I think one of the big things that has changed in the last five years is really that civil society cares, that regulators care and increasingly governments are beginning to understand the climate and environmental imperative. It’s no longer thinking that climate change is an abstract externality, a problem for the future; it is actually something that is manifesting itself now in the business models of many companies.”
Disruption is a part of daily life, Parry noted, but it isn’t all negative. “It is about avoiding stranded assets, stranded business models. It’s about those disruptive themes that will change the shape of our lives, the shape of our indices. But importantly, it’s also about these emerging growth dynamics, which we’re seeing through our economy very dramatically already. And here it’s about that power of compounding ultimately.”
That said, the power of compounding only works when avoiding permanent capital impairment, he added. “I think 2020, if anything it has done, is remind us that business models can be impaired severely, that not all companies can be winners and that the index itself is not the baseline for measuring risk.”
In particular, the index is not a representation of the future. “And it is really important in our thinking in this disruptive world to get our minds around not anchoring to the past, but moving to the future.”
Institutional investors must be careful about playing to methodology over purpose, Parry said. “I think this is one of the dangers that we have with our current approach to [sustainability] and ESG is that if we think we can measure it, we think we can manage it. But that could end up leading us to false gods in terms of accelerating change that we need to deliver.”
Overall, he highlighted how investors are in some ways building models in a degenerative system and must ensure that they’re not “shuffling deck chairs on the titanic.”
Now that ESG and sustainable investing has been embedded into the thinking of many, Parry outlined how investors can try to create the necessary changes. “We need to create a thriving system. It’s about the valuation, not just of financial capital and the reporting of ESG scores, but it’s about the valuation of all the other capitals: natural, social and human, alongside financial.”
Further, key players must increasingly collaborate toward shared goals. “Very much, sustainability is the mantra of today. It’s a core part of us finding our own agency. It’s us finding adaptive pathways to the future and managing critical tipping points. But if we want to go to the next level, we’re going to have to go beyond ESG to really begin to think about transformational change and how we, as asset owners and asset managers, work with all other actors in the system to create that system that we want for future generations.”