The Global Movement Towards Responsible Investment

Peter Zaman, Partner

5 March 2020

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What we will cover

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• What is responsible investment

• Drivers behind responsible investment

• International Trends (ex. Europe)

• Where are we going and what does it mean?

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Why responsible investment?

Because our current economic model is not sustainable.

• IPCC report states that we have 12 years to limit global warming to avoid 1.5 °celsius’ change.

• We need to reduce our emissions by half in circumstances where our population is growing and people are getting wealthier and therefore,

more emission intensive.

• Our approach to generating economic growth has a disproportionate impact on our social structures and the planet. For example, we

consume roughly 170% of Earth’s natural resources every year and yet our growth will add another 2b people by 2050.

• We require a shift in the way we deploy our capital in pursuance of our economy.

It’s no longer theoretical

• 17 of the 18 warmest years on record have taken place since 2001.

• In 2018, extreme drought + poorly maintained power lines = California wildfires and bankruptcy of Pacific Gas & Electric Corp.

• Volkswagen has been fined more than $49bn worldwide as a result of its emissions scandal.

• In 2017, $43b estimated cost of impact of Hurricane Maria on Puerto Rico’s economy.

• In Davos 2020, the environment filled the top five places in the list of concerns likely to have a major impact over the next decade in WEFs’

annual risks report.

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Global Climate Risk Index 2020

4Source: Germanwatch e.V.

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What is responsible investment?

ESG“Responsible investment is an approach to managing assets that see investors include

Environmental Social and Governance (ESG) factors in:

• Their decisions about what to invest in, and

• The role they play as owners and creditors.” (PRI)

Socially Responsible Investment (SRI)This approach encompasses all financial products that have a specific socially responsible

(SRI) investment strategy. The investor understands ESG criteria is a tool to ensure that the

investments he/she makes reflect his/her moral values. Consequently, he/she wants to align

investment with ethics, social or environmental purpose in order to improve the sustainable

impact of investment decisions.

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Approaches towards responsible investment

ESG Incorporation ESG Stewardship

Integration Screening Thematic

Explicit and

systematic

inclusion of

ESG issues in

investment

analysis and

decisions to

better

manage risks

and improve

returns.

Use filters to

rule

companies in

or out of

contention for

investment,

based on

investor’s

preferences,

ethics or

values.

Combine risk

return profiles

with intention

to contribute to

specific

environmental

or social

outcome (e.g.

impact

investing).

Engagement Proxy Voting

To engage with

companies on ESG

issues to improve

their handling of it

(either individually or

via forums).

Formal expression of

approval/disapproval

through shareholder

voting on specific

resolutions on ESG

issues.

6Source: PRI

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Recommendations of the Task Force on Climate-related Financial Disclosures

Extracted from: TCFD Final Report

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Use of ESG reporting standards

Plenty to chose from.

Sustainability Accounting Standards Board

Conceptual Framework (2017)

• Tailored to U.S. corporations and SEC

filings

SASB

International Organization for

Standardization (ISO 26000 Guidance on

social responsibility)

ISO

The International Integrated Reporting

Council (IIRC International Framework)

IIRC

Global Reporting Initiative (GRI

Sustainability Reporting Standards)

GRI

The Organisation for Economic Co-

operation and Development (OECD

Guidelines for Multinational Enterprises)

OECD

UN Global Compact (Communication on

Progress)

UN

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Sustainability Reporting Cycle

Asset managers, asset owners and others have encouraged greater corporate disclosure. Third-party

organizations have then created guidelines on sustainability standards and ESG metrics that reinforce

the cycle.

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Drivers behind responsible investment

The Paris Climate Change Accords • Commitments from 195 countries

• Goal to keep emission increase well below 2°celsius’

• To do that, we need to be limiting our average CO2 output to 14 GT p/y for next 20 years (currently 36 GT p/y)

UN PRI• Now more that 2500+ signatories representing $80tn of assets

• Made it mandatory for 2085 signatories to report against TCFD indicators

• Had placed 10% of its signatories on a watchlist for failing to meet ESG targets

UN Sustainable Development Goals (2015)• Globally agreed sustainability agenda for implementation by 2030

• 17 Sustainable Development Goals with 169 associated (aspirational) targets

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UN Global Goals for Sustainable Development

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Drivers behind responsible investment

Investor pressure• Increasing awareness and acceptance of the link between ESG information, a

company’s purpose, values and strategy and its performance

• Companies with sustainable practices outperform companies that have not integrated

ESG considerations into operations

Fiduciary duty rules • The rise in ESG is happening in tandem with a heightened regulatory environment

• Increasingly mandating or strongly advising consideration of ESG matters in institutional

investments

Regulatory Drivers• Asset owner regulations (e.g. disclosure requirements for pension funds)

• Stewardship codes

• Corporate disclosure requirements (e.g. governments, stock exchanges, TCFD etc.)

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International Trends

Broad developments

• Banks are committing to stop funding

coal plants

• Investment funds are divesting fossil

fuel assets

Screening of investments

• Increasing demand for supply chains

to be transparent and sustainable

• Development of sustainable

commodity products

Influencing supply chains

• Conflicting ESG ratings due to different

weights and evaluations

• Greatest disparities observed in:

Governance > Social > Environmental

Low correlation

• National Plan on Implementation of the 2030 Agenda for

Sustainable Development

• Green Industry Guidance Catalogue (2019) is a directive

of 6 categories of green industries, as areas for local

government to form supportive policies that are eligible

for green bonds

China

• Lack of consistent, verifiable and

comparable ESG date

Consensus on barriers

• Increasing numbers of ratings service

providers

• Credit ratings agencies acquiring ESG

ratings businesses

Ecosystem is adapting

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International Trends (ex. Europe)

Central Bank leadership

“Climate-related risks are a source of financial risk and it therefore falls squarely within the mandates of central

banks and supervisors to ensure the financial system is resilient to these risks.” (NGFS Call for Action Report)

• 50 central banks are now part of the Network for Greening the Financial System (NGFS) (launched in

Dec17)

• Link between financial stability in insurance and banking and (i) natural disasters, and (ii) the changing

price of carbon relative to renewable energy supplies.

• Recognition of the need for greater quality of information

• ECB is very concerned about the impact of extreme weather events on global commodity prices and the

impact of migration triggered by climate

• Better understanding of the exposure of a company’s operations to physical and transition risks related to

climate change

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NGFS Recommendations Call to Action Report 2019

Integrating climate-related

risks into financial stability monitoring and micro-supervision.

a) Assessing climate-related financial risks:

b) Integrating climate-related risks into prudential

supervision:

• Engaging with financial firms:

• Setting supervisory expectations to provide guidance to

financial firms as understanding evolves.

Integrating sustainability factors into own-portfolio management Central banks to lead by example by integrating ESG into their

own operations.

Supporting the development of a taxonomy of economic

activities

A taxonomy would:

• facilitate financial institutions’ identification, assessment and

management of climate and environment-related risks;

• help gain a better understanding of potential risk differentials

between different types of assets; and

• mobilise capital for green and low-carbon investments

consistent with the Paris Agreement.

Bridging the data gaps Public authorities should share data of relevance to Climate Risk

Assessment and make them publicly available in a data

repository.

Building awareness and capacity, encouraging technical

assistance and knowledge sharing.

Build in-house capacity and to collaborate to improve

understanding of how climate-related factors translate into

financial risks and opportunities.

Achieving robust and internationally consistent climate and

environment related disclosure.

• Pledge support for the recommendations of the Task Force

on Climate-related Financial Disclosures (TCFD)

• Urge policymakers and supervisors to consider further actions

to foster broader adoption of the TCFD recommendations

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Mapping physical risk transmission channels

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Mapping transition risk transmission channels

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International Trends by numbers

“I believe we are on the edge of a fundamental reshaping of finance”

Larry Fink, CEO BlackRock

Some numbers• BlackRock, world’s largest fund manager with $7tn under management, joins the Climate Action 100+ initiative in

January 2020

• 33 Global Banks financed fossil fuel companies $1.912t between 2016-2018 (Banking on Climate Change Report,

2019)

• 24 ESG related controversies for S&P 500 index companies in 2019 wiped of $534b in market value for those

companies involved, relative to the index over the following 12 months (BoA study)

• $250b of bonds were issued in 2019 with the environmental, social or sustainable label (led by European issuers)

• 8 out of the 16 stock exchanges with compulsory ESG reporting requirements located in Asia (UBS report)

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Where are we going …

• SEC announced “particular interest” in

disclosures by registered investment

advisers on ESG strategies

• Leading to mandatory disclosures

Greater regulation

• Standards and ratings will continue to

be diverse to cater for different

industries

• More methodology disclosures on how

disclosures are used

Disclosure overload

• Increased recognition of environmental

risks on businesses

• Leading to more divestment of

potential stranded assets and

investment arbitrage

Environmental significance

• Greater disclosures by

corporates looking to raise

funds

• Consideration of ESG

factors in investments and

ratings

More ESG integration

• Development of awareness

and expertise

• Greater availability of

information

More adoption in Asia

• Increase in product

offerings with ESG label

• Growing AUM in ESG funds

More ESG products

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… what does it mean?

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Increased recognition of Environmental impact

20 Source: CFA Institute and PRI, “Guidance and Case Studies for ESG integration: Equities and Fixed Income”.

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Growth in corporate sustainability disclosures

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Growth in ESG funds (USD)

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Continued adoption of ESG in AsiaPac

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Your Speaker‘The "extremely competent" Peter Zaman maintains his position as one of the eminent

practitioners in the climate change field.’ Chambers and Partners Global 2020

20 years of practicing as a transactional lawyer in the UK, EU and, most recently, in Asia has

left Peter with a broad base of experience which allows his practice to be multi-faceted. He

has practiced as a partner for 10 years and regularly draws on his experience to help guide,

support and collaborate with his clients to enable them achieve their commercial objectives.

Peter firmly applies the mantras “variety is the spice of life” and “there is no such thing as bad

experience” to embrace work opportunities as they present themselves for his clients. The

breadth of his practice covers transactional and regulatory work in respect of carbon finance,

commodity derivatives, derivatives and structured products. His carbon specialization extends

to all aspects of carbon finance (CDM, JI, Green Investment Schemes), emissions trading,

carbon funds and the voluntary markets. He is a recognised and established authority on

legal issues relating to emissions trading and has been involved in the area since the

inception of the EU Emissions Trading Scheme in 2005.

Peter is a familiar name in the legal directories and has been ranked as a Band 1 lawyer for

Climate Change by Chambers and Partners Global for many years. He continues to be

recognized in Who’s Who Legal: Environment, and in 2018 he won the Client Choice Awards

for Singapore Derivatives..

His clients include industry leading names who are commodity merchants, miners, utilities,

investment banks, multilateral development institutions, corporates and fund managers. Since

moving to Singapore, his practice has increasingly focused on China and, in particular, on the

on-shore and offshore commodity derivatives business opportunities relating to China.

Peter is also a contributor and author of the legal critique chapter in Michele Stua’s book

titled, “From the Paris Agreement to a Low-carbon Bretton Woods –Rationale for the

establishment of a Mitigation Alliance” (Springer 2017)

Peter Zaman

PartnerSingapore

+65 6320 5307

pzaman@reedsmith.com

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