Germany has an opportunity to move center stage in the area of green finance in 2017 given the German G20 Presidency summit in Hamburg in July, the PRI’s annual investors’ summit in Berlin in September and the COP23 international climate finance negotiations in Bonn in November.
With this in mind, the second issue of the Sustainable Finance Report examines how activity in sustainable investing is gathering momentum. We examine key trends such as asset owner demands, fiduciary duty, regulatory requirements and climate change.
Part of the reason for the increasing importance of ESG originates from growing academic evidence and investor experience that shows incorporating ESG into investment decision-making can improve performance and reduce risk.
To address these themes, the first article in this report examines how the regulatory environment is affecting the ESG investment landscape. Typically legislation has focused on corporate disclosure, stewardship codes and regulation aimed specifically at asset owners. The fact that the number of laws as they relate to climate change has also doubled every five years since 1997 reveals why investors are placing increased scrutiny on their holdings of carbon intensive securities.
Increased mandatory reporting and disclosure requirements are also taking place at a corporate and investor level. The Financial Stability Board’s Taskforce on Climate-related Financial Disclosure has developed proposals for assessing exposure to physical climate change risks, liability risks and how asset valuations might be affected by low-carbon government policies. Germany’s G20 Presidency in 2017 is likely to consider how the proposals from the Financial Stability Board’s Task Force on Climate-related Financial Disclosure could eventually become mandatory for companies and investors, which would extend the reach of ESG investing.
Given the importance of assessing and addressing climate risk in an investment portfolio, the second featured article in this report examines the various routes open to investors with exposure to carbon intensive assets. Here, we examine fossil fuel divestment campaigns, investor engagement as well as hedging portfolios via low carbon investments.
Asset owners are also becoming increasingly forceful in their objectives and, in many instances, are adopting low carbon commitments. For some, this is not just reducing the carbon footprint of their portfolios, but, more importantly increasing their investments in clean technology, green infrastructure and green bonds. In recent years, China and the U.S. have led the world in clean energy investment. We examined prospects for China’s renewable sector in the first issue of the Sustainable Finance Report published last year. Consequently in the third featured article of this report we examine prospects for the U.S. renewables sector in light of the U.S. Presidential election results.
In the fourth featured article we also assess developments in the global real estate market, which, in our view, is the asset class with amongst the strongest reasons for incorporating sustainability. This stems from the strong link with financial performance, developments in the areas of investor requirements, government policies, tenant demand and the growth of smart data technologies.
Our final article is an introduction to the global microfinance sector and the broader ambitions of financial inclusion. With its roots in Bangladesh in the early 1970s, the sector has grown significantly in recent years in part due to microfinance's portfolio diversification properties. In addition, universal access to financial services is viewed as part of the solution to many of the Sustainable Development Goals signed in New York in September 2015 including ending poverty, ending hunger and gender equality.
This report therefore provides a snapshot of the multiple factors driving the growth in sustainable and ESG investing, which we expect will gather momentum in 2017 through growing investor interest and heightened regulatory activity.