The second annual GreenFin Summit, part of GreenBiz 20, brought together 200 sustainability and investment professionals representing $22 trillion in assets under management and more than 50 Fortune 500 companies.
The focal question: What would it take to align and leverage capital markets to drive the global economy towards sustainability?
This question comes at a critical time. Integrating ESG data into investment decisions has moved from the margins to the mainstream and is now top of mind on Wall Street. ESG considerations are being factored into a growing number of investment managers’ portfolios, indices and engagement strategies, integrating traditional financial metrics with such financially material criteria as climate change and human capital.
As a result, corporate sustainability executives are engaging in vital new dialogues with their internal colleagues in investor relations, treasury and governance and are increasingly interacting with fund and index managers that hold stock in their company.
The invitation-only GreenFin Summit, presented by GreenBiz in partnership with Trucost, part of S&P Global, yielded a lively discourse that was by turns encouraging and frustratingly familiar. In some ways, it seemed to tread old ground, rehashing conversations of 15 years ago with little apparent progress. At the same time, the consensus seemed to be that we have rounded a corner and that something has shaken loose to propel real action.
This is the day after “Groundhog Day” — a reference to the 1993 Bill Murray movie — the beginning of a decade of change, said one participant. Many in the room felt that we’ve seen seismic moves just in the last few weeks from unexpected corners that are reimagining the role environmental and social issues play in financial markets. In January, for example, BlackRock CEO Larry Fink asked companies in his annual letter to explain what social purpose they serve and outlined a stronger stance on ESG issues in general and climate risk in particular. A couple weeks later, State Street Global Advisors (SSGA) CEO Cyrus Taraporevala conveyed in his letter that ESG is no longer optional, and that “we are prepared to use our proxy voting power to ensure companies are identifying material ESG issues and incorporating the implications into their long-term strategy.”
Also last month, Bank of America CEO Brian Moynihan said at the World Economic Forum in Davos, Switzerland, that investors want to be in companies that are doing right by society.
Moynihan’s point seemed underscored by the presence for the first time at GreenFin Summit of representatives from such mainstream investment organizations as the National Investor Relations Institute (NIRI), the Council of Institutional Investors and the National Association of Corporate Directors. According to NIRI research, the overwhelming majority of investor relations officers now think ESG issues are a pressing concern, up from less than a third 10 years ago.
Here are eight takeaways from the two-half-day event:
- ESG analysis is a fundamental element of risk analysis. ESG factors should be integrated into 21st-century risk analysis — a core discipline, not an optional strategy — and investors cannot afford to continue treating the space as a feel-good add-on.
- We need to expand the tent. Impact investing is still essentially a luxury product, which has to change if we hope to amass enough capital to move the needle in any meaningful way. Moreover, ESG reporting, a requirement for access to a new generation of sustainability-linked financial instruments, demands extensive internal systems that are too resource-intensive for smaller firms. The investment bankers and financial services professionals in the room recognized that part of their job is to help more companies to come onboard.
- Business needs the help of sound public policy, but it’s not doing enough to promote it. Strong carbon pricing is urgently needed to incentivize effective climate risk management, among other things. One way to get there is for companies to increase transparency substantially around their lobbying and political spending.
- ESG data remains muddled. There is a plethora of ESG reporting standards and divergent rating frameworks. Summit participants discussed the notion of a unified standard, without reaching a consensus on what that might be. Some investors are moving away from third-party ESG ratings, preferring to receive the underlying data and evaluate it themselves.
- The robots are coming. The above concern may become moot as machine learning and artificial intelligence play increasingly significant roles in ESG analysis. As they do, lagging companies will have an increasingly hard time hiding their underperformance. Data — and thus real insight — into ESG performance increasingly will come not from companies’ own reporting, but from external factors and sources.
- Companies sorely need an interdisciplinary approach. Policy makers, investors and banks came together at the summit, exactly the types of cross-functional collaborations essential to tackling urgent environmental and social challenges. At the company level, sustainability teams need to work intimately with legal and finance departments, which is a rarity today. Summit participants repeatedly emphasized the importance of proper incentives, noting that if companies embedded ESG metrics into compensation strategies, they’d see silos melt away.
- ESG-linked financial vehicles are a rounding error in total debt markets and need to scale up quickly. With $700 billion in debt issued in the United States alone every month, the current green bond market of $250 billion is minuscule. Such vehicles need to provide a significant benefit for good ESG performance, which we’re only just starting to see.
- The United Nations’ Sustainable Development Goals (SDGs) are investors’ North Star (or Southern Cross, depending on where you are in the world). While they were written for member states, the SDGs are eminently adaptable to business. They are the ultimate impact framework and provide a methodology that can help companies understand the part of their market capitalization that is not captured well by financial statements.
So, will the 2020s really be the decade of change in investing? According to Erika Karp, founder and CEO of Cornerstone Capital, one of the summit speakers: “Corporate sustainability is the relentless pursuit of material progress towards a more regenerative and inclusive economy.” The tools to get there already exist.
The conversation last week suggests the volition may finally be there, too.