What is driving the sustainability agenda? Here, J.P. Morgan's Regional Head of UK, Channel Islands & Ireland Private Bank Oliver Gregson, who we were pleased to have as a keynote speaker at our Sustainable Finance Week event earlier this year, shares his view.
Looking at the issues, opportunities and what the future holds for sustainable investing, we are beyond the pale. We've moved over the tipping point and there is no way back.
We have seen huge acceleration on this agenda in the last few years. If you look at the widest measures of sustainability - ESG, SRI etc - AUM is around 40 trillion. That acceleration represents our own organisational transition over the last few years in terms of how we've approached the need to change some things we do.
We have made a number of large commitments in support of this agenda:
- Paris-Aligned Financing: we've committed to align key sectors of our financing portfolio with the goals of the Paris Agreement
- Sustainable Development Target: we aim to facilitate more than $2.5 trillion over the next 10 years to address climate change and contribute to sustainable development, including $1 trillion for green initiatives
- Operational Commitments: we've set a number of targets to drive progress on operational sustainability, including our commitment to be carbon neutral across our operations
But what's driving all this change? Here are five key factors I think are really having that impact.
1. The science
We are living in a changing world. Population growth, depletion of natural resources and climate change are creating both risks and opportunities in markets.
After 10,000 years in a geological era of stability, we're now rapidly approaching 10 billion people, and our impact is huge. Concentration of CO2 continues to increase, even despite a global lockdown, and that's having dramatic effects. If we want to meet the aim of the Paris Agreement of limiting change to one-and-a-half degrees, we need to seriously limit the carbon concentration in the atmosphere and the trajectory we are on. Forget net-zero, it needs to be net-negative!
2. Investor and consumer preferences
Investors and consumers are voting with their dollars, and it's impacting all business. People are demanding change. It's not just generational. Consumers across all age groups consider it extremely important for companies to implement programs to improve the environment. That's also the case on investor preferences, with ESG track record being important. People are really wanting to invest their money with meaning and to align their portfolios with their principles. More consumers and institutions are asking companies to be socially and environmentally responsible. They are voting with their money paying a premium for products and brands with positive impacts
3. Policy and regulation
The legal, regulatory and policy agenda is making ESG mandatory! For too long a key missing element, we have now seen a global expansion of commitments and rules which has been a massive driver of change. In 2019, we had the European Green Deal and in June 2020 we had the European Recovery Fund. In October, to everyone's surprise, China committed to carbon neutrality by 2060, with peak CO2 emissions by 2030, then US President Biden brought the US back to the table to re-joining Paris. We've got the G7 and G20, and COP26 coming up this year in Glasgow. In the UK, we have legislated for mandatory TFCD-aligned disclosures and a net-zero and a major carbon reduction commitment in the EU - they want to become the first climate neutral continent by 2050. The EU green taxonomy will align and define all economic activities within that taxonomy, and we've got changes to MiFID II. That's one of the biggest impacts, because it's going to require us to change the suitability requirements of the way that we approach giving advice to clients.
We've been living with the world of SFDR, which came out in March, and the EU and China are releasing a common taxonomy for green investments, but I think the biggest piece is the US. The executive order signed by US President Biden had a number of major impacts. He's asked US banking and securities regulators to coordinate efforts to address climate-related financial risks and risks to financial stability with the size of the US and its capital markets. This is really big news.
4. Risk and return
The financial materiality of ESG factors are too big to ignore for clients from both a risk (physical, liability and transition) and return (significant alpha opportunity from a whole-economy transitions) perspective.
This has moved on leaps and bounds from the understanding of the importance of this to not just be about profit with purpose, money with meaning or something that you did with your philanthropy, but to really understand that this is just what good looks like if you're going to invest going forward. And we've seen outperformance starting to come from this - better returns, lower risk.
Leaders in this area generate a more stable and higher quality of earnings and that attracts a premium in terms of their valuation and lower cost of capital.
Climate risk in particular is distinctive for its reach, breadth and scope but it is not really priced in at the moment. So, the opportunity to think about how you address your clients' portfolios, going forward, is absolutely key.
5. Supply of investment opportunities
The increase in opportunities has led to a corresponding increase in demand - very much a self-fulfilling circle, borne out by what people have started to understand by the risk and return agenda. 2020 was the stress test but ESG and SI not only held their own, but outperformed.
It all sounds great, but there are the issues that come from this. Such extreme growth comes with growing pains, and issues to be aware of include greenwashing, proliferation of products, lack of standardisation, lack of consistency, and issues around data and reporting.
I want to end on a call to action. Noted American astrobiologist Carl Sagan said: "Anything else you're interested in is not going to happen if you can't breathe the air and drink the water. Don't sit this one out. Do something. You are by accident of fate alive in an absolutely critical moment in the history of our planet". There really isn't any other agenda than this, the science is unequivocal. The legal, regulatory and policy landscape is going to make this mandatory. The financial materiality of ESG factors are simply too big for clients to ignore on both the risk/return side, and the impact on the real-world economy.
It's what the talent of today and the leadership of tomorrow really care about. In 10 years' time it will simply be the way things are done.
You can watch day two of Sustainable Finance Week in full here.
For more information about Guernsey's finance industry please visit www.weareguernsey.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.