Climate Change rising as an ESG imperative

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(Pictured: Mamadou-Abou Sarr)

Climate change is making its way up the to-do list of super funds as they expand and refine their ESG strategies, helped along by recent scientific views, unusual weather and the next Climate Change Conference in Paris, which is being seen as a milestone in the ESG investing sector.

According to Mamadou-Abou Sarr, Northern Trust Asset Management’s head of ESG, who visited Australia from Abu Dhabi last week, there was a growing number of requests from big investors about the risks associated with climate change.

The timely visit coincided with the publication of a report by the Climate Change Authority recommending a target of 30 per cent reduction in emissions on 2000 levels by 2025 and a freak two-day storm in Sydney and Newcastle, resulting in at least eight deaths and millions of dollars of damage. The Government promised its next emissions reduction target by mid-year, well ahead of the 21st Climate Change Conference in December.

Sarr said that about US$7 trillion of assets had come under ESG-governed strategies in the past two years, taking the total around the world to about US$21.4 trillion. About one third of all professionally managed assets were now integrating ESG principles in portfolios.

Key trends in the ESG include a change in the rhetoric to recognize financial risk and the increasing availability of data, he said. “It’s moved from a push by governments and agencies to a pull from asset owners who are particularly rallying to address climate change risk factors… Climate change can be classified both from macro and micro risk assessments.”

There was an increasing number of ESG tools for investors and specialist research houses providing information, he said. There was also an increasing number of indices and smart-beta strategies, such as Northern Trust’s range of “engineered equity” funds, from which to draw.

The ‘G’ in ESG continued to attract attention with interest in accounting risk and gauging potential malpractices. One of the trends highlighted in a recent paper from Northern Trust, “the Challenges of ESG Investing – Regulation”, is the blending of both negative and positive screens in the investment management process.

With the ‘S’ in ESG – often an overlooked component – the rise of impact investing in Europe and the US, with a smattering of involvement in Australia, is attracting increasing attention. “Impact investing is growing rapidly,” Sarr said. “Here is an investment vehicle that can be used.”

For many investors, the inclusion of social factors in the process depended on their objectives and how they measured success.

The latest impact investment projects tend to try to combine the three main sources of funding: governments, philanthropists or charities, and institutional investors. This allows for different returns streams which satisfy the different objectives.

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