Getting real about ESG

Jenn-Hui Tan

Feb 16, 2023 – 8.00am

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This content is produced in commercial partnership with Fidelity International.

Sustainable investing has been challenged on many fronts over the last 12 months, but the climate crisis is here and there can be no turning back.

Volatile markets create a stark contrast between the needs of different stakeholders and the choice they face of integrating ESG for value or for values.

As a result, a new, more mature approach to ESG integration is emerging — one that acknowledges the necessary trade-offs between the short-term decisions required to remain in business versus the longer-term needs of customers, employees, and communities.

Jenn-Hui Tan is Global Head of Stewardship and Sustainable Investing, Fidelity International.

Some companies with net-zero plans have found them harder to implement in 2022 due to higher material and energy costs and disrupted supply chains, while others have benefited from clean energy investments already made. This is repeated at the government level, where many nations have had to revert to fossil fuel power generation to keep the lights on (literally) and to protect the economy, while still planning for a more secure, affordable, and sustainable energy future.

Investors continue to support capital allocation towards the energy transition where it produces long-term positive returns and creates competitive advantage.

But they too have become more focussed on the reality of reaching net zero, especially in relation to sector materiality (e.g. higher emitters could pose greater risks), scenario analysis (e.g. economic effects of climate scenarios), product suites (ways to decarbonise portfolios), public policy monitoring (sectors exposed to policy changes) and active ownership (where investors can have the biggest impact). (Source: Accomplish survey of client ESG behaviours: PowerPoint Presentation - accomplish.world)

It is essential for asset managers to broaden the ways in which we try to influence sustainable outcomes for clients. At Fidelity International, we’ve increased our engagement with company value and supply chains on material risks to sectors, particularly biodiversity, and with policymakers on system-wide risks such as climate change and biodiversity loss that require macro stewardship.

This is particularly relevant for high-emission industries such as steel and mining that are core to the transition but rely on capital-intensive emerging technologies to decarbonise. It is also important for sectors like coal that must be phased out in a just manner but at speed.

We have now built our thermal coal transition framework and begun intensive engagement with major players. We have developed new sustainability tools, including one that measures corporate revenue generation against the metrics and targets of the Sustainable Development Goals, and extended our impact and nature product ranges.

The more standardised and aligned regulation is, the more effective it should be. Global initiatives such as the Taskforce on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) are good first steps, and we hope for better co-ordination across jurisdictions. However, in a fragmenting geopolitical world, differences will persist, and green product labelling is likely to remain country specific.

Regulation will drive greater transparency through common frameworks and underlying data standards, increasing the amount of sustainability data available to investors.

But simply having the information is not enough. What matters is how investors use and interpret this data to drive meaningful analysis of, and engagement with, companies to generate real-world outcomes.

Moreover, different sectors may require different metrics and methods of comparison to understand how quickly they can and should achieve sustainability goals. The industry should resist the temptation to reach for one-size-fits-all solutions.

The loss of biodiversity is unprecedented and is accelerating, posing a serious threat to global economic prosperity and supply chains, made worse through its connection with climate change. As policymakers wake up to this systemic risk, regulatory and disclosure frameworks for natural capital, including the EU taxonomy and Taskforce on Nature-related Financial Disclosures (TNFD), are being developed, with more to come.

The financial industry needs to extend our work to understand the real price being paid for nature loss, and how we can help our clients mitigate this risk and capture opportunities.

Despite the multiple challenges going into 2023, there are plenty of ways sustainable investing can be adapted to help solve these problems, the most obvious being faster deployment of renewables and storage to increase energy security.

We need to support the real economy’s transition by having the right building blocks for clients, engaging with heavy emitters, and leveraging research.

The environment for ESG may remain tough in 2023, but the climate crisis is here. Many areas of the transition are starting to accelerate as companies and investors increasingly realise that, whether for energy security reasons or to avoid future climate disasters, there is no turning back.

Jenn-Hui Tan is global head of stewardship and sustainable investing, Fidelity International.