Insights

A Week in Impact: Ready or not

Concern grows that financial institutions aren't prepared for climate change; appetite for sustainable investing is stymied by limited product choice; and credit ratings agencies join the ESG data race.

READY OR NOT, HERE IT COMES

Is climate change the new 9/11 for insurers? Arguably, suggests the FT’s Patrick Jenkins. Having caused a record $225bn of insured losses, natural catastrophes have already easily topped the $40bn of cover lost by insurance companies after the 2001 terror attacks: an event that reshaped the US insurance industry. According to ratings agency Fitch, environmental risk is particularly significant for insurers operating in Asia-Pacific.

While it's the sector most frequently dragged into the debate, insurance companies aren’t the only ones unprepared for the inevitable consequences of climate change. Citing the recent bankruptcy of PG&E, Alicia Seiger, director of Stanford University’s Sustainable Finance Initiative, told the US House Financial Services Committee that index funds and the investors who own them (mostly pensions) face an unmanageable risk from climate change because "they’re unable to monitor it."  

Not just index funds. In its latest report, consultancy Create-Research finds that AI and climate change will “rewrite the future” of the entire investment industry, which is ill-prepared for the twin disruptors. The good news? Though worried about stranded assets, 57% of respondents said they viewed climate change as both an investment risk and opportunity. This brilliant infographic by BlackRock digs deeper into the opportunities yielded by the climate change “megatrend.”

MONEY OR MORALS?

Fortunately, you don’t have to choose. The misconception that investors must sacrifice returns to ’do good’ has been challenged by a new report from the Global Impact Investing Network (GIIN), which found 74% of “frontier finance" investors target risk-adjusted, market-rate returns and nine out of 10 are happy with their financial performance.

No wonder appetite for sustainable investing is at an all-time high. In a recent report, Morgan Stanley finds that “more than eight in 10 US individual investors (and nine in 10 Millenial investors) now express interest in sustainable investing." However, "while adoption is growing—with half of individual investors (and two-thirds of Millenials) taking part—it still lags behind interest.” One reason cited is a lack of product choice: a problem also raised by NN Investment Partners on this side of the pond. As reported in IPE, “almost half of European professional investors say a lack of responsible investing opportunities will prevent the sector from becoming mainstream.”

In Japan at least, the train has left the station. Japan’s Government Pension Investment Fund (GPIF) has announced plans to expand the range of sustainable indices to which it allocates money, with CIO Hiro Mizuno “inviting proposals for international equity ESG indices.” This comes amid news Japanese companies have overtaken their European and US peers in terms of climate risk disclosures, as 200 companies comply with the Task Force on Climate-related Disclosures.

IN OTHER INDUSTRY NEWS

Legal & General Investment Management has partnered with London-based index provider Foxberry to create a new sustainable fund: the L&G Europe Equity (Responsible Exclusions) ETF sustainable fund.

Meanwhile, the FT reports that credit rating agencies are joining the ESG data race via “a flurry of dealmaking.” While the sector “has traditionally been dominated by index providers such as MSCI and a handful of specialist firms, such as Sustainalytics… Now Moody’s and S&P Global, two of the big three credit rating agencies, are elbowing their way in, offering separate ESG scores on companies in addition to their traditional assessments of creditworthiness."