Insights

Five takeaways from PRI in Person 2019

This month, we attended PRI in Person: a record gathering of asset managers and owners brought together to review the state of play for sustainable finance. The first of many climate-focused events that punctuated September, we came away with five takeaways and a cautious optimism for the future of responsible investing.

Held in Paris, PRI in Person 2019 brought together a record 1,700 attendees to “showcase the latest innovations in responsible investment practice and debate the impact of emerging ESG issues and global trends.”

We’ve been to enough responsible investing conferences to expect a certain pattern. Caffeine-fuelled investors, eyes glued to iPhones, half-listen to a keynote speaker wax lyrical about why Responsible Investing is Important, his platitudes (and it’s usually a he) infused with terms like “seachange,” “fork in the crossroads,” and “turning point.” This is invariably followed by a series of panels during which asset managers and owners boast of a lukewarm commitment to ESG, without going so far as to widen the scope of fiduciary duty that has weathered two decades and one financial crash. Everyone leaves swatting away an uncomfortable suspicion that the financial industry’s commitment to sustainability can be measured in plastic coffee spoons. 

This felt different. The platitudes were there, the pace may be slow. But there was a new tension in the room that indicated investors might be finally ready to move the dial. We came away with five takeaways and a cautious optimism for the future of responsible investing.

The climate crisis demands urgent action

“We may well be the last generation with an opportunity to act; thereafter, it will be too late. We need a new economic model. We need a new form of capitalism based on sustainability and social equality.” Bruno Le Maire, French Minister of the Economy and Finance

The conference opened with speeches from French President Emmanuel Macron and Minister of the Economy and Finance Bruno Le Maire, in a symbolic nod towards the ways in which financial institutions and governments are coalescing to build a more sustainable economy. 

"Today we are clearly witnessing a shift towards green finance." - Emmanuel Macron, French President

Long the preserve of niche political parties and institutions, the climate crisis is now capturing worldwide attention. In the last month, the FT launched its groundbreaking ‘New Agenda’ campaign supporting a reset of our economic model, almost 90 multinational companies committed to Paris Agreement targets, and millions of people from across the world took to the streets for Greta Thunberg’s global climate strikes. 

“There is an extremely urgent need for more ambitious action. We must act immediately. We have just over 10 years to turn the tide on the climate and environmental emergency: if we wait, we face an abrupt transition, or even worse, we may not have any transition at all.” - Dr. Werner Hoyer, President, European Investment Bank 

Why the noise? Because this is our last chance to mitigate the consequences. In one year, the timeframe for changing the course of global warming has shrunk from decades to a matter of years if not months. And while as European governments, policymakers and businesses are aware of the urgency of the problem, investors also have a critical role to play.

Expect a dramatic policy response

"Investors can expect a forceful, abrupt and disorderly inevitable policy response." Nathan Fabian, Chief Responsible Investment Officer, PRI

The PRI used the conference as a platform to launch a suite of research and tools on the #InevitablePolicyResponse, beginning with a report on how public support for the climate transition is creating a mandate for aggressive policy action.

Despite - or because of - the insufficiency of government action to achieve the Paris Agreement, the PRI anticipates a policy response by 2025 that will be more forceful, abrupt and disorderly as a result of the delay. This will create considerably greater disruption than that for which investors and businesses are currently prepared.

Markets simply haven't adequately priced in risk, and asset managers need to act now to protect and enhance the value of their investments.

Don’t underestimate the opportunities

“The sustainable revolution has the potential to change the world the way the industrial revolution did, but with the speed of the digital revolution.” - Al Gore

The inevitable shift to a sustainable economy will be disruptive, but it also represents a significant investment opportunity. 

The unprecedented surge in green bonds - debt instruments that finance environmentally friendly projects - is one oft-cited example. Since the first green bonds were first launched a decade ago, the market has grown exponentially. So far this year, issuance has surpassed $200bn and is projected to hit $250bn: up from $37bn in 2014. On the equity side, there's also an entirely new suite of renewable-energy products and companies poised to disrupt the fossil fuel incumbents.

“When we launched green bonds, everyone thought we were crazy. Now, it’s one of the fastest-growing asset classes in the world.” - Dr. Werner Hoyer, President, European Investment Bank

But it's not just market instruments that investors should be thinking about. As Greta-mania took hold across the rest of the world, PRI invited a number of young people to speak at the conference, most notably Aliénor Martin-Péridier of youth activist group Wake-Up Call on the Environment. There was resounding unanimity that investors need to begin measuring not just the carbon footprint of the companies in which they invest, but also the broader, long-term impact of their products and services.

“Millenials are demanding the same thing on both sides of the Atlantic. At some point, businesses and policymakers will have to respond.” Dr Gunther Thallinger, Allianz

We’re on the precipice of an unprecedented generational wealth transfer between two investing cohorts with very different values. Over the next 30 years, Baby Boomers are expected to transfer $30 trillion to Generation X and Millennials. As conference speakers made very clear, listening to the demands of younger generations isn't just a sentimental touch: it's critical to the long-term survival of most of the companies represented in the room.

Outcomes-based investing is on the horizon

“ESG has become an end in itself, rather than a means to an end. It's time for investors to turn sustainable finance up a notch. When the winds of change blow, some build walls and others build windmills." Jean Raby, CEO, Natixis Investment Management

The investment community has traditionally favoured ESG integration with an emphasis on internal corporate governance, but there was a new focus on outcomes-based investing with the UN Sustainable Development Goals (SDGs) as the standard. Demand for SDG and outcomes-based reporting was, in fact, one of the main points of feedback in the PRI's reporting framework consultation.

"The SDGs are a strategy plan for the world. As with any full potential plan, it requires investment and resources to achieve. It's not about moving the few or the best, but the rest."  Therése Lennehag, Head of Sustainability, EQT

The appetite for SDGs makes sense in light of the urgency of the climate crisis, which requires measurable, real-world action. But it's not just the climate we should be concerned about: PRI CEO Fiona Reynolds called on investors to pay more attention to the social impact of global warming, with mass displacement, resource shortages and even human trafficking increasingly likely.

"We must challenge this notion impact is for private markets: it’s essential public markets play their role.” Jonathan Bailey, Head of ESG, Neuberger Berman

Impact and outcomes-based investing has long been considered the domain of private markets. But if the world is to meet the SDGs by 2030, public markets and listed equity investors must begin thinking about impact, too. Encouragingly, asset managers spoke about the ways in which they're incorporating impact frameworks into their investment processes alongside ESG considerations, though there were concerns that investors too easily “fall into an alignment conversation rather than a contribution conversation" when talking about listed equities.

What does it amount to?

Is climate action among the investment community gathering enough steam? Or is it mostly hot air?

It's easy to walk away from three days of brilliant speeches, inspiring soundbites and packed-out talks with the sense that change is happening. But the fifth, and perhaps most important, takeaway is that we're still waiting for real action.

In the middle of a climate crisis, and at a time when we urgently need critical reflection and systemic action, is any award-laden, sponsor-driven conference commensurate with the task at hand?

We might be heading in the right direction, but it's still unclear whether we'll get there fast enough.