No wealth without [eco]health

13 Oct 2021 | Private markets pivot to ESG; banks push to keep financing fossil fuels; the US becomes a panacea for renewable opportunities. Plus, we dive into the latest casualty of climate change: the portfolio risks of which are critically overlooked

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🌐 A “whole-of-financial-system” approach is needed to mitigate the risks posed by biodiversity loss, according to an NGFS report, which provided guidance for central banks and financial supervisors ahead of this week’s UN Biodiversity Conference.

🤝 Fortunately, there are promising signs of collaboration in Mark Carney’s 300-institution-strong GFANZ. On Monday, the group called on G20 governments to issue a series of policies to achieve net zero—including phasing out fossil fuel subsidies

🛢️ Unfortunately, banks aren’t playing ball. Lenders have rejected GFANZ’s recommended IEA targets (which halt fossil fuel financing) in favour of IPCC’s non-prescriptive targets (which don’t). Environmentalists aren’t happy. Nor is Chris Hohn.

🚀 The surging popularity of ESG is set to stage a “reboot of historic proportions” in Europe’s private markets, according to PwC, which predicts assets in European private market ESG funds will skyrocket to between €775.7bn and €1.2trn by 2025.

🏆 In its biannual Renewable Energy Country Attractiveness Index, EY ranks the US highest for renewable energy investment opportunities, followed by China, France and the UK. But heed IEA’s warning: Global grid spending must rise 50%.

💸 Under new head Jigar Shah, the US Energy Department’s Loan Programs Office (LPO) is working to support EY’s conclusions. Shah tells Bloomberg the LPO has earmarked $44bn for innovative clean technologies in early commercial development.

⚒️ The low-carbon transition tightrope (which we explored last week) is on full display in Spain, where the question of whether or not to mine untapped minerals is stoking tension between strategic and tactical environmental priorities.

😷 If it’s not COVID, it’s climate. According to a pre-COP26 report from WHO, climate change is the biggest health threat facing humanity, as extreme weather events kill thousands (and take out health systems), and emissions, millions.

🏥 Investors are overlooking human health risks, says ShareAction. Risk assessments focus on short-term, company-level risks rather than those at a portfolio level, and so fail to capture a) a company’s wider impact, and b) longer term regulatory risks.

Util in the news

⚖️ On Monday, Patrick Wood Uribe spoke with Bloomberg about an issue on which we've spilled a lot of ink: How do you balance theme purity and liquidity when money is flooding into a concentrated market? Investors are caught between a rock and a hard place—as BlackRock discovered this year with its clean energy ETFs.

🎙️ Join interactive podcast Driving Fintech Forward this Thursday 13 October 2021, 16.00 GMT, as industry experts, including Patrick Wood Uribe, dive into the world of ESG technology. How are innovations advancing the reliability of ESG reporting and thus market growth? Which non-financial datasets will be most critical and why?

No wealth without [eco]health

With the UN Biodiversity Conference underway and COP26 almost upon us, the environment is firmly in the spotlight—and so, too, its social ramifications.

Despite a fresh focus in the early days of the pandemic, the relationship between ecological/environmental and social issues has garnered relatively little mainstream attention. That’s a problem. From both a financial and humanitarian perspective, the impact that climate change will have on social stability tomorrow threatens to eclipse any risks on which investors are focusing today.

That social, environmental and financial issues are totally intertwined and interdependent is undeniable. Addressing any one risk a) in silo, b) with a short-term lens, and c) at a stock level is tantamount to trying to put together a puzzle with only half the pieces in the box and without a picture of what the end-result should look like. Also the puzzle is actually a Rubik’s Cube, but you were only looking at one side.

Human health risks are critically under-diagnosed

Compared to mass displacement and migration, human health is sometimes overlooked as a social casualty of climate change. Generally, in fact, human health is chronically overlooked as a portfolio risk, according to research from ShareAction.

“Asset managers’ risk assessments tend to focus on short-term and company-level risks rather than those at a portfolio level. This limits their ability to assess how the negative external health impacts of one company in their portfolio may have negative financial consequences on another part of their portfolio, or how longer term risks such as from regulatory changes may affect their investments.”

Overwhelmingly, the investors surveyed didn’t view human health as an issue under their remit or that of their portfolio companies. Where they did assess the role of companies, they tended to focus purely on healthcare and pharmaceutical companies, neglecting the role of other sectors.

The solution? Echoing the Scope 1, 2 and 3 framework, ShareAction puts forward an investor framework for assessing health risk: one that assesses company impact not only in terms of their workers, but also their consumers (via their products and services) and communities (via their environmental impact).

The two latter are, in our view, most interesting. First, because of the emphasis on real-world impact. And second, because of the implication that environmental change almost always has some kind of effect on social and financial outcomes.

In short, a Scope 1, 2 and 3 framework for social as well as environmental issues points to the direction of travel for risk assessment more broadly.

The long and winding road that leads to health

We discovered an interesting datapoint in our latest research on the relative exposure of sustainable and non-sustainable funds (as if we haven’t plugged it enough, you can download the report here). Despite being less exposed to the healthcare sector, the sustainable fund group performed better against SDG 3: Good Health & Wellbeing.

As ShareAction points out, healthcare and pharmaceutical companies don’t have a monopoly on health impact. The sustainable fund group outperforms thanks to a variety of second-degree sector and industry biases, such as underexposure to tobacco and alcohol (as well as some other, more nuanced and surprising results).

Most importantly, however, the sustainable fund group is significantly underexposed to energy (0.81% vs. 2.97%), which has a negative impact of -20% on SDG3.

⬆️ Sustainable fund sector exposure ⬆️
⬆️ Total fund sector exposure ⬆️
Climate change, not COVID, is the greatest risk to human health

On Monday, the World Health Organisation (WHO) warned climate change is the biggest health threat facing humanity, as extreme weather events kill thousands and weaken healthcare systems where they’re needed most. Published ahead of COP26, the report shows 90% of people breathe dangerously polluted air, with fossil fuels causing millions of premature deaths each year. According to ShareAction, as much as 80% of health outcomes are driven by environmental factors.

And health isn’t ‘just’ a sustainability issue (is anything?). Carrot and stick responses to the health crisis are about to hit bottom lines.

The stick: Regulators are rolling out policies on everything from tobacco to unhealthy food to air quality, which means companies will begin internalising the previously external costs of corporate health impacts. The WHO has already outlined 10 climate-cum-health recommendations in the COP26 Special Report on Climate Change and Health, including a set of priority actions for governments and policy makers.

The carrot: Most asset owners surveyed by ShareAction said improving health was a ‘clear priority’ or ‘area of focus’, while a survey of UK public savers found that SDG3 is, remarkably, the most prioritised goal.

So why aren’t asset managers acting?

A different type of supply problem

Despite the costs of ignoring the impact of climate on health, and the seemingly obvious financial reward, traditional ESG data is failing asset managers and owners.

There are few funds with an emphasis or even nod to health, thanks in large part to a dearth of analysis from incumbent data providers. What’s more, as providers tend to compare companies within a sector, key health-damaging industries—particularly those ostensibly unrelated to health (e.g. energy)—can continue to score highly.

“Two-thirds of asset owners said they weren’t aware of options to invest in funds delivering positive health impact and three-quarters said they receive minimal or no information from their fund managers on stewardship in relation to health. Forty-two percent reported that they were “unsatisfied” or “very unsatisfied” with the information they receive on this topic.”

There’s a market opportunity for funds that measure and drive positive health outcomes. But it requires insight into the impact of every company and sector on every sustainability theme, as well as the ways in which those impacts lead back to health.

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