In line with its responsible investor philosophy, Mirova is committed ...
ILG published key reports about Sustainable Investment
One immense challenge, because implementing the SDGs will require so much money that even agreeing on investment needs at the international level is not an easy task. Some UN bodies estimated that it would require from five to seven trillion US dollars per year, not even taking into account the energy transition. It will, undoubtedly, require moving from millions to trillions, in a context of restricted public financial capacities.
We also face an immense paradox. Despite this observation of the world’s blatant need for investment in sustainability, the role of the private sector remains controversial when asking today how finance should be mobilised.
On one hand, the private financial industry has immense resources – the money is there. On the other hand, the SDGs require immense investments that cannot be supplied by public State financing only. But today, demand and supply do not match, and the financial system is not fulfilling its role of supporting social and economic needs. Banks used to play the role of transforming short-term deposits into long-term loans. Today, financial markets need to shoulder these responsibilities too. If they do not, the powerful tool that is finance will continue to be misused and attract ever more distrust.
The Investment Leaders Group’ members convened by the University of Cambridge Institute for Sustainability Leadership share one common conviction: finance is only a tool, but a powerful tool, whose impact is not, and should not be neutral. Finance is not neutral because the way markets invest global capitals impacts the course of our lives. Also, finance should not be neutral if it is to fulfil its role of serving the needs of our economies. Reimagined, finance may prove a powerful lever to invest in sustainability. We need to rethink how capital is allocated in order to support employment, eradicate poverty, and facilitate environmental, social and technological innovations, as well as to build new, more sustainable infrastructures and finance the energy transition.
The ILG’s mission to shift the investment chain towards responsible and long-term value creation has been created upon this conviction, so that economic, social and environmental sustainability are delivered as an outcome of the investment management process as investors go about generating robust, long-term returns.
The ILG is now three years old. Over that time we have taken a fresh look at some of the most interesting challenges and opportunities raised by investment. I would like to share some of the highlights of this journey with you.
The group started by clarifying the purpose of its work in the 2014 report, The Value of Responsible Investment. This explored the ethical, financial and economic cases behind responsible investment, concluding that it is not only consistent with fiduciary responsibilities but, done well, can improve long-term returns while reducing systemic risks.
We then turned our attention to fiduciary law, particularly in the United States where pension fund trustees and beneficiaries have struggled to relate social and environmental issues to investment decisions. A presentation was published to explain why these are legitimate concerns of fiduciaries. It was gratifying to see the US Department of Labour concur with this position in recent guidance.
Three areas were then selected for more work.
Firstly, investment impact. While the financial performance of funds is readily accessible, their social and environmental impacts remain largely opaque to the public and the industry itself. To change that, we have developed a framework in our In search of impact report to help investors measure and communicate their contribution to sustainable development.
Secondly, investment mandates. In our report, Taking the long view, we identify the characteristics of mandates that encourage long-term, sustainable investment management. By adopting this guidance, investors strengthen their ability to make capital work in the long-term interest of beneficiaries and society.
Thirdly, risks and opportunities. While many investors recognise social and environmental risks in portfolios, they lack the tools to integrate them into existing financial models. Climate change poses a clear present risk and a potential opportunity to investments and was therefore our starting point.
Our report, Feeling the heat, guides the industry in assessing the impact of carbon-related regulation on asset profitability. Our research, Unhedgeable Risk, published in 2015, examines the effects of climate-related shifts in market sentiment on portfolio value.
It would not be an overstatement to say that if the proposals in these reports were implemented, the investment industry would evolve into a force for positive social and environmental impact in the world: a true partnership with governments and citizen on one hand, and clients and beneficiaries on the others.