The Paris Agreement on climate change took place in December 2015 with signatories agreeing to keep the rise in global temperatures below 2 degrees Celsius (above pre-industrial levels). The most recent follow-up meeting took place in Bonn, Germany in November. Politicians, NGOs and regulators have taken the lead, but they need the financial services industry to put its money where their mouths are. Fortunately this is more than just an opportunity for philanthropy. Investment opportunities abound from investing in greener technologies like wind and solar, through to investing in greener companies.

It is this second aspect which interests us – an area which has grown substantially in the past three years. The US Forum for Sustainable and Responsible Investment (US SIF) defines Socially Responsible Investing as “an investment discipline that considers Environmental, Social, and Corporate Governance (ESG) factors to generate long-term competitive financial returns and positive social and environmental impact.” The US SIF have since shown that assets engaged in socially responsible investing have increased 33 per cent to $8.72 between 2014 and 2016. There are a number of differing approaches to how ESG investment can be done, with the approach taken depending on your investment goals and preferences. The common denominator here is the use of qualitative and quantitative ESG data in the investment process.

There is growing interest from the consumer side, with consumer-facing apps for millennials as an example, but it’s the institutional side where things get interesting: pension funds, insurers, university endowments, philanthropic foundations are all starting to integrate ESG in their investment processes.

In July this year, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, with $1.3 trillion under management, announced that it planned to raise its allocation to environmentally and socially responsible investments to 10 per cent of its stock holdings from 3 per cent now. That same month, Swiss Re, the European insurer, announced plans to benchmark its entire $130 billion portfolio against ESG indices. According to a recent survey “two-thirds of institutional investors use environmental, social and governance (ESG) considerations as part of their investment approach, and 25 per cent expect to increase their allocation to managers with ESG-based investment strategies within one year”.

The reasons for this are complex, and range from client demand, through to ethical or risk concerns. In part it is in response to the fact that ESG regulation has doubled since 2015 and the number of laws relating to climate change has doubled every five years since 1997. We believe that ESG regulation will continue to increase, and will increase faster as regulators look at new ways to contribute to the Paris Agreement.

Ultimately though it is reward rather than regulation that is the key driver. The historical concern against using ESG in the investment process was the idea that doing so would sacrifice returns. This concern still exists, but is not backed by the data. At a global level, MSCI data show that the MSCI Low Carbon Target Index, has modestly outperformed the MSCI ACWI since 2010. At an emerging market level, the Financial Times earlier this year reported that “the MSCI EM ESG Leaders Index has been outstripping the MSCI EM benchmark consistently since the 2008/09 financial crisis. In June, the outperformance gap reached a record of 51.84 points, double its span in early 2013.” From a capital preservation view, the Financial Times reported that using US data, a Bank of America Merrill Lynch report found that an investor who only held stocks with above-average ESG scores would have avoided investing in 90 per cent of bankrupt companies seen since 2008.

By investing in responsible, well-run companies, the financial services industry can play the leading role in meeting the goals of the Paris Agreement on climate change. With rising temperatures, and rising oceans, it is imperative that we do so sooner rather than later.



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Tim Fright is the Founding Director of Climate Friend. Tim and his colleagues use Hedge Fund-style analytics and Big Data to create an Environmental Social and Governance (ESG) investing framework that can offer responsible investment opportunities with superior risk-adjusted returns. Tim is a graduate of the University of Cambridge and King’s College, London and has more than ten years’ experience in technology and government. He is a communications adviser to, and investor in, several tech start-ups, a Fellow of the Royal Geographical Society, and was part of a 2008 Antarctic expedition which undertook environmental research analysing the effects of climate change on the Beardmore Glacier. @Climate_Friend