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Many initiatives have been launched to provide businesses with answers and help them navigate expectations, writes Christine Chow.

Ensuring that their investment portfolio contribute to the long-term sustainability of the planet is one of the key challenges organisations face today. That means adopting prudent financing and a thoughtful investment strategy. But how can financial sector players go about doing that? Sustainable finance raises a lot of practical questions. Many initiatives have been launched to provide businesses with answers and help them navigate these expectations. Here I describe four of them:

PRI: The UN has led the creation of the Principles for Responsible Investment (PRI), which advocate the incorporation of sustainability thinking into financial management. PRI, in short, asks investors to take into account environmental, social, and corporate governance (ESG) issues in their activities. PRI’s six principles for responsible investment focus on engagement by investors with the companies in which they invest, to encourage improved financial and non-financial performance, and positive environmental and societal impact. Businesses need to assess if the firms and professionals managing their investment portfolios are following this engagement principle. This can be done by asking for cases and evidence of positive change and impact. For instance, encouraging fund managers to provide examples of how they have addressed climate change and low carbon transition of portfolio companies.

TPI: Investors can also find support in the Transition Pathway Initiative (TPI), backed by 60 asset owners and institutional investors worldwide with US$18 trillion assets under management. TPI provides data and information to guide investment decisions, and establishes an asset manager performance evaluation system, ranking them from “best in class” to “significant areas of shortfall”. Managers are required to integrate research insights with their commitment and the implementation of responsible investment.

Stewardship Code: In the UK, the Stewardship Code 2020 became effective on 1 January, advising companies to build their engagement based on outcomes. Managers should be able to provide more granular voting policies and statistics, demonstrating their theory of change engagement activities, evidence of their contribution to change, and how the outcomes have impacted investment decisions.

TCFD: The Financial Stability Board, an international organisation led by central bank governors, created the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 “to develop recommendations for voluntary climate-related financial disclosures that …provide decision-useful information to lenders, insurers, and investors.” During the last financial year, asset managers seeking TCFD or equivalent standards of climate change-related disclosure from investee companies increased from 25% to over 60%.

The board of directors

The board of directors plays a key role in supporting financial companies in their sustainability efforts. There is a common misunderstanding that climate governance is mainly about companies’ boards making an explicit statement of support to combat climate change. It needs to be much more thorough than that. Aligned with the recommendations of the World Economic Forum (WEF), good climate governance must cover an appropriate board structure, with sufficient expertise to address the short, medium- and long-term risks and opportunities of climate change. The board should ensure that climate systemically informs strategic investment planning and decision-making processes and is embedded into the management of risk and opportunities across the organisation, with corresponding remuneration incentives to promote the long-term prosperity of the company.

Board members should maintain regular exchanges and dialogues with peers, policy-makers, investors and other stakeholders to encourage the sharing of methodologies and to stay informed about the latest climate-relevant risks and regulatory requirements.

Just transition

Most importantly, a just transition is necessary for workers and society to maintain social cohesion and harmony as the world’s economy responds to climate change. The ‘just transition’ principle is part of the 2015 Paris Agreement on climate change.

Asset managers’ engagement in social issues such as supply chain monitoring and workforce diversity has been slow in comparison to climate change. Most managers focus on gender diversity on the board of directors. For a just transition, managers need to make sure investee companies abide by the UN Guiding Principles for Business and Human Rights to ensure that human right considerations — from modern slavery to the impact of flexible working in the 21st century — are integrated into their analysis.

One last thing

Asset managers must also engage with companies to understand how they are dealing with the impact of technology, not only from the strategic standpoint, but also from the perspective of systemic risk, data governance (data integrity and privacy), ethics and conduct. Social media can help spread information about public health, but it can also create panic and polarise society, as shown by the current coronavirus crisis. When does ‘misinformation’ become ‘fact’? Who has the authority to authenticate hard facts? It is a non-linear, decentralised process often without a definitive timeframe and procedure for authentication. How can soft facts be validated, especially if they could contradict each other? What is the accountability framework of direct and third-party publication such as in chatrooms? Is surveillance really for safety or does it violate privacy? There are so many grey areas. Companies need to monitor and manage the social impact that their use of technology creates.

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Note: The post gives the views of its authors, not the position USAPP– American Politics and Policy, nor of the London School of Economics.

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About the author

Christine Chow
Christine Chow has 23 years of experience in investment management, research and consulting. Her PhD thesis on responsible investment was short-listed for a United Nations award in Sweden for industry relevance and academic excellence. She is a member of the LSE’s Court of Governors, a member of the School’s Investment Committee, a board member of the International Corporate Governance Network (ICGN) and a member in the Data Governance Task Force of the UK All Party Parliamentary Group (APPG) on artificial intelligence. In 2019, she was named as one of Brummell Magazine’s Inspirational Women in the City of London. Christine graduated from LSE and the University of Melbourne. She completed executive education on financial engineering at Stanford University. She was an adjunct finance professor at the Hong Kong University of Science and Technology.