Fair COP?
24 Nov 2021
World leaders and climate activists gathered at this year’s 2021 United Nations Climate Change Conference. But as the dust settles, what will be COP26’s lasting legacy from a back-office perspective?
Image: ystewarthenderson/stock.adobe.com
The 2021 United Nations Climate Change Conference (COP26) gathered much attention during its two-week tenure, and with a political leader and climate figurehead appearing at every turn, the conference was rarely out of the headlines.
During the course of the summit, foreign minister of Tuvalu, Simon Kofe, stood knee-deep in seawater on the shores of his small island nation to highlight the devastating impact of climate change on small Pacific nations, while indigenious peoples from across Colombia, Peru and Bolivia gave first-hand accounts about how climate change, deforestation and coal-mining are already affecting their home environment.
Where the world’s emission heavyweights were concerned, the US did not declare that it would ban fossil fuels any time in the near future, nor did India or China promise to “phase out”, but rather “phase down”, their sourcing and distribution of coal. However, the US and China did unveil an unanticipated plan to work together on cutting emissions that was unexpected by many.
While some disappointment was felt about COP26’s overall achievement by some, there was much consensus that it was a turning point, with businesses and regulators, more than leaders and politicians, seizing the reins to take action going forward.
“COP26 was a success,” affirms Andrew Pitts-Tucker, managing director at Apex ESG Ratings at Apex. “It put the climate crisis back on the agenda. It has triggered an enormous amount of discussion. The key players are engaged — China, US and India are sincere. But they need to follow up the rhetoric with action.”
Environmental, social and governance (ESG) has made its way into the mainstream of asset management and asset servicing discussions and considerations. Just five years ago in-house ESG teams — on the buy- and sell-side — were a fairly new installation; now their presence is a business affirmation and statement to the wider market of ESG conscience.
On the investment side, assurance of this is highlighted in Linedata’s Tenth Global Asset Management Survey, which indicates that nearly half of respondents (46 per cent) have incorporated ESG integrations by creating a centralised ESG team, while 43 per cent have received a score from an ESG rating company, and 42 per cent have become affiliated with sustainable investing organisations, either globally or regionally.
Whether it is from the outlook of an investor, custodian or third-party solutions provider, a transfer agent or payments manager, “the world’s top global banks are currently forming pivotal alliances and tackling some difficult topics”, says Tony Warren, executive vice president and head of strategy and solutions management at FIS.
2021 will be remembered as the year of action, and this move to action looks likely to increase in earnest as the impacts of climate change become all the more apparent. However, how can those who have not yet partaken in necessary change move toward ESG goals, and to what extent did COP26 influence them to change?
Data as the baseline
Out of COP26 came the initiation of the International Sustainability Standards Board (ISSB), an independent body which develops and approves International Financial Reporting Standards that will offer global baseline sustainability reporting standards under robust governance and public oversight.
Another move toward robust governance is the European Union’s Sustainable Finance Disclosure Regulation (SFDR) regulation, adopted in March 2021, which will assist institutional asset owners with comparing and monitoring the sustainability characteristics of investment funds.
SFDR establishes transparency requirements for financial market participants on the integration of sustainability risks and consideration of adverse sustainability impacts in their processes, and the disclosure of sustainability features of financial products. From a European perspective, at least, it has already set out to change the status quo. However, it is not all that easy when the baseline and underlying enabler of this measuring and monitoring of impact and disclosure is data. As has been an industry trend and pressure for many years; not all businesses have ready access to data, or indeed, the right data — especially small to medium institutions that may not have the resources or, more likely, the capital to enrich this side of their business model to improve their ESG goals or initiatives.
As Ed Gouldstone, global head of research and development, asset management, Linedata, outlines: “The asset management industry will struggle to negate the negative impact on the environment without the right data to inform sustainable decision-making.”
The right data is key. “We collect data from the actual investment themselves and collect a company’s real data to calculate environmental footprint,” comments Apex’s Pitts-Tucker when discussing Apex’s ESG strategy. “We can see where a company is falling short on global standards and identify its gaps in compliance. It is not a ticking off exercise but actually an opportunity to show a company its full potential.”
Another dependable source that can be a prerequisite for positive ESG change, on the condition that good data is available, is pension schemes, particularly within the UK, says Pat Sharman, country managing director, UK at CACEIS.
“As the third largest pensions market globally (with £2.5 trillion of assets), UK pension schemes are in a unique position to drive change. This means getting hands on good data, so that exposures can be understood at a portfolio, industry, and individual security level,” she adds.
Sharman explains: “Once pension schemes have this data, they can form their own independent assessment of their portfolio exposure to climate risks and can then use this to have a robust dialogue with their asset managers on how they are managing these risks across companies and issuers.”
COVID-19
Businesses are increasingly looking both inward and outward to bring about change; change that has of course been heavily influenced by the rise in hybrid working, a necessity characterised through the last 20 months by the COVID-19 pandemic.
The pandemic greatly influenced the observation of an employee’s carbon footprint through business travel (or lack of), and a business’ need to decrease office space, which in turn, brought down gas usage through central heating.
Vicky Dean, managing director of Europe, Middle East and Africa at Goal Group, indicates: “Goal Group has made significant changes since January 2020 which have included a successful remote working model, down-sizing office space, reducing travel for office-based staff and [the] planning [of] less business trips — therefore lowering carbon emissions and our carbon footprint.”
On the investment side, the pandemic also influenced the interest in ESG assets. Globally, ESG assets are expected to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management, according to a recent report by Bloomberg Intelligence, while Linedata’s aforementioned survey highlights 67 per cent of respondents have already prioritised the integration of ESG factors into their investment strategies. But to ensure this inundation of private money continues, an international framework of standards is needed to mitigate false or misleading environmental claims, now coined as “greenwashing”, to ensure credibility of the inflows maintained.
“Greenwashing” is a popular term to describe businesses and even countries who, through their marketing or mandates, manipulate their products or statements to appear more green and appeal to people who care about the environment. It is a term often used in retail but is infiltrating its way into all aspects of life and particularly business decisions.
However, the concern for greenwashing within financial services is subsiding simply through added scrutiny in recent years. As Mike Tae, chief transformation officer, investor communication solutions at Broadridge, indicates: “There has been an increased focus on holding companies accountable and aligned with shareholders, particularly around ESG practices.”
“43 per cent of environmental proposals were passed in 2021 versus less than 5 per cent in 2019,” Tae cites, adding that this has “created even greater opportunity for investors to not only voice their opinions with the corporations through which they hold ownership, but moreover a means of holding those corporate issuers accountable”.
On a global scale, Swedish climate activist Greta Thurnberg, among others, is holding politicians, fossil fuel companies and the likes to account for greenwashing, criticising their inaction through her Strike for Climate campaign. Her criticism will no doubt be ongoing in the years to follow.
It would be remiss to believe either the buy- or sell-side have escaped such accusations of greenwashing from Thunberg and others, but with their global influence on investments and investment flows, “the greenwashing and virtue signalling is not helping and it is no longer believable,” affirms Matthew Ayearst, director of sustainability (ESG), global wealth and capital markets at CGI. “Caveat, you will be called out soon and it will be costly,” he warns.
The “S” and the “G”
When we consider the most pressing points of ESG, it is often the “E” for environmental change that receives the most attention, due to the collective understanding of the immediacy of action needed to combat the effects of climate change. The “S” (social) is often treated as an afterthought, with its importance for evoking climate action remaining both underappreciated and misunderstood. The cause and effect of job loss through good intention for climate action is one very common oversight. As Apex’s Pitts-Tucker indicates: “If India stopped producing coal, that is 250,000 people who would be potentially out of work.”
He adds: “If train companies do not charge as much as they do for moving coal around the country, they will not be in a position to offer discount train tickets to those who have no other means of transport to get to work. There are massive social implications.”
Discussing the “G” (governance) aspects of ESG concerning the private sector, Diane Eshleman, head of Americas at Delta Capita, reflects: “Without public policy intervention, the private sector cannot drive sufficient change. That said, global financial institutions can and should adopt governance policies and risk mechanisms to limit carbon emissions, drive appropriate waste management practices, and inspect their entire supply chains to enforce best practices.”
For the phasing out of excessive carbon emission, there is the Powering Past Coal Alliance (PPCA) which looks to phase out the financing of coal-fired power and thermal coal mining by 2030 in the European Union, and by 2040 in all other markets. This is an initiative that HSBC, one of the world’s largest banks, has signed up to.
“We recognise that our net zero by 2050 ambition needs to be underpinned by short-term targets, and by demonstrating real progress on decarbonisation year by year,” affirms Celine Herweijer, group chief sustainability officer at HSBC. “We need to tackle the hard issues upfront.”
It doesn’t have to be perfect
Not all banks, departments or third-parties have as strong a sway or ESG responsibility as global banks such as HSBC, but “with better investment and further examination to enhance current operations and processes, small changes can make a real difference”, outlines Goal Group’s Dean. That can mean “transitioning to cloud-based, remote working, moving towards a paperless office, or automating current working practices,” she says.
Though the front-office may often need to lay claim to being the stalwart for climate change within financial services, by its association with investment, the back-office has and should have just as much influence for ESG changes, which can begin by looking in-house.
If COP26 taught us anything it is that there is not a moment to lose, but the move toward better ESG strategies need not be overwhelming. Industry experts say it does not take much when considering the first step, and that first step goes back to data.
“First and foremost, financial institutions can ensure they have the data available to integrate the discussion of environmental impact into their business strategies. That starts with the data they have control over, which is their own corporate footprint,” underscores Lisa Edwards, president and COO of Diligent.
As Edwards indicates, the first step is data gathering, and the second step is extracting knowledge in real, everyday terms.
“Many businesses undertake a process called a materiality assessment — a process adapted from financial accounting which ranks and prioritises key sustainability issues,” says Daniel Jones, ESG consultant at management consultancy, Writing it Right.
“Once these have been established it is easier to see where to focus your efforts. Ultimately, sustainability needs to make business sense — and so it is important to implement measures that will positively impact your business and add value to what you’re currently doing, rather than being just a bolt-on,” he adds.
Lasting legacy?
The main objective of COP26 was to bring the world, perhaps not just a step forward, but this time, a leap forward, to “keep 1.5 alive” – a reference to making sure the Earth’s temperature does not increase by more than 1.5C, a scientific understanding that will keep the planet in the state that we know it. COP26’s legacy will be evidenced by the industry action that comes after it.
“At a minimum, COP26 is now getting more public attention and regulators are looking to drive action from the results of this conference,” says Diligent’s Edwards. “My hope is the capital markets continue to act, going above and beyond regulations.”
It is also the United Nations’ aim to reduce world fossil fuel emissions to net zero by 2020. All these targets indicate that investors and back-office institutions have no choice but to carry on with ESG-oriented investment and work toward this aim, respectively.
“[ESG reporting strategies have] to be genuine — something the firm does because it wants to, not because of some legal obligation,” affirms Jacolene Otto, head of private equity and real estate at Maitland.
Discussing the grassroots impact and lasting legacy of COP26 and what it will mean for asset managers and servicing, Goal Group’s Dean attests: “Everyone is capable of doing something to contribute and I believe now, the need can no longer be ignored.”
Looking ahead, and considering how COP26 will be looked on in retrospect, Apex’s Pitts-Tucker states: “There have been various financial institution promises over the course of the last four to five years which have been fairly hollow in their outcome, but at COP26 there is a real sense that this time it is different. On a global scale, we have just got to keep that momentum going. Hopefully, it will take us very much in the right direction.”
During the course of the summit, foreign minister of Tuvalu, Simon Kofe, stood knee-deep in seawater on the shores of his small island nation to highlight the devastating impact of climate change on small Pacific nations, while indigenious peoples from across Colombia, Peru and Bolivia gave first-hand accounts about how climate change, deforestation and coal-mining are already affecting their home environment.
Where the world’s emission heavyweights were concerned, the US did not declare that it would ban fossil fuels any time in the near future, nor did India or China promise to “phase out”, but rather “phase down”, their sourcing and distribution of coal. However, the US and China did unveil an unanticipated plan to work together on cutting emissions that was unexpected by many.
While some disappointment was felt about COP26’s overall achievement by some, there was much consensus that it was a turning point, with businesses and regulators, more than leaders and politicians, seizing the reins to take action going forward.
“COP26 was a success,” affirms Andrew Pitts-Tucker, managing director at Apex ESG Ratings at Apex. “It put the climate crisis back on the agenda. It has triggered an enormous amount of discussion. The key players are engaged — China, US and India are sincere. But they need to follow up the rhetoric with action.”
Environmental, social and governance (ESG) has made its way into the mainstream of asset management and asset servicing discussions and considerations. Just five years ago in-house ESG teams — on the buy- and sell-side — were a fairly new installation; now their presence is a business affirmation and statement to the wider market of ESG conscience.
On the investment side, assurance of this is highlighted in Linedata’s Tenth Global Asset Management Survey, which indicates that nearly half of respondents (46 per cent) have incorporated ESG integrations by creating a centralised ESG team, while 43 per cent have received a score from an ESG rating company, and 42 per cent have become affiliated with sustainable investing organisations, either globally or regionally.
Whether it is from the outlook of an investor, custodian or third-party solutions provider, a transfer agent or payments manager, “the world’s top global banks are currently forming pivotal alliances and tackling some difficult topics”, says Tony Warren, executive vice president and head of strategy and solutions management at FIS.
2021 will be remembered as the year of action, and this move to action looks likely to increase in earnest as the impacts of climate change become all the more apparent. However, how can those who have not yet partaken in necessary change move toward ESG goals, and to what extent did COP26 influence them to change?
Data as the baseline
Out of COP26 came the initiation of the International Sustainability Standards Board (ISSB), an independent body which develops and approves International Financial Reporting Standards that will offer global baseline sustainability reporting standards under robust governance and public oversight.
Another move toward robust governance is the European Union’s Sustainable Finance Disclosure Regulation (SFDR) regulation, adopted in March 2021, which will assist institutional asset owners with comparing and monitoring the sustainability characteristics of investment funds.
SFDR establishes transparency requirements for financial market participants on the integration of sustainability risks and consideration of adverse sustainability impacts in their processes, and the disclosure of sustainability features of financial products. From a European perspective, at least, it has already set out to change the status quo. However, it is not all that easy when the baseline and underlying enabler of this measuring and monitoring of impact and disclosure is data. As has been an industry trend and pressure for many years; not all businesses have ready access to data, or indeed, the right data — especially small to medium institutions that may not have the resources or, more likely, the capital to enrich this side of their business model to improve their ESG goals or initiatives.
As Ed Gouldstone, global head of research and development, asset management, Linedata, outlines: “The asset management industry will struggle to negate the negative impact on the environment without the right data to inform sustainable decision-making.”
The right data is key. “We collect data from the actual investment themselves and collect a company’s real data to calculate environmental footprint,” comments Apex’s Pitts-Tucker when discussing Apex’s ESG strategy. “We can see where a company is falling short on global standards and identify its gaps in compliance. It is not a ticking off exercise but actually an opportunity to show a company its full potential.”
Another dependable source that can be a prerequisite for positive ESG change, on the condition that good data is available, is pension schemes, particularly within the UK, says Pat Sharman, country managing director, UK at CACEIS.
“As the third largest pensions market globally (with £2.5 trillion of assets), UK pension schemes are in a unique position to drive change. This means getting hands on good data, so that exposures can be understood at a portfolio, industry, and individual security level,” she adds.
Sharman explains: “Once pension schemes have this data, they can form their own independent assessment of their portfolio exposure to climate risks and can then use this to have a robust dialogue with their asset managers on how they are managing these risks across companies and issuers.”
COVID-19
Businesses are increasingly looking both inward and outward to bring about change; change that has of course been heavily influenced by the rise in hybrid working, a necessity characterised through the last 20 months by the COVID-19 pandemic.
The pandemic greatly influenced the observation of an employee’s carbon footprint through business travel (or lack of), and a business’ need to decrease office space, which in turn, brought down gas usage through central heating.
Vicky Dean, managing director of Europe, Middle East and Africa at Goal Group, indicates: “Goal Group has made significant changes since January 2020 which have included a successful remote working model, down-sizing office space, reducing travel for office-based staff and [the] planning [of] less business trips — therefore lowering carbon emissions and our carbon footprint.”
On the investment side, the pandemic also influenced the interest in ESG assets. Globally, ESG assets are expected to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management, according to a recent report by Bloomberg Intelligence, while Linedata’s aforementioned survey highlights 67 per cent of respondents have already prioritised the integration of ESG factors into their investment strategies. But to ensure this inundation of private money continues, an international framework of standards is needed to mitigate false or misleading environmental claims, now coined as “greenwashing”, to ensure credibility of the inflows maintained.
“Greenwashing” is a popular term to describe businesses and even countries who, through their marketing or mandates, manipulate their products or statements to appear more green and appeal to people who care about the environment. It is a term often used in retail but is infiltrating its way into all aspects of life and particularly business decisions.
However, the concern for greenwashing within financial services is subsiding simply through added scrutiny in recent years. As Mike Tae, chief transformation officer, investor communication solutions at Broadridge, indicates: “There has been an increased focus on holding companies accountable and aligned with shareholders, particularly around ESG practices.”
“43 per cent of environmental proposals were passed in 2021 versus less than 5 per cent in 2019,” Tae cites, adding that this has “created even greater opportunity for investors to not only voice their opinions with the corporations through which they hold ownership, but moreover a means of holding those corporate issuers accountable”.
On a global scale, Swedish climate activist Greta Thurnberg, among others, is holding politicians, fossil fuel companies and the likes to account for greenwashing, criticising their inaction through her Strike for Climate campaign. Her criticism will no doubt be ongoing in the years to follow.
It would be remiss to believe either the buy- or sell-side have escaped such accusations of greenwashing from Thunberg and others, but with their global influence on investments and investment flows, “the greenwashing and virtue signalling is not helping and it is no longer believable,” affirms Matthew Ayearst, director of sustainability (ESG), global wealth and capital markets at CGI. “Caveat, you will be called out soon and it will be costly,” he warns.
The “S” and the “G”
When we consider the most pressing points of ESG, it is often the “E” for environmental change that receives the most attention, due to the collective understanding of the immediacy of action needed to combat the effects of climate change. The “S” (social) is often treated as an afterthought, with its importance for evoking climate action remaining both underappreciated and misunderstood. The cause and effect of job loss through good intention for climate action is one very common oversight. As Apex’s Pitts-Tucker indicates: “If India stopped producing coal, that is 250,000 people who would be potentially out of work.”
He adds: “If train companies do not charge as much as they do for moving coal around the country, they will not be in a position to offer discount train tickets to those who have no other means of transport to get to work. There are massive social implications.”
Discussing the “G” (governance) aspects of ESG concerning the private sector, Diane Eshleman, head of Americas at Delta Capita, reflects: “Without public policy intervention, the private sector cannot drive sufficient change. That said, global financial institutions can and should adopt governance policies and risk mechanisms to limit carbon emissions, drive appropriate waste management practices, and inspect their entire supply chains to enforce best practices.”
For the phasing out of excessive carbon emission, there is the Powering Past Coal Alliance (PPCA) which looks to phase out the financing of coal-fired power and thermal coal mining by 2030 in the European Union, and by 2040 in all other markets. This is an initiative that HSBC, one of the world’s largest banks, has signed up to.
“We recognise that our net zero by 2050 ambition needs to be underpinned by short-term targets, and by demonstrating real progress on decarbonisation year by year,” affirms Celine Herweijer, group chief sustainability officer at HSBC. “We need to tackle the hard issues upfront.”
It doesn’t have to be perfect
Not all banks, departments or third-parties have as strong a sway or ESG responsibility as global banks such as HSBC, but “with better investment and further examination to enhance current operations and processes, small changes can make a real difference”, outlines Goal Group’s Dean. That can mean “transitioning to cloud-based, remote working, moving towards a paperless office, or automating current working practices,” she says.
Though the front-office may often need to lay claim to being the stalwart for climate change within financial services, by its association with investment, the back-office has and should have just as much influence for ESG changes, which can begin by looking in-house.
If COP26 taught us anything it is that there is not a moment to lose, but the move toward better ESG strategies need not be overwhelming. Industry experts say it does not take much when considering the first step, and that first step goes back to data.
“First and foremost, financial institutions can ensure they have the data available to integrate the discussion of environmental impact into their business strategies. That starts with the data they have control over, which is their own corporate footprint,” underscores Lisa Edwards, president and COO of Diligent.
As Edwards indicates, the first step is data gathering, and the second step is extracting knowledge in real, everyday terms.
“Many businesses undertake a process called a materiality assessment — a process adapted from financial accounting which ranks and prioritises key sustainability issues,” says Daniel Jones, ESG consultant at management consultancy, Writing it Right.
“Once these have been established it is easier to see where to focus your efforts. Ultimately, sustainability needs to make business sense — and so it is important to implement measures that will positively impact your business and add value to what you’re currently doing, rather than being just a bolt-on,” he adds.
Lasting legacy?
The main objective of COP26 was to bring the world, perhaps not just a step forward, but this time, a leap forward, to “keep 1.5 alive” – a reference to making sure the Earth’s temperature does not increase by more than 1.5C, a scientific understanding that will keep the planet in the state that we know it. COP26’s legacy will be evidenced by the industry action that comes after it.
“At a minimum, COP26 is now getting more public attention and regulators are looking to drive action from the results of this conference,” says Diligent’s Edwards. “My hope is the capital markets continue to act, going above and beyond regulations.”
It is also the United Nations’ aim to reduce world fossil fuel emissions to net zero by 2020. All these targets indicate that investors and back-office institutions have no choice but to carry on with ESG-oriented investment and work toward this aim, respectively.
“[ESG reporting strategies have] to be genuine — something the firm does because it wants to, not because of some legal obligation,” affirms Jacolene Otto, head of private equity and real estate at Maitland.
Discussing the grassroots impact and lasting legacy of COP26 and what it will mean for asset managers and servicing, Goal Group’s Dean attests: “Everyone is capable of doing something to contribute and I believe now, the need can no longer be ignored.”
Looking ahead, and considering how COP26 will be looked on in retrospect, Apex’s Pitts-Tucker states: “There have been various financial institution promises over the course of the last four to five years which have been fairly hollow in their outcome, but at COP26 there is a real sense that this time it is different. On a global scale, we have just got to keep that momentum going. Hopefully, it will take us very much in the right direction.”
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