The Resilience of ESG: Insights from the World’s Largest Responsible Investment Conference
In recent months, a narrative has emerged among bankers, investment managers, and corporate executives suggesting that the era of Environmental, Social, and Governance (ESG) investing has reached its conclusion. However, the recent gathering of the Principles for Responsible Investment (PRI) in Toronto, the world’s largest responsible investment conference, revealed a different story. Attendees, particularly pension executives, expressed unwavering commitment to ESG principles, emphasizing their critical role in securing long-term financial returns.
The PRI Conference: A Testament to ESG’s Enduring Relevance
The PRI, which boasts over 5,300 member organizations managing assets exceeding US$128 trillion, serves as a cornerstone for responsible investment practices. At the conference, leaders from major pension funds reaffirmed their dedication to ESG strategies. Michael Cohen, Chief Investment Operating Officer at CalPERS, the US$529 billion fund for California public employees, articulated a clear vision: “We have fully bought into the thesis that we can generate outperformance by leaning into the climate revolution.” CalPERS plans to double its climate investments over the next six to seven years, underscoring a proactive approach to sustainable finance.
Similarly, Bertrand Millot, head of sustainability for the Caisse de dépôt et placement du Québec (CDPQ), highlighted the importance of returns in safeguarding the pensions of six million Quebecers. Millot noted that CDPQ’s decision to divest from the oil sector five years ago and reinvest in clean energy has yielded an impressive 18% annual return. “We are very happy to be out of the oil sector,” he stated, showcasing the financial viability of sustainable investments.
Government Support for ESG Initiatives
The conference also featured a keynote address from Canada’s Finance Minister and Deputy Prime Minister, Chrystia Freeland, who announced a new plan for labeling green and transition investments. This initiative aims to enhance ESG and climate-related investments in Canada, including clean energy bonds and transition bonds for high-emission sectors like steel and cement. Such governmental support signals a commitment to fostering an environment conducive to responsible investment.
The Divergence in Financial Perspectives
Despite the optimism expressed at the PRI conference, a rift is evident within the financial industry regarding the effectiveness of ESG investing, particularly concerning climate action. Prominent asset managers, including Larry Fink of BlackRock, have publicly distanced themselves from the term “ESG,” labeling it as “weaponized” by both ends of the political spectrum. This shift has raised questions about the future of ESG commitments among large financial institutions.
Conversely, asset owners, particularly pension funds, are intensifying their ESG commitments. Adam Scott, executive director of the Canadian climate action group Shift: Action for Pension Wealth and Planet Health, noted a significant divergence in perspectives: “Pensions have long time horizons on their investment, so they’re starting to come around to a deep internal recognition that they have to hit climate targets or invest in that direction.” This long-term view contrasts sharply with the short-term focus of many banks, which often prioritize immediate returns over sustainable investments.
The Impact of Fossil Fuel Financing
A recent report released during the conference highlighted the stark contrast in emissions linked to different financial entities. It revealed that financed emissions from six banks, six asset managers, and six pension funds totaled 1.44 billion tonnes of carbon dioxide in 2022, with pension funds responsible for less than 10 million tonnes. This data underscores the potential for pension funds to lead the charge in sustainable finance, given their significant long-term assets.
While some asset managers and banks have retreated from ESG commitments, many remain dedicated to sustainable investment practices. Numerous institutions continue to participate in PRI and other climate coalitions, demonstrating a commitment to responsible finance.
The Call for a Reset in Financial Responsibility
The Institute of International Finance recently issued a paper advocating for a reset on the role of private finance in the net-zero transition. The authors argue that the prevailing finance-centric theory of change, which posits that banks and investors can drive change by reallocating assets from high emitters to low emitters, overlooks the commercial viability of the projects they finance. This perspective echoes sentiments from energy executives who argue that phasing out fossil fuels is unrealistic in the current geopolitical climate.
The Future of ESG: A Growing Confidence
Despite the challenges facing ESG investing, recent surveys indicate a growing confidence among asset owners regarding the importance of sustainability. A survey by FTSE Russell found that 86% of large asset owners and 63% of smaller owners are incorporating sustainability considerations into their portfolios. Similarly, a Morningstar survey revealed that 67% of asset owners believe ESG factors have become more critical in investment decisions over the past five years.
Tom Kuh, head of ESG strategy for Morningstar Indexes, emphasized the connection between ESG and fiduciary duty, stating, “It runs counter to the narrative that ESG is dead.” This sentiment was echoed by UN climate envoy Mark Carney, who highlighted the potential for profitability in aligning with societal goals such as net-zero emissions.
Conclusion: The Path Forward
As the PRI conference demonstrated, the narrative that ESG investing is on the decline is overly simplistic. While challenges persist, particularly from certain sectors of the financial industry, the commitment of pension funds and asset owners to sustainable investment practices remains strong. The future of ESG will depend on collaboration between private and public sectors, as well as a willingness to adapt to the evolving landscape of responsible finance.
Eugene Ellmen, a seasoned commentator on sustainable business and finance, encapsulates the essence of this ongoing dialogue: “The planet is on a path where there is no crystal ball. Companies are going to do projections and make suggestions that are more or less correct. We need to really get comfortable with that.” As the financial world navigates these complexities, the importance of ESG principles in shaping a sustainable future cannot be underestimated.