Sustainability and Finance – Momentum Building, But a Long Way to Go

Guest post by Chris Pinney, President, High Meadows Institute

While it may seem that increasing progress is being made on integrating sustainability in the financial sector, the recent UN Principles for Responsible Investment (PRI) conference in Montreal was a sobering reminder of the challenges that still need to be addressed.

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On the one hand, we have seen a rapid growth of financial firms subscribing to the UNPRI, with firms now representing $45 trillion in assets under management.  At the same time, as UNPRI’s Managing Director Fiona Reynolds reported in Montreal, only 6% of asset owners committed to the UNPRI report that their performance management and compensation systems for senior executives include metrics that recognize and reward sustainability performance. As she noted, “What gets measured gets managed. If responsible investment is to become truly mainstream, it must start at the very top of every organization, with the right incentives.”

Combatting skepticism from investors

Keynote speaker Spencer Glendon from Wellington Management noted from a mainstream investor perspective that while there is general agreement that climate change is a risk, there is a “paucity of truth but a wealth of information” around the subject, making it difficult for investors to accurately assess the risk climate change represents. His perspective was echoed in both corridor and panel conversations, suggesting that many mainstream investors remain deeply skeptical about the current data around sustainability issues like climate change. At the UNPRI academic conference prior to the main meeting, academics blamed themselves in part for the confusion around climate science and the fact the only 40% of Americans  view climate change as a major threat to the country, according to a January 2014 Pew Research poll.

Difficulties around institutionalizing environmental performance

Chris Pinney photo

Chris Pinney

On a related front is the two-fold challenge investors face: making the link between investment performance and sustainability, and sorting through the ever-growing set of survey instruments and reporting standards for sustainability. Professor George Serafeim from the Harvard Business School noted that Harvard’s research showed that only 13% of 120 ESG indicators they reviewed had a measurable impact on financial performance.  Furthermore, he noted these factors only have relevance when analyzed in the context of the ESG issues that are specifically material to the industry the company operates in. In this context, he made a strong case for initiatives like the Sustainability Accounting Standards Board (SASB), which is creating industry-level materiality standards for companies to use in their reporting to the U.S. Securities and Exchanges Commission, enabling investors to evaluate and understand which ESG issues they should focus on for investment purposes.

While significant challenges remain to be addressed, it is clear there is growing momentum to integrate sustainability in mainstream capital markets. The increasing number of signatories to the UNPRI and the participation in UNPRI gatherings is just one indicator of this trend, with recent initiatives such as SASB providing practical tools for moving the sustainability and finance agenda forward. The High Meadows Institute is pleased to collaborate with EDF on this journey working with our private equity and financial partners.

Chris Pinney is President of the High Meadows Institute (HMI), a new policy institute founded by a small group of investors and business leaders, to engage business leadership in the creation of a social contract that can ensure economic and social progress for all in the 21st century.

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