Alex Thornton, Senior Writer, Formative Content, was on site to attend a very special lunch at FundForum International 2019 in Copenhagen recently. Here's what was discussed.
It is time for environmental, social and governance (ESG) opportunities and risks to be factored into every investment decision.
That was the clear message delivered to CEOs at a special lunch hosted by KPMG at the FundForum International 2019 conference in Copenhagen. Tom Brown, Global and UK Head of Asset Management, opened the lunch with a welcome address to 30 senior executives representing asset managers and asset owners from across the industry.
Guests were presented insights into the state of the sustainable finance market, the implications of evolving disclosure rules, and how digital innovation can help companies meet their ESG goals.
Here were the key points:
ESG presents many opportunities
As Tomas Otterström, Global Leader, Sustainable Finance Services, KPMG International, pointed out, there is business to be done.
Over the last 12 months, interest in ESG has grown rapidly. More products and funds are available, and there is a growing awareness that ESG needs to be integrated into the investment process.
Companies that are rated in the top quintile for ESG performance have better financial returns than those in the bottom quintile. There is a significant opportunity for resources to be reallocated towards models and processes that provide greater long-term sustainability.
Investors are also increasingly concerned with the societal, as well as the financial, impact of their investments. There is a growing demand for data that quantifies ESG values, and for services and products that clearly present this information to investors: transparency is crucial.
KPMG has developed ways of assessing societal and environmental impact not just of a financial sector company’s own activities, but of its partnerships.
Regulators are acting now
Many of the changes in ESG are being spurred on by regulation.
The markets in financial instruments directive (MiFID II) will require investment advisers to learn about and respond to the sustainability preferences of clients. The EU sustainable finance plan envisages requirements to explain how products fit with ESG values, and how ESG is integrated into internal processes.
As every part of the financial services industry will be affected – central banks, insurers, stock exchanges – there will be pressure from all sides to establish standard ways of reporting.
Climate risks are financial risks
A recent survey of CEOs by KPMG International found that climate change is now their number one concern. As Laetitia Hamon, an expert on sustainable finance and Senior Manager at KPMG Luxemburg pointed out, part of the reason that it has climbed the agenda is that investors are recognising that the physical and transition risks linked to changing climate are producing financial risks.
Companies could face huge costs, as Californian power company PG&E found out when it was charged with being liable for devastating wildfires in the state. Insurers are seeing prudential risk and sustainability as two sides of the same coin. Accurate risk management is the future of sustainable finance.
Transparency and disclosure are key
The combination of regulation and investor pressure means clear communication will be more important than ever.
Different investors will have their own priorities and definitions when it comes to ESG. To ensure that their expectations are met, it will be essential to be transparent about where their money is invested, what those companies do, and what the impacts of those activities are. Institutional investors are already under growing pressure from stakeholders and will demand information.
A prospectus which is currently only checked for financial compliance will have to disclose ESG effects as well. Internal processes are likely to be put under the microscope as never before. Even in instances where regulators don’t mandate compliance, investors will.
Potential of technology and data
These requirements might seem onerous, but the network of KPMG member firms are using its experience and insight to integrate ESG into all the services it traditionally provides.
Technology will help. For example, KPMG in Finland has already developed AIRBICS, an AI tool to automatically screen information released by companies to assess not just their carbon emissions, but those of suppliers too.
ESG data will be valuable to the public. One bank is in cooperation with a partnering credit card company developing a way of showing consumers the carbon footprint of their spending and offering a way to offset it automatically. There will be opportunities to develop new apps and services to millennials keen to use simple interfaces to apply their own ESG filters to their investments.
Once sustainable finance was considered a ‘nice to have’. Now there is a clear consensus that it is the only direction to travel in.