25 April 2019
SDG Knowledge Weekly: Sustainable Investment and ESG Factors
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The Network for Greening the Financial System’s first comprehensive report focuses on climate change as a source of financial risk.

BNP Paribas’s ESG Global Survey 2019 notes that asset managers and owners are increasingly holding investments in funds that incorporate environmental, social and governance criteria; the Global Sustainable Investment Alliance published its 2018 Global Sustainable Investment Review.

A joint report by the Overseas Development Institute (ODI) and Development Initiatives examines Subnational Investment in Human Capital.

Following last week’s SDG Knowledge Weekly brief on public, private and international finance, this week’s issue focuses on investment – as previously touched upon with the launch of nine principles by the International Finance Corporation (IFC). This issue pays particular attention to environment, social and governance (ESG) investments, with particular focus on the “E.”

The Network for Greening the Financial System’s first comprehensive report titled, ‘A Call for Action: Climate change as a source of financial risk,’ estimates that the global economy could lose up to USD 20 trillion due to climate change risk. The report outlines how climate change falls within the mandate of central banks and supervisors, and issues recommendations for central banks and policymakers on six topics:

  1. Integrating climate-related risks into financial stability monitoring and micro-supervision;
  2. Integrating sustainability factors into own-portfolio management;
  3. Bridging the data gaps;
  4. Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing;
  5. Achieving robust and internationally consistent climate and environment-related disclosure; and
  6. Supporting the development of a taxonomy of economic activities.

The Network was established by eight central banks and supervisors during the One Planet Summit in December 2017. An op-ed by Mark Carney, François Villeroy de Galhau and Frank Elderson is available on the The Guardian, and a summary write-up of the report on Climate Action is here.

The SDG Investment Fair took place from 15-17 April 2019, at UN Headquarters in New York, US, on the theme, ‘Closing the SDG investment gap.’ The Fair was held in conjunction with the UN Economic and Social Council’s (ECOSOC) Financing for Development (FfD) Forum, providing a dynamic platform alongside the Forum to discuss specific investment opportunities, partnerships, policies and regulations to help close the investment gap. A summary of the Forum is available here.

ESG is no longer on the periphery of the investment community, BNP Paribas reports.

BNP Paribas published the findings of its ESG Global Survey 2019, which notes that asset managers and owners are increasingly holding investments in funds that incorporate ESG criteria (75% of asset owners and 62% of asset managers, versus 48% and 53% respectively in 2017). The report’s foreword defines ESG integration as “the incorporation of ESG factors into financial analysis and investment decision-making in order to enhance returns and/or mitigate risk.” The report emphasizes that ESG is no longer on the periphery of the investment community thanks to investor demand, regulation and greater certainty on long-term financial performance.

A press release on the report highlights that the SDGs are “a new compass” for investment, with 65% of BNP Paribas’s survey respondents aligning their investment framework with the Goals. The largest barriers, the report and release emphasize, center on lack of data and analytical skills, as well as high technology costs and risks of greenwashing. The report also flags a shift in challenges for analysts: whereas environmental and social factors were considered equally difficult to analyze and integrate in 2017, environmental issues are now perceived as easier, whereas social issues appear to have increased in relative difficulty. Despite these analytical and integration challenges, the report emphasizes that 60% of survey respondents expect ESG portfolios to outperform traditional ones over the next five years.

The Global Sustainable Investment Alliance (GSIA) published the ‘2018 Global Sustainable Investment Review.’ The biennial report defines the term “sustainable investment” as an approach that considers ESG factors in portfolio selection and management. The review focuses on five major geographies/markets: Australia and New Zealand, Canada, Europe, Japan and the US, and notes “particularly robust growth” in Japan. The report highlights strategies such as negative/exclusionary screening, which is most popular in Europe, as well as ESG integration and shareholder action. A summary write-up is available on the SDG Knowledge Hub.

S&P Global Ratings launched a new workstream on ESG Evaluation, offering “a cross-sector, relative analysis of an entity’s capacity to operate successfully in the future, grounded in how [ESG] factors could affect its stakeholders and potentially lead to a material financial impact.” The analysis is complemented by S&P Global’s interactive ESG Risk Atlas, which profiles factors across the three categories, including greenhouse gas (GHG) emissions, workforce and diversity, and transparency and reporting. A write-up is available on Sustainable Brands, and a related report on the S&P 500 ESG Index is here.

At the regional level, the UN Economic and Social Commission for Asia and the Pacific (ESCAP) estimates that an additional annual investment of USD 1.5 trillion is needed per year in order to meet the SDGs in the region. ESCAP’s report titled, ‘Survey 2019: Ambitions beyond growth,’ drives home the message that “short-term ambitions cannot override long-term sustainability,” also emphasizing that environmental degradation has reached “alarming levels.” On economic and policy challenges, the report identifies trade tensions as the greatest risk facing the region. The report also finds that the cost of achieving the SDGs is “largely affordable,” but notes that countries with special needs will require assistance. A summary write-up is available on the SDG Knowledge Hub.

Sustainable investment encompasses not just infrastructure or environmental initiatives, but also investment in people. The Overseas Development Institute (ODI) examines ‘Subnational Investment in Human Capital’ in a report prepared jointly with Development Initiatives. While the report deals primarily with public finance (rather than private or blended) relating to health and education, it notes that “data on how finance is allocated at the subnational level is extraordinarily lacking.” Without such information, investments in human capital are likely to remain firmly within the public sphere, as the lack of data will continue to limit private investors’ interest. The report underscores the need for targeting at sub-national level, given disparities between the poorest regions of countries and those countries’ national averages.

Addressing this need, ODI calls for incentivizing the publication of data, which is critical across the investment spectrum, whether it is public or private. ODI’s recommendations for national governments and donors focus on improving targeting and increasing transparency, which may help to partially bridge the measurement gap on social issues indicated in the BNP Paribas report above.

Additional issues of the SDG Knowledge Weekly can be found here.

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