24.08.2021    Insight

Investment Sustainability and Stewardship

ESG and impact investing is a journey. We wanted to highlight its importance and hint at further changes and improvements to come as we continue to evolve our thinking, proposition and reporting to clients at Alvarium. This piece is meant as a first instalment to our thinking in this area.

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As long-term stewards of client capital and a UN PRI Signatory, we believe that preservation and growth in capital are aligned with being a responsible investor, which for us means incorporating sustainable investment analysis in our decision-making process. This includes an evaluation of Environmental, Social and Governance (ESG) practices of the strategies and managers we invest in, as well as offering clients sustainable or impact portfolio strategies. In other words, we conduct our fundamental research of possible investment opportunities in three areas: return, risk, and degree of ESG; sustainability; and/or impact alignment.

As we direct capital to managers and investments with strong ESG practices, we send a signal of its importance to others in the investment world. We are not alone. The nature of value creation appears to be changing in response to global trends – many companies are increasingly taking a broader view of risks and opportunities associated with their business, and their responsibility to society. With over 90% of S&P 500 companies now publishing some form of sustainability disclosure and 36% presenting alignment with specific UN Sustainable Development Goals (SDGs), the corporate world is changing[1].

The Alvarium investment team’s view is that we all have a role to play to positively influence change by directing capital to responsible companies and investments. This piece represents the first of several as we advance our sustainability offering for clients.

The scale of the problem
The path to carbon neutrality as articulated in the Paris Accord of 2015 is challenging. Its goal to limit global warming to 1.5C, compared with pre-industrial levels, means greenhouse gas emissions need to peak as soon as possible if we are going to achieve a climate-neutral world by mid-century. We are far from this target.

In a recent report, the UN’s Intergovernmental Panel on Climate Change (IPCC) shows just how dire the situation is. The world is likely to only temporarily reach 1.5C of warming within 20 years in a best-case scenario of deep cuts in greenhouse gas emissions. But even with these rapid emissions cuts, temperatures would continue to rise until “at least” 2050, and lead to further extreme weather events. Without “immediate, rapid and large-scale reductions” in emissions, curbing global warming to either 1.5C or even 2C above pre-industrial levels by 2100 would be “beyond reach”. The starkly worded report states that the evidence for human-induced warming is “unequivocal” and that its impact is being felt around the world.

Hardly a day goes by where we don’t read about the devastating impact of global warming on our environment, from heatwaves and droughts to cyclones and floods. Warming and acidifying oceans are causing severe coral bleaching, while wildfires are damaging vital carbon stores in North America and Siberia[2].

With global greenhouse gas (GHG) emissions having increased by almost 50% since 1990[3], actions to reduce the damage of climate change are increasingly a priority among governments. Recently, 58 countries representing 54% of GHG emissions have committed themselves to a net-zero target, and we expect this number to increase ahead of the UN Climate Change Conference of the Parties (COP26) scheduled for November this year in Glasgow, Scotland.

Implementing this goal is a daunting task that will require major breakthroughs in climate technology[4] and energy transformation. The problem is exacerbated by the fact that greenhouse gases are not all the same. Carbon dioxide (CO2) for example has the lowest global warming potential of the major greenhouse gases but one of the longest lifetimes in our atmosphere. Such a long-life gas time means that any reduction of CO2 emissions today will not immediately lead to lower CO2 concentration in the atmosphere. Indeed, the OECD argues that for each tonne of CO2 emitted, over 60% will remain in the atmosphere in 20 years, 45% will be there for 100 years, and some will be around after thousands of years[5].

The scale of the problem explains why policymakers are focused on bold reduction targets to halt emissions as quickly as possible.

A tsunami of investment
With the US re-joining the Paris accord and China and the EU committing to a new range of highly aggressive carbon-reduction targets, governments around the world are pursuing green policies and investment targets. As the most significant contributors to CO2 emissions, as seen in the chart below, our view is that it is essential that the US, China and the EU drive policy change.

See article download for additional graphs.

Already President Biden has pledged to cut GHG by 50% by 2030[6] and doubled financial aid for developing countries struggling with escalating droughts, floods, heatwaves and other impacts of the climate crisis. The US target is now in line with EU commitments. Canada and Japan also announced upgraded emissions-reduction targets at the climate summit earlier this year. In a speech to the UN General Assembly, Chinese President Xi Jinping called for a global “green revolution”. He has pledged that China will help to tackle climate change by “adopting more vigorous policies and measures” and will aim to “have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060”. As China is a major polluting nation, this could have a significant impact on climate change forecasts, if realised.

Every sector of the economy could be impacted, but as seen in the chart below, the industry with the greatest GHG emissions is energy (including that in industry, buildings and transport), accounting for 73% of greenhouse gas emissions. Agriculture accounts for a further 18% of GHG emissions. An unprecedented transformation of existing energy infrastructure and food production could be needed to achieve the world’s climate and development objectives.

See article download for additional graphs.

In its recent call to action, the International Energy Agency (IEA) calls for a total transformation of how we produce, transport and consume energy over the next three decades, including:

  1. Ending the sale of conventional petrol cars by 2035.
  2. Reaching 100% clean energy by 2040.
  3. Using heat pumps to meet at least half of all heating needs by 2045.

The numbers required for investment could be staggering.

  1. The OECD estimates that between $6.9trn and $70trn a year will be required up to 2030 to meet new climate and development objectives.
  2. Morgan Stanley estimates that getting to net-zero emissions will require $50trn in investment by 2030, with potentially $3trn to $10trn of earnings potential.
  3. Goldman Sachs estimates that China alone will need to spend close to 30% of that number, or $14trn, given the size and scale of its economy.

The investment landscape
In our view, 2020 marked a seminal shift in global opinion.

  1. The pandemic accelerated an appreciation of how an exogenous event can disrupt global economic activity and has elevated the urgency of climate change.
  2. Last year was tied for the hottest year on record, with scenes of devastation from a host of climate-related disasters[7]
  3. The killing of George Floyd held a mirror up to society regarding the importance of racial discrimination, social injustice, and the need for companies to play a greater role in promoting diversity, equity, and inclusion.

Fidelity conducted research in 2020 and found that companies with strong ESG metrics, using their proprietary ESG methodology, also outperformed[8].

Performance of ESG strategies in 2020

See article download for additional graphs.

Some managers go even further than producing ESG metrics in that they seek to align their portfolios with the UN’s 17 SDGs. Also known as the Global Goals, these SDGs were adopted by the UN in 2015 as a call to action to achieve a better and more sustainable future by addressing key global challenges including poverty, inequality, climate change, environmental degradation, peace and justice. These SDGs have now become a blueprint for certain managers and investments who seek to proactively address such challenges through their investment strategy.

The 17 SDGs, pictured in the image below, thus represent not only a governmental agenda for societal change but have in investment circles come to represent a way for companies to demonstrate impact alignment.

See article download for additional graphs.

Investing sustainably
We have embedded an evaluation of ESG metrics in our own investment analysis. We apply these non-financial factors as part of our investment evaluation process to avoid material risks and identify growth opportunities associated with environmental change in the managers in which we invest.

We recognise that some investments go further as they actively align with the UN SDGs (so-called sustainability investing) or even set out to proactively address one or more of the UN SDGs (so-called impact investing).

We also see opportunities for ESG, sustainable and impact investing in both public and private markets. New business models transforming established industries and driving towards new sustainability standards will in our view provide excellent opportunities for profit.

We believe that investing in a way that aligns with responsible ESG and sustainability goals is entirely consistent with achieving return.

ESG investing may also help to mitigate risk:

  1. Avoiding ownership of “stranded or disrupted assets” in a world demanding sustainable profits.
  2. Avoiding assets that could experience environmental disasters or controversial scrutiny around implementation of ESG policies and cause valuations to decline.
  3. Lowering financial risk by avoiding “risk” mishaps (Greensills, Archegos, Wirecard); companies which did not understand the importance of good governance, or the “G” in ESG.

In our view, ESG-integrated, sustainable and impact investment strategies are likely to continue to see long-term, tangible benefits through reduced cost of capital for underlying investment companies with strong commitments to sustainable and responsible business practices.

What we have done in Alvarium Investment Advisory
At Alvarium, we want to offer our clients different ways to invest sustainably, all of which can be aligned with clients’ interests, values, beliefs and preferences. We also recognise that there is a spectrum of ESG, sustainable and impact investments.

We define sustainable investing in four ways:

  1. At the most basic level, we seek managers and investments that integrate ESG disciplines alongside their traditional investment process. In other words, we have embedded an evaluation of a manager’s ESG disciplines (ESG Integrated) alongside our traditional fundamental assessment metrics. As many of our managers and investments have a growth and quality bias, we find that they are also well-positioned to benefit from the growth opportunity of this transformational change. ESG integrated managers could also include low tracking error strategies tilted to align with specific ESG values or themes.
  2. Some of our managers actively promote positive social and environmental change aligned with the UN SDGs. Such investments can be solely focused on these solutions, by mandate or prospectus, or involve strategies that actively practise engagement and stewardship to promote change and improvement in corporate ESG behaviour. In this category we also consider strategies whose holdings meaningfully align with investable themes associated with the UN SDGs for a significant part of the overall portfolio. Investments in this category do not have to be solving a specific social or environmental challenge, but they must be contributing positively to sustainability challenges. These might also be called sustainable investment strategies.
  3. Some investments seek to have a material impact in line with the UN SDGs. In other words, the investment or investment manager strategy has committed to be classified as an impact strategy. They have chosen to proactively invest in solutions for one or more of the 17 UN SDGs and are willing to provide transparent non-financial reporting metrics to evidence this impact. Strategies in this category aim to demonstrate materiality, intentionality and additionality (the extent to which the provision of a UN SDG solution would not have occurred in the absence of this investment) in their underlying investments, and the impact of the underlying companies is thus measurable and reportable.
  4. Finally, some managers could be classified as catalytic, in that their primary purpose is impactful or concessionary change. They may deliver a return, but the purpose of the investment is to solve a specific community or impact need.

Thus, sustainable investing can be thought of as a spectrum in terms of degrees of focus that could be categorised as follows:

  1. ESG Integrated (which could include Values Aligned strategies)
  2. Positive Sustainability
  3. Impact Aligned to UN SDGs
  4. Catalytic or Concessionary Change

Some investments would meet the criteria of all of the classifications, while others are likely to satisfy only one of two.

We have also translated the 17 UN SDGs into investable themes of interest, such as clean energy, smart cities or nutrition, by way of example and as indicated in the chart below. This mapping represents many areas of long-term secular growth. The information is provided directly from our underlying managers to ensure the mapping is aligned with the managers’ reasons for holding the investment.

Translation of 17 Sustainable Development Goals into Investable Themes

See article download for additional graphs.

Goals ahead
Investing sustainably is a journey. The sustainable and impact investment landscape is rapidly changing and as it changes we will evolve our policies, goals and objectives and continue to engage with our managers to understand and make suggestions on how they are furthering their commitment to ESG. A key priority looking forward will be understanding clients’ wishes and values so that we can more accurately tailor portfolios while enriching client reporting in this important area.

Alvarium is an independent, global multi-family office offering tailored investment solutions for leading global families and foundation clients. We provide bespoke investment management and a powerful network for co-investment, collaboration and connection. As well as acting as trusted advisors in the financial markets, we are able to offer proprietary direct co-investment opportunities, outside traditional asset classes, with specialisms in real assets and the innovation economy.  Alvarium has over 220 employees and 28 Partners, working across North America, Europe and Asia Pacific. We advise assets in excess of $18bn in value.
Alvarium is the trading name for Alvarium Investments Limited, a company incorporated in England and Wales, together with its associated entities and subsidiaries. This document is for information purposes only. This document does not constitute a recommendation and should not be taken as a recommendation of any course of action. This document is not advice and should not be taken as providing investment, legal or tax advice. Past performance should not be taken as an indication or guarantee of future performance, and Alvarium makes no warranty or representation about future performance. The information in this document is believed to be materially correct but Alvarium makes no representation or warranty as to its accuracy or completeness. To the fullest extent permitted by law, Alvarium accepts no liability for any inaccuracy or omission in this document. The contents of this document are strictly private and confidential and may not be copied, distributed, published or reproduced in whole or in part, or otherwise disclosed without the prior written consent of Alvarium.

[1] Source: Governance & Accountability Institute – 2020 Russell 1000 Flash Report – 26 October 2020

[2] Source: The Conservation – Increasing wildfires threaten to turn Northern Hemisphere’s boreal forests from vital carbon stores into climate heaters – 21 August 2021

[3] & 4 Source: JP Morgan – Achieving net zero: The path to a carbon-neutral world – 10 May 2021, and source above

[5] Source: OECD.org – The climate challenge: Achieving zero emissions

[6] Source: The Guardian – Biden vows to slash US emissions by half to meet ‘existential crisis of our time’ – 22 April 2021

[7] Source: NASA – 2020 Tied for Warmest Year on Record – 14 January 2021

[8] Source: Fidelity White Paper – Putting sustainability to the test: ESG outperformance amid volatility – November 2020


Investment Sustainability and Stewardship

ESG and impact investing is a journey. We wanted to highlight its importance and hint at further changes and improvements to come as we co [...]

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