Data Disclosure and Scenario Analysis: Calls for Action Take Center Stage at Sustainable Investment Forum 2019

In Brief

Sustainable Investment Forum (SIF) 2019 pointed to progress made by the financial sector in the past year in understanding the importance of integrating environmental, social and governance (ESG) factors into investment decision-making processes.

Speakers called climate-aligned finance a clear example of just how important data is when making key decisions.

SIF participants argued that along with the transparent disclosure of data, climate-aligned investing demands effective scenario analysis tools.

New York skyline

New York City / Daniel Mennerich / CC BY-NC-ND 2.0

“Unless we act now, climate change could reduce the global GDP by 20% by the end of the century,” said Nick Henry, CEO of the media platform Climate Action, in his 2019 Sustainable Investment Forum (SIF) inaugural address.

A conference convening 450 investment professionals, 40 speakers and more than 30 sponsors, SIF 2019 sparked debate and introspection among its attendees. The event focused on the importance of climate resilience, climate-aligned investment and how the financial sector can play its part to ensuring a swift global energy transition. Taking place during the heart of Climate Week in New York in September, SIF 2019 saw multiple calls to action from speakers ranging from “the need for action, not beautiful speeches,” to sustainable investment as “ambitious and necessary,” with the aim of avoiding that 20% GDP loss.

Speakers included United Nations representatives, asset managers, and CEOs from a variety of firms across the United States, who all looked to share their experiences in the domain of climate-aligned investing. To echo Dawn Martin, executive vice president and chief program officer of Ceres, the financial sector is slowly realizing that it will have no choice but to include “sustainability in the bottom line.”

In comparison to last year’s event, SIF 2019 pointed to progress made by the financial sector in the past year in understanding the importance of integrating environmental, social and governance (ESG) factors into investment decision-making processes. One marked shift was the emphasis placed on moving beyond defining ESG factors into the realm of actively employing them in portfolio analysis and asset management.

Discussions emphasized the goal of mobilizing public and private sources to drive decarbonization and advance resilience. Several key themes related to this objective emerged, including data and disclosure, as well as climate-aligned investing models and scenario analysis.

Data and Disclosure: The Role of Transparency

Throughout the event, speakers returned to the same point: the critical necessity of transparent, useful data in investment. The more one knows, participants emphasized, the better an investment decision that individual can make. Climate-aligned finance is no exception. To the contrary, speakers called it a clear example of just how important data is when making key financial decisions.

Martin clarified the danger for investments as a result of climate change: “One trillion dollars is currently at risk from the changes and impacts of climate change,” she said. Investments throughout the globe could be affected, and without proper data, asset managers and portfolios reduce their chance of evading the massive damage that stands to accompany climate change.

In response to this new challenge, SIF participants argued that the data investors need is no longer limited to merely the reliability and past record of a company Instead, investors should now investigate companies’ decision-making processes, and the factors that go into them. They should look to understand companies beyond mere analytics. What are their reasons for accepting or passing on particular business opportunities, and how do they review their information before making decisions? Do they consider their environmental impact and consistently improve their internal corporate governance systems? Are companies following a sustainable business plan and strategic vision? Is information reviewed by multiple individuals, or is investment at the discretion of a sole person? In all of these processes, investors should ask: What of the role of climate alignment in companies’ behavior?

This information is critical in evaluating the level of commitment a firm has to ESG principles, yet there is little evidence of this currently being done throughout the financial sector. Rodney Irwin — managing director and a part of the senior management team at the World Business Council for Sustainable Development — made a plea to attendees to begin incorporating these practices in their firms. “You as the investment community have huge influence over demanding that business behave differently,” he said. “You are not asking for this information, therefore the pressure is not there to provide it.”

How to go about procuring such data, then? A collection of answers took center stage at SIF 2019, but perhaps the most succinct one came from Refinitiv’s head of sustainable investing and fund ratings, Leon Saunders Calvert: “Disclosure is everything,” he said.

As a data analytics, trading and risk assessment tool developer, Refinitiv’s work revolves around efficient data disclosure. Calvert explained that Refinitiv’s internal scoring system, which is used to evaluate the attractiveness of possible investments, and is based on a combination of working with potential investments to obtain disclosure of data while also ensuring transparency in their own work. Calvert also said that Refinitiv’s system deducts points from possible investments if companies opted out of disclosing their decision-making data.

“Disclosing bad is better than not disclosing at all,” he said.

The focus on engagement for better data disclosure was not limited solely to Refinitiv, with Brian Rice — portfolio manager for the California State Teachers’ Retirement System — also saying that he works extensively with external managers to maximize ESG integration in the decision-making process. The key questions to answer during such evaluations, he suggested, were: What are companies doing to ensure proper ESG alignment? Are the companies thinking critically about their internal decision-making processes? Which factors do companies believe will impact the value of their operations?

By having firms engage with external managers to bring ESG- and climate-aligned investing to the forefront of their portfolios’ concerns, they are inherently leveraging investment as a tool for ESG integration into the financial world's best practices. Calvert called on firms to continue ESG integration, and to “start trading ESG data not as alternative data, as it is today, but as fundamental data.”

This sentiment was echoed by Hiro Mizuno — executive managing director and chief investment officer at Government Pension Investment Fund of Japan — with his concept of “universal ownership.” The idea entails viewing the market as a whole, beyond simply a firm’s closest competitor, and then incorporating the entire market’s well-being as a factor into investment decisions. When describing the fund’s asset managers today since the introduction of ESG, he said, “asset managers now look beyond just alpha, they now need to take into account the negative externalities of their work.”

Scenario Analytics: Modeling Investment Risk Factors

Climate-aligned investing requires a shift in the current financial atmosphere, and Paul Bodnar — managing director of the Rocky Mountain Institute — highlighted its importance: “Climate finance is not just about doing more green investment,” he said. “We cannot build a green economy on top of a brown economy and still reach the 1.5˚C benchmark.”

Several speakers said that the best way to lead such change was through example; and that along with the transparent disclosure of data, companies need to implement effective scenario analysis tools.

The U.S. head of responsible investment at Mercer, Alex Bernhardt, presented the organization’s approach to climate scenario analysis, underscoring a data-driven method combined with adaptability. Mercer first began by employing several integrated assessment models to understand the economic and scientific underpinnings of climate change, then generated data-based, granular global temperature outcome distributions. They then tied these into economic projections via the integrated assessment models, and numerically quantified the impacts of climate change across asset classes.

A similar approach was adopted by both S&P Global as well as Manulife, who also presented their scenario analysis toolkits. Trucost, a subsidiary of S&P Global, launched their new Physical Risk Assessment Model at SIF 2019, and laid out how they developed it. They first surveyed firms at the asset level throughout the globe in order to understand climate change vulnerability, then combined that data with granular maps showing climate change risk levels. Together, these maps generated a physical risk map that displayed the extent of climate change risk and potential damage to assets throughout the world, a fundamental factor to consider while investing in a climate-change-impacted world.

Manulife, on the other hand, developed their scenario analysis toolkit by collaborating with the climate science firm Carbon Delta in order to tackle the challenge of bringing a macro-level view to portfolio analysis. Emily Chew — global head of ESG research and integration at Manulife — said that there are several challenges for accurately analyzing climate scenarios: current models stop at around the 2040-2050 timeframe, and physical risks for business-as-usual scenarios could currently be greatly under-estimated.

Speakers said that this is a new situation for investment firms, as typically in the past they were the ones leading companies into new strategies and models, whereas today companies are coming to firms with unique and complex challenges. All three scenario analysis presenters, however, stressed the importance of climate prioritization in investment firms’ agendas. Finding the time to discuss climate change as a priority at the institutional level, Bernhardt said, is becoming ever more necessary, yet also more challenging. He was joined by the other speakers in a call for firms to focus on scenario analysis modeling and climate change as a priority in order to shift clients towards a decarbonized economy.

SIF 2019 indicated that the financial industry is making progress on the path towards decarbonization, but still has a long journey ahead of it. More proactive participation is required in order to increase data transparency and ESG integration. Only then will firms be able to match and exceed the examples set by industry change leaders such as Mercer, Refinitiv and Manulife. According Mindy Lubber, CEO of Ceres, when it comes to climate the sector must “get past the point of ‘we can’t do it because’ to ‘what is it going to take for us to reach it?’ ”

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