John David, head of Rathbone Greenbank Investments and Kate Elliot, deputy head of ethical, sustainable and impact research for Rathbone Greenbank Investments set out their top-three ESG themes for 2020.
A major international report, published in May 2019, highlighted the extreme threat that terrestrial and marine ecosystems are under. While there are a number of drivers, deforestation and land use change is a huge component of this theme: most notably the effects of beef production in the Amazon, with land being cleared for pasture and also to grow soy beans for livestock feed.
Jair Bolsonaro, Brazil's president has been playing ‘strong man' politics, dismantling environmental protections, and so far, refusing to bow to pressure from environmentalists. Against this backdrop of political inertia, the role of the private sector in protecting ecosystems has become all the more important.
There is a raft of urgent ESG concerns, but the three most pressing themes for investors in 2020 are biodiversity, climate change and, underpinning all, how to respond to a rapidly changing landscape of responsible investment regulation." Kate Elliot
Rathbone Greenbank Investments (Greenbank) has been involved in a large-scale engagement project, co-ordinated by the PRI and Ceres, for several years. Through this, Greenbank is working with companies connected to deforestation and land degradation in the Amazon and Cerrado regions to improve traceability of goods and move rapidly towards zero deforestation.
Other non-forest biomes are also highly important to biodiversity. For example, the change of use of natural land to farmed land within the agricultural sector, the impacts of plastic pollution on marine ecosystems or the stresses that result from climate change and more extreme weather events.
The window of opportunity is narrowing; we need a step change in global ambition and action. The sooner this occurs, the greater our chance of avoiding systemic shocks to our economy, society and the environment.
The Extinction Rebellion and school strike movements have rocket-propelled climate change as an issue in 2019, and the topic looks set to continue to grab headlines in 2020. In the UK, this will be especially pertinent as Glasgow hosts the COP26 climate summit; the build-up should be an opportunity for the UK to demonstrate leadership, and a platform for the government to make policy announcements.
COP26 will be a landmark gathering. Five years after the Paris Agreement (COP21) was reached, it will provide the first opportunity for countries' Nationally Determined Contribution (NDC) targets to be reviewed and strengthened.
While global progress has not lived up to the level of ambition seen in 2015, there have been some positive steps in the past year, with the UK adopting a target to reach net zero GHG emissions by 2050 and the EU following suit at the end of 2019. With the UK's exit from the EU now almost inevitable, questions will be raised about climate ambition and related policies and it is crucial that this topic is not side-lined in negotiations over the UK's future relationship with the bloc.
Despite the leadership of Europe and the UK on decarbonisation globally, the 2016 election of President Donald Trump caused a severe setback in climate ambition in the US, and all eyes are on the presidential race in 2020. If a Democrat wins, it is likely they will be more supportive of climate action, but which Democrat will make a big difference in terms of scale of ambition. If President Trump were to win again, it is likely there would be no progress and the US would remain dangerously off-track to deliver its share of global emissions reductions.
The UK Stewardship Code revisions came into effect on 1 January 2020, and will bring a focus on outcomes and effectiveness rather than policy statements. Signatories must demonstrate their actions by reporting on what they are doing. They will also have to ensure that ESG factors (including climate change) are taken in to account when investment decisions are made - and that they align with the needs of their clients, helping to improve accountability and transparency.
Within Europe, the European Parliament has recently approved the EU taxonomy for sustainable activities, a list of economic activities which "can make a substantial contribution to climate change mitigation and criteria to do no significant harm to other environmental objectives", namely a list of ‘what is green'.
A revision to MiFID II is expected to roll out a requirement that investment providers ask their clients about their ESG preferences as part of the European Commission (EC ) Action Plan on Financing Sustainable Growth. This would be in much the same way that they currently ask clients about risk appetite and would take place during the adviser's suitability assessment with the client.
And the EC's High-Level Expert Group (HLEG) on Sustainable Finance's proposal that financial institutions disclose how they integrate ESG risks in their investment decision-making and advisory process is due to be implemented from early 2021. Asset managers and institutional investors offering ‘sustainable' products will have to disclose how they achieve sustainability targets.
While these European initiatives are not yet fully implemented, Greenbank welcomes the move towards standardisation, and believes increased levels of transparency and measurability will help to push back against greenwashing, making it much easier for more people to invest sustainably.
Subscribe to International Investment's free, twice-daily, newsletter