A community already exists within finance which is committed to adding value for investors, while collectively changing the world. Both we and the next generation deserve nothing less.
Financial markets are a fascinating and ever-changing force, often at the centre of history. One of the formative experiences of my career in the investment industry is to have witnessed the embryonic stages of Sustainable Investing. In 1996, I was at Candriam when we launched our first ESG fund. It has been an amazing journey since then. Today, twenty years on, the question in financial markets is: How can we collectively change the world to make it more sustainable?
We in the investment community have a role to play. We can make a difference. As a CIO, I see sustainable investing as a world of opportunities, both in the search for returns, and in the management of risks. ESG analysis is all about risk mitigation – social risks, climate risks, governance risks – and at the same time seeking out companies which create value. And I can tell you, energy transition, eco mobility, sustainable buildings, clean water – all of these can provide amazing investment opportunities.
As a father of four, I am happy and proud to work for an investment manager with ESG in its DNA. I am extremely concerned about climate change, resource scarcity, pollution … for my own children, and for the next generation. Responsible investing provides a sense to my daily job. It has the power to re-confirm the central role of the financial markets, as intermediaries which reconcile the agents of capital with the society to which this service is dedicated. This is my role on as a CIO, sharing this vision with the 200 members of my team.
And I can tell you our future clients expect it from us. In the next few decades, $60 trillion of wealth will be transferred from the Baby Boomers to the Millennials. Two thirds of these Millennials see investments as a way to express their social, political and environmental values, compared to only one third of the Baby Boomers. Millennials are demanding real impact.
Have the Baby Boomers really fared so poorly? In recent decades, collective action and progress have produced amazing results. The number of people living in extreme poverty, with less than $1.90 per day, has fallen by nearly 1.1 billion since 1990. Many endemic and life-altering diseases been controlled or eradicated. Infant survival rates have soared. Life expectancy has risen dramatically around the world. Literacy has become the norm – a century ago, 20% of the world's population could read; today, 86% of the world population are literate.
Yet according a recent poll, 51% of Millennials think Baby Boomers have spoiled it for the next generation. We are enjoying the highest standards of living in human history -- so what have we missed?
Just one figure says it all: The world’s richest 1% owns more than half of the world’s wealth! We have never created more value, but its distribution has never been so skewed. This crisis in Global Governance has fuelled an unprecedented wave of populism. Take note: according to Bloomberg, 41% of the world GDP is now ruled by populist leaders, compared to just 4% in 2007.
This populist shift undermines international efforts to address global challenges, and especially the most existential threat humanity has ever faced: climate change. Unfortunately, whilst the Paris 2-degree target and need are fixed, the level of commitment from governments too often fluctuates depending on political considerations.
The financial community has the power to address global environmental challenges. Of course we alone cannot save the world. But financial markets and asset owners can make a difference. The financial crisis required a strong, global, coordinated action from government and central banks. The climate crisis requires an greater coordinated action from governments, institutions, corporates, and society. But we will also need the financial community.
Imagine a possible path together. Let’s imagine that within a year, all investors worldwide commit to cease financing the most CO2-intensive power generation facilities; commit to massively invest in the electrification of transport; and commit to redeploy capital to renewable energies and energy efficiency technologies.
As of today, over 1000 institutions, including Candriam, have already made that commitment. Trust me, this sends a strong signal. Within three years, we as investors have aligned a substantial part of our portfolios with the '2-degrees target' agreed with 184 nations in Paris in 2015, and since ratified.
I can predict that, if all investors made this commitment, the likelihood of remaining within that critical '2 degrees' ceiling would be vastly improved.
A 'Just Transition' in energy sources is a prerequisite to create this world that we are imagining. This world can become a reality if we, the investment community, rise to the challenge. Simultaneously, governments must fulfil their role of safety net for those impacted by this transition. Governments must not allow rising populism, and remaining eco-scepticism, to delay the actins required to avoid climate catastrophe. Governments must create a level playing field through carbon pricing and taxation, stricter restrictions on air pollution, and fiscal neutrality for the lowest income levels. This means that the industrial and technological benefits of mitigation and adaptation initiatives should be shared widely. After all, this commitment to fairness was embodied in the preamble to the Paris Agreement in 2015.
The question is no longer whether we should consider sustainability, or whether sustainable investing benefits returns. I believe our challenge now, is how do we embed sustainability into every investment decision and every asset class, whilst getting our clients to join us on that journey?
How can we collectively change the world to make it more sustainable? As far as Finance is concerned, we need three things.
- A common language. In June 2019, the European Commission is expected to publish the first part of its taxonomy of environmentally sustainable activities, which will begin to provide a common language for all investors to use when assessing the sustainability of business models.
- Measurement. We must continue to develop our ability to measure and enhance the environmental and social impact of our investments. Our investors want to see, and we want to show them, that not all ESG strategies are equal. This is an essential step to dismiss green-washing.
- Bold measures from governments. Put a clear price on carbon, in line with the 'two-degrees' scenario. Send an unambiguous signal to all companies, and to all investors, that the days of free negative externalities are limited. Make climate change a material factor for all investors, for every asset class. Further, Governments will be crucial to ensure a just energy transition for workers and communities as we move away from a carbon-intensive models.
We want to expand the existing community of engaged and visionary investors. Not only are these investors able to see the future, but they are creating the future together. It is our role and responsibility, at Candriam and within the wider investment community, to acknowledge that the decisions we make have a huge impact. The allocation of capital by investors sends a price signal to the market and can shape the future not only of industries and nations, but more importantly, our future and the future of our children.