SINGAPORE (July 8): Asset managers are increasingly using their financial clout to persuade companies to be friendlier to the planet, wielding a combination of the stick of disinvestment and the carrot of engagement. But can the financial world do more to ensure countries and their central banks are also meeting their environmental, social and governance (ESG) responsibilities?
Travel platform fromAtoB.com scrutinised the 2018 flight statistics for leaders of the Group of 20 nations to work out who emitted the most carbon dioxide. Of the 15 leaders examined, Japan’s Shinzo Abe was responsible for the most emissions, taking 38 flights covering 128,000 miles and emitting almost 14,500 tonnes of CO2 gases.
It may seem like a slightly frivolous exercise; we don’t expect our national leaders to forgo airplanes in favour of slower but greener modes of transport. (Well, not yet, anyway.) But it is indicative of how the climate crisis is prompting increased scrutiny of many of the activities we take for granted, including long-haul flights.
And a new study published recently by Hermes Investment Management suggests that the weaker a nation’s commitment to ESG, the higher its financing costs are likely to be.
Hermes studied 59 countries, using ESG scores generated by London Stock Exchange Group’s Beyond Ratings unit, and compared those rankings with prices in the credit-default swap (CDS) market for the years 2009 to 2018.
Countries with higher default-swap prices typically pay more to borrow in the bond market than those with lower CDS values. So there is a connection between a nation’s likely funding cost and how its ESG ranking compares with its peers.
The Beyond Ratings ESG scores are weighted, with 30% derived from a country’s environmental record (including energy policies and natural resources stewardship), 30% for social policies (such as health, equality, political freedom) and 40% for governance (corruption, political stability, rule of law). Individually, the study found that governance had the closest correlation with CDS prices.
Hermes suggested that environmental risks may not be reflected in sovereign CDS prices. Moreover, “the risks associated with environmental issues, in particular climate change, are difficult to quantify (whether in terms of transition risk or physical climate risk) and their time horizon is even more uncertain”, the fund management firm said. Bloomberg LP competes in the market for ESG data.
A separate report published recently by Swiss bank UBS Group suggests that the world’s central banks are lagging behind in taking ESG factors into account when managing their portfolios. The study, based on a survey of reserve managers taken earlier this year, showed that only 9% of central banks are taking measures that go beyond the broad ESG frameworks that UBS reckons most public agencies have already put in place.
That is probably because central banks do not answer to any particular constituency. Only 19% said they were taking climate risks into account “in anticipation of increased pressure from stakeholders”, while just 6% said they had experienced “increased scrutiny” from politicians and supervisory bodies. Some two-thirds cited the lack of reliable benchmarks and data as an obstacle to reflecting environmental issues in portfolio management.
That lack of standardised data is recognised as an important impediment to the sustainable finance movement. So, the recent moves by the European Union to create a taxonomy to help asset managers identify investment opportunities is to be welcomed, as is the UK Treasury’s announcement last week that it is considering making it mandatory for companies to disclose their exposure to climate risks.
UBS calculates that even just the world’s six major central banks — those representing the US, China, Japan, the eurozone, Switzerland and the UK — control more than US$21 trillion ($28.5 trillion) of assets between them. With the rest of the world waking up to the need to go green, it would be a shame if the financial firepower of central banks was not similarly harnessed in defence of the planet.
