How can investors take part in the change for good?

Lars Dijkstra, CIO at Kempen Capital Management, discusses how active managers and private investors can support the EU's green recovery

Our generation is experiencing two important transitions, digital and sustainable.

These long-term shifts are not merely an economic phenomenon, but affect the whole system and the entire structure of society. In order to be successful, governments, companies, regulators and society alike have to cooperate. This is now happening at an accelerated pace as a result of the pandemic.

The European Union has already aligned its long-term policy framework to be a carbon neutral economy by 2050. The pandemic has not dampened enthusiasm to achieve this target, but the scale of the economic devastation which coronavirus has caused across Europe has created some stumbling blocks.

EU leaders struck a deal on a mammoth €750bn stimulus package which the Commission has said will make combatting climate change central to the continent’s economic recovery from coronavirus. However, the final deal fell short of initial expectations; the EU’s flagship Just Transition Fund, designed to wean countries off fossil fuels, received just €17.5bn – less than half of what was initially proposed – and concerns are already being raised around a perceived lack of accountability as to how nations should allocate loans in alignment with the EU’s Green Deal.

See also: – Green deal or no green deal?

While the recovery package is an important indication of the future direction of the European economy, there is clearly still more to be done. It is not just up to governments to combat climate change; these long-term transitions require alignment of the public and private sectors. In particular, meaningful allocations of capital from the largest and most influential institutional investors to specific projects aimed at intentionally and actively solving sustainable and digital issues will be crucial in driving ‘net positive’ outcomes for society.

To identify and support sustainable leaders, now and in the future, we believe active ownership and data driven insights are critical. Investors are stewards in defining and improving the long-term sustainability of their holdings. By investing in a company, the cost of capital is impacted and, as a shareholder, you can influence ESG strategy and direction to drive positive change through continuous dialogue and proxy voting.

The ability to measure and report on a company’s ESG progress is also crucial in driving forward these digital and sustainable transitions. However, while a lot of ESG and sustainability data is disclosed publicly, it can often be difficult to identify and assess which information is most useful for making financial decisions, and much of the information available is not yet fully standardised.

In order to incentivise the private sector to invest in green economic projects, the EU has adopted a sustainable finance Taxonomy, which should be established by the end of 2020, to ensure its full application by the end of 2021. This standardised classification system should encourage private investment into technologies that will contribute to a number of metrics and objectives set out by the EU to improve climate change mitigation and adaptation.

The impact on investment outcomes will be significant; the EU expects that, in the future, credit markets will start to differentiate much more between companies in a way that should result in ‘green’ companies having lower borrowing costs. The transition to a sustainable economy will also be an important driver for equity returns.

Although the EU Taxonomy will only come into force next year, many fund houses are already working hard to develop ESG integration strategies and set sustainable ambitions aligned with the Paris Agreement. National and international task forces have been convened to ensure that there will be fast convergence to common non-financial metrics, encouraging investors to implement self-regulatory standards and benchmarks so they can report and deliver on the EU’s sustainable and digital ambitions.

These ambitions are far more likely to succeed if they can fully leverage the power and scale of private investment. By complementing, rather than replicating, the EU’s own initiatives, investors can support the EU’s Green Deal whilst supporting long-term sustainable value creation.

At the close of the EU Summit, Frans Timmermans, the EU’s Green Deal Chief, stated: “If we are asking our children to contribute to a recovery, by allowing us to go onto the financial markets to get subsidies and loans, then we have to have something to offer for our kids as well, which is an environment that is better and an economy that is future proof.”

Private investment, and active management in particular, is a key part of this vision. When times are changing, investors and companies cannot stand on the side lines, but rather take part in the change for good.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...