25 February 2020

LSE: Putting sustainable finance into practice

Ensuring that the investment portfolio contributes to the long-term sustainability of the planet is one of the key challenges organisations face today. Sustainable finance raises a lot of practical questions. Many initiatives have been launched to provide businesses with answers and help them navigate these expectations.

Christine Chow  describes four of those initiatives:

PRI: The UN has led the creation of the Principles for Responsible Investment (PRI), which advocates the incorporation of sustainability thinking into financial management. PRI, in short, asks investors to take into account environmental, social, and corporate governance (ESG) issues in their activities. PRI’s six priciples for responsible investment focus on engagement by investors with the companies in which they invest, to encourage improved financial and non-financial performance, and positive environmental and societal impact. Businesses need to assess if the firms and professionals managing their investment portfolios are following this engagement principle. This can be done by asking for cases and evidence of positive change and impact. For instance, encouraging fund managers to provide examples of how they have addressed climate change and low carbon transition of portfolio companies.

TPI: Investors can also find support in the Transition Pathway Initiative (TPI), backed by 60 asset owners and institutional investors worldwide with US$18 trillion assets under management. TPI provides data and information to guide investment decisions, and establishes an asset manager performance evaluation system, ranking them from “best in class” to “significant areas of shortfall”. Managers are required to integrate research insights with their commitment and the implementation of responsible investment.

Stewardship Code:In the UK, the Stewardship Code 2020 became effective on 1 January, advising companies to build their engagement based on outcomes. Managers should be able to provide more granular voting policies and statistics, demonstrating their theory of change engagement activities, evidence of their contribution to change, and how the outcomes have impacted investment decisions.

TCFD:The Financial Stability Board, an international organisation led by central bank governors, created the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 “to develop recommendations for voluntary climate-related financial disclosures that …provide decision-useful information to lenders, insurers, and investors.” During the last financial year, asset managers seeking TCFD or equivalent standards of climate change-related disclosure from investee companies increased from 25% to over 60%.

Full article on LSE

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