In early September, around 1,500 delegates convened in Paris for the largest ‘PRI in Person’ conference ever held. The United Nations-supported Principles for Responsible Investment (PRI) is an international network of close to 2,500 investors, who are committed to upholding the PRI’s six Principles. These Principles speak of the integration of ESG factors into investment decision-making, active ownership and engagement with investee companies, and the need for collaboration among investor signatories.
Climate focus and the Just Transition
This year’s conference was understandably focused on climate breakdown – the defining issue of our time. PRI in Person framed this through the tagline “responsible investing in an age of urgent transition”, and the transition to a low-carbon economy was at the heart of many of the plenary sessions as well as the shorter ‘breakout’ sessions which took place during the conference. This sense of urgency is very welcome. The scale of the challenge facing humanity cannot be understated. Emissions reduction pathways to limit warming to 1.5°C above the pre-industrial average grow steeper every day that action is delayed. The consequences of inaction will be widespread and profound, and are already being seen today.
Adding a social element into the emissions reduction narrative, the concept of a “Just Transition” got some air-time, but still, in our view, not enough. PRI CEO, Fiona Reynolds, acknowledged in a keynote address that the ‘S’ of ESG remains very much the “poor cousin”. The message was that social issues matter, however difficult they may be to quantify or grapple with. If it is ‘unjust’, the Transition as a whole may falter. This is something we are very cognisant of. It was highlighted in a recent report that human rights violations in the renewables sector now outstrip those in oil & gas. In pushing for a transition to a low-carbon economy, we have to do so in a socially just and responsible way.
The Sustainable Development Goals
The SDGs remain something of a problem for mainstream (listed) equity investors. Language here is so important. We can justifiably talk about ‘aligning’ our investments to the SDGs, but once we get into ‘contributing to the Goals’ through our investments, we’re on more uncertain ground. One of the most frank takes on the SDGs came from Hermes’ Will Pomroy, who stated (in our view, quite correctly), that our ‘impact’ as mainstream equity investors comes not from the allocation of capital, but from engagements with the companies in which we invest. This is why engagement is so core to our process.
If the SDGs are challenging for investors to contend with, the conference highlighted that they are just as problematic for companies. I think this partly stems from how they are generally depicted – as a list, rather than an ecosystem. When portrayed as a list, the tendency is to pick a few that you like, miss or ignore the potential connections between them, and also pay little regard to those you haven’t picked.
How we usually see the goals:
How the goals interact:
Sure, the list/grid looks neater. But the world is a complex place. It’s the failure to understand these interconnections properly (or worse, ignore them in spite of our understanding) that has led to the wide ranging ecological, environmental, and social problems we see today. We would do well to take a breath before making the same mistake with the concept of ‘investing in the SDGs'.
The Inevitable Policy Response (IPR)
This was a particularly interesting addition to this year’s PRI in Person conference. The IPR is research commissioned by the PRI, and conducted by partners such as the Grantham Institute, the Carbon Tracker Initiative, and Vivid Economics. The findings suggest that the policy response to the climate crisis will be abrupt, disruptive, and delayed; investors ought to consider the findings seriously, due to the profound implications of such a policy response for most – if not all – sectors and markets.
The IPR also has some potentially troubling implications for investors who believe that remaining invested in fossil fuel companies and engaging ‘constructively’ with them is the best approach to responsible investing. These investors – and the companies that they are invested in – are trying to walk a very precarious tightrope, highlighted in an interview with the CEO of Royal Dutch Shell, which took place on the second day of the conference. Ben van Beurden stated that, whilst Shell was committed to the transition to a low-carbon economy, his company does not want to be associated with what he called “disruptive change”.
The message seemed to be: no major disruption to Shell’s business as it transitions. The question will be whether, if climate models turn out to be too conservative, the policy response will take this question out of Shell’s hands. If governments act rapidly to curb emissions and keep fossil fuels in the ground, the investors that are engaging with Shell may ultimately be faced with the choice of capital destruction or frustrating policy responses designed to deal with the very issues they purport to care about. After all, some things can’t be win-win. Often, someone loses.
We need to stop talking about materiality
The narrative of ‘win-win’ was nowhere more in evidence at the PRI conference than in discussions about financial materiality and ‘long-term value creation’. To us as investors grounded in ethical and responsible investing, hearing speakers talk of the need to make human rights “material” is deeply concerning. The same mentality was on display in a recent investor statement signed by hundreds of PRI signatories which called for a halt to Amazonian deforestation because of the “financial impact deforestation may have on investee companies, by potentially increasing reputational, operational and regulatory risks.” This, we feel, totally misses the point. It suggests that the Amazon is only worth protecting because its destruction may be problematic for a narrow group of shareholders. We have spoken out against this trend in the past, and we will continue to do so in the future.
We need to start thinking about "Growth"
Two key issues were largely conspicuous by their absence at the PRI in Person conference. The first of these is rising inequality, and the role of investors in this trend. We will explore this in more depth in our upcoming Amity Insight, “Mind the Gap: Economic Inequality in the 21st Century”.
The second of these is the potential incompatibility of perpetual economic growth with “sustainability”. I find it surprising, to an extent, that this is still excluded from mainstream discussion, particularly because the forecasts made in the seminal “Limits to Growth” report by the Club of Rome in 1972 have been unnervingly accurate to date. Speakers at the PRI conference referred to “inclusive growth”, “green growth”, and so forth, seemingly without interrogating what these terms mean, and whether they are misnomers. In fact, the only speaker to question the ‘growth model’ – if only in passing – was 24-year-old climate activist Aliénor Martin-Péridier. Abandoning the growth model would certain have profound implications for our economies and societies, and it may only be appropriate for already highly-developed countries. But the fact that we are not talking about it is nonetheless disturbing.