Welcome to ‘In the Hot Seat’, a fortnightly series where we tackle some of the biggest questions facing sustainability professionals across a range of industries. We’ll also explore what sustainability means and how it is interpreted across different sectors and geographies.
This week, Zara de Belder, Head of Maitland/AMO Sustain, caught up with Lisa Beauvilain, Head of Sustainability & ESG, at Impax Asset Management. Lisa is responsible for the development and oversight of Impax’s Sustainability and ESG analysis, including overseeing stewardship work in the Listed Equity team.
1. What lessons has Covid-19 taught us about our approach to sustainability and ESG?
The most interesting and urgent lesson is the link between biodiversity loss and deforestation and the increased risk and prevalence of zoonotic viral outbreaks. We will only get more of these in the future, unless we start understanding this relationship and tackle it firmly. I believe there will be a multi-lateral framework or global agreement to do everything possible to prevent future pandemics such as Covid-19, which has been so devastating both for human health and the economy. After the 2003 SARS outbreak, an international framework called “One Health” was developed, which looks at the nexus of environmental destruction (deforestation, biodiversity loss), management and relationship with farmed and wild animals (animal welfare, antibiotics use, wild animal trade) and human health and healthcare (preventive healthcare, vaccine development). In the aftermath of Covid-19, it is very likely that we will see this type of significantly expanded global framework being developed, to prevent future pandemics and outbreaks.
2. Impax previously filed a petition with the US Securities and Exchange Commission requesting the regulator to require corporates to improve their assessment of physical climate risks. How can companies become better informed of potential climate-related risks and why is disclosure so critical?
Physical climate risk, or risks of extreme climate events (such as storms, heat or water stress or coastal flood risks) are linked to specific geographic locations. In order to assess company or portfolio-level physical climate risks, an evaluation of activities (e.g. sectors or greenhouse gas intensity or fossil fuel reserves) is not very meaningful, as an activity is not a very strong
indicator of physical climate risk, but the location of companies’ facilities, plants or offices is critical. Companies are not systematically disclosing the location of plants, warehouses or facilities (addresses or coordinates). This is basic, but necessary data in order to start physical climate risk assessments. We engage to obtain this data from companies. Once we have the data, we can run it through our proprietary model, assessing current and future physical climate risk, across nine indicators, at the facility-level for companies. The engagement then continues with discussion regarding the facilities that are most exposed to physical climate risks. This has been almost without any exceptions an eye-opener for companies, who in most cases have not done this type of detailed analysis to date. Climate change is today recognised as a systemic risk to the stability of capital markets and hence companies and investors have to understand, manage and mitigate physical climate risks, not just transition risks. However, as long as the very basic location-data is absent, this remains a tedious and time-consuming exercise for investors. This data needs to become mandatory for companies to report and that is why Impax filed a petition with the SEC in 2020.
3. Next month, Beijing will unveil its Five-Year Plan, which covers 2021 to 2025, at the National People’s Congress. What can we expect from the Plan and how will it support China on its net-zero trajectory?
With environmental objectives likely to feature prominently, the centrepiece is a national carbon emissions trading scheme that will be the largest in the world. It will initially officially cover the power sector, which alone is responsible for twice the emissions of the EU carbon market. The Chinese government has already committed to investing $15 trillion in renewables over the next
40 years. In order to deliver China’s 2060 goal, the annual rate of installation of renewables infrastructure would need to increase by 2.5 times. Hydrogen potentially has a key role to play in
helping China meet its net-zero goal. China already leads the world in hydrogen production but it will need to switch from ‘grey hydrogen’, produced using fossil fuels, to ‘green hydrogen’, powered by renewable energy, as well as supporting the development technologies to exploit this supply in a range of sectors. We also expect incentivisation for local and provincial governments to adopt green policies, and the directing of major state-owned enterprises to announce their own carbon reduction plans. The state-owned banks and other financial intermediaries and regulators are also likely to push harder on green finance and green bonds.
4. If you had one piece of advice for someone considering a career in sustainability, what would it be?
With the growth, maturing and mainstreaming of sustainable investment and with increasing sustainability risks (climate change, pandemics, biodiversity loss and inequality), in-depth knowledge and expertise of sustainability becomes more and more important in effective investment processes. Investment teams require diverse skill sets and expertise, with specialists in climate science, medicine, social studies and computer science, as well as the traditional financial and economic expertise. Industry leaders are well past simplistic ESG exclusions or best-in-class ESG assessments and deep into climate science and models, working on quantifying metrics for measuring biodiversity or ecosystem value or measuring the value of human capital in company valuation models. It is a fast-evolving area. In addition to deep specialist sustainability knowledge, a strong knowledge of accounting and financial models and valuation methodologies will be important. For a transition to a sustainable economy to be achieved, for sustainability to become fully part of capital markets and for negative externalities to be taken into account in investments and company valuation models, the accounting models and frameworks as we know them today will have to change and valuation models be updated. The most successful investors will be those with a fully integrated sustainability and financial approach and knowledge and who can best adapt to this shift.
5. Finally, what does sustainability mean to you?
Sustainability means economic activity and growth within planetary and societal boundaries, where negative environmental and social externalities have a cost and are fully accounted for. Impax believes the economy is in a transition. Companies providing solutions to unmet environmental or societal challenges are strongly positioned with tailwinds. Those with negative environmental and social externalities, are likely to be disrupted by new, more efficient technologies, changing and more sustainability-focused consumer preferences, reputational risks due to information speed and transparency and due to regulatory or policy changes which mean higher costs for companies with negative externalities. It has never been more important to identify the companies and investments enabling or benefiting from a transition to a more sustainable economy, for successful investing.
About the Author
Also by this Author
- Maitland/AMO Sustain – In the Hot Seat with Michele Giddens, Co-Founder and Co-CEO of Bridges Fund Management
- Maitland/AMO Sustain – In the Hot Seat with Jovana Stopic, ESG Manager at IK Investment Partners (‘IK’)
- Maitland/AMO Sustain – In the Hot Seat with James Alexander, Chief Executive at The UK Sustainable Investment and Finance Association (UKSIF)
- Maitland/AMO Sustain – In the Hot Seat with Kensey Biggs, Senior Vice President, ESG and Corporate Social Responsibility at Truist
- Maitland/AMO Sustain – In the Hot Seat with Lisa Beauvilain, Head of Sustainability & ESG at Impax Asset Management