RESPONSIBLE INVESTMENT QUARTERLY - Q4 2020
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RESPONSIBLE INVESTMENT QUARTERLY Q4 2020
Responsible Investment Quarterly – Q4 2020
CONTENTS
01 Foreword................................................3
02 Portfolio Manager Viewpoint...................7
03 Country Head Focus –
Austria.................................................11
04 Infrastructure investing
in a post-Covid world...........................14
05 Solutions to the ever-growing
plastic waste problem .........................19
06 What are the principal
considerations and obstacles to
climate change risk management?.......25
Stewardship in action
07 Voting Q4.............................................29
2
Responsible Investment Quarterly – Q4 2020
01 Foreword
Climate issues will continue to be a The scope of our voting activities is
major area of focus that is touched of course broad, and another aspect
upon in more depth later in this report. of it continues to be the issue of
For example, Chris Wagstaff, our Head boardroom gender diversity. We have
of Pensions and Investment Education, had an active voting strategy on this
looks at considerations and obstacles issue that has been developing since
to climate change risk management. 2016. During 2020 we took voting
In addition, Andrea Carzana, one of our action at more than 200 companies
European equities portfolio managers, where concerns existed, including
touches on the relevance of net-zero a number where diversity among
transitions for investors in his portfolio the senior executive leadership, a
manager’s viewpoint. The topic also developing area of focus throughout
features in this quarter’s country the year, gave us cause for concern.
Iain Richards focus (Austria) as well as in the
insights into infrastructure investing Looking ahead to 2021, this facet of
Head of Global Responsible our voting activity will continue with an
Investment Policy in a post-Covid world.
Figure 1: Proxy Votes on 2020 Key Climate Resolutions
Looking back over 2020 it was clearly Hartford (Wellington) 27 90
Columbia Threadneedle 33 82
an unusual year. The coronavirus Victory Funds 34 75
pandemic and lockdowns have Principal Funds 34 75
required considerable adaptation. Invesco (Incl. ETFs) 34 66
JPMorgan 34 57
The resilience and determination
Fidelity (Geode) 34 56
people have shown is remarkable. Janus Henderson 32 56
MFS 24 54
In addition, the continued scrutiny of Franklin Templeton 32 53
asset manager voting as an indicator Jackson National 34 51
T. Rowe Price 34 49
of whether they “walk the talk” has TIAA Funds 34 41
continued, most commonly in relation Schwab 34 35
to voting on climate resolutions. State Street (Incl. SPDR) 34 32
American Funds 23 30
Although we have not always been
American Century 30 27
included in reports published on Fidelity (Ex. Geode) 33 19
climate voting, Figure 1 provides a Vanguard (Ex. Actively Managed) 34 15
BlackRock (Includes iShares) 34 12
good insight into our ongoing focus
Dimensional Funds 34 7
on climate voting in a US shareholder 0 25 50 75 100
resolution during 2020.1 # Resolutions Voted Average % Support
Source: Morningstar. “Which Fund Companies Supported Climate Via Proxy Votes?”. 2nd December 2020.
3
2020 2022
Responsible Investment Quarterly – Q4 2020
added focus on ethnic diversity. As we the pandemic has been invaluable to The nature of these changes will
vote at thousands of company general the insights we bring to our investment shape the research agenda and we
meetings, accessing reliable data strategies. That level of research will be looking at aspects of this
sources to expand our approach and intensity – and enthusiasm – reflects further over the course of 2021.
develop greater consistency remains our belief that responsible investment
important. To that end we are indebted research is fundamental research and As we move into 2021 it is with
to the many organisations and groups the combination of macro, thematic the momentum provided by the
that provided invaluable insights and and security level analysis in this extraordinary pace of ESG adoption
information to us as investors. context is essential. among the broader asset management
community, which more than doubled
Turning back to the pandemic, In a policy context, both a renewed during 2020. This has also been
Covid-19 has forced attention to turn focus on climate change and on reflected in the scale of the assets for
to many of the structural weaknesses the need for inclusive growth will which ESG is now a factor. Although
that exist in our economies and be important considerations in much of the attention often focuses on
societies both domestically and the post-Covid environment. Europe, where the market is already
internationally. The response from Both have significant importance well established, it is notable looking
colleagues, across all disciplines, for our economies and the wider back across 2020 that the rate of
in collaborating to analyse both the changes that are already taking place change (adoption) has been highest
short- and long-term implications of – the fourth industrial revolution. in the US market.2
4
Jackson National 34 51
T. Rowe Price 34 49
TIAA Funds 34 41
Schwab 34 35
State Street (Incl. SPDR) 34 32
Responsible Investment Quarterly – Q4 2020
American Funds 23 30
American Century 30 27
Fidelity (Ex. Geode) 33 19
Vanguard (Ex. Actively Managed) 34 15
BlackRock (Includes iShares) 34 12
Dimensional Funds 34 7
0 25 50 75 100
# Resolutions Voted Average % Support
Figure 2: EU sustainable finance reform timeline
2020 2022 2023
Level I EU Green Level II Level II Level II Environment Level II Additional Level II
SFDR Deal Draft Draft SFDR Taxonomy Objective Full SFDR Taxonomy quantitative
Regulation Investment Taxonomy delegated delegated disclosure application? disclosures disclosures
published Plan & Just delegated acts (RTS) acts (RTS) by + Initial by for PAI
in OJ Transition acts end-2021 Taxonomy end-2022 (re: 2022)
Mechanism published disclosures
Dec Jan Dec Nov Jan Feb Mar Jun Q4 Jan Jun Q4 Jan Jun
Level I Regulatory 10 March Mandatory Additional Level II Level II Art. 8 & 9
Taxonomy filings Lev 1 SFDR PAI draft Art. 8 & 9 Taxonomy Annual
Regulation (fast-track) Application Disclosure Taxonomy template delegated Reports?
published Date Criteria by disclosures? acts (RTS)
in OJ (PAI opt-in end-2021? (incl. seg + UK TCFD
disclosure) mandates) rules?
Source: Columbia Threadneedle Investments, February 2021.
These trends have important (16 December 2020). Increased reforms. For now though I will conclude
implications for both asset managers market volatility and risk of significant with the above chart to offer a quick
and asset owners, particularly those draw-downs following the “Covid” snapshot of some key aspects of
in Europe. The initial March 2021 crash has propelled ESG investing the timeline around the current EU
deadline for sustainability-related to the forefront of many investors’ sustainable finance reforms and the
disclosure in the financial services decision-making criteria. The Global all-important disclosure regulation with
sector under the Sustainable Finance Sustainable Investment Alliance (GSIA) its focus on sustainability risk as well
Disclosure Regulations (SFDR) has suggests there are seven commonly as principal adverse impacts (Figure 2).
everyone’s attention and focus. used socially responsible investing
As both groups respond to these strategies; in practice, investors use
requirements, the approach taken will more than one at a time. However, it
have potentially significant implications is worth mentioning that overall their
for investment strategies. performance has been positive –
although there are deviations across
Given the scale of change involved, these strategies.
the importance of practical approaches
to integration, rather than formulaic The first quarter of 2021 and beyond
ones, will be important. A notable will see a procession of milestones Source:
1 https://www.morningstar.com/articles/1013254/
example of why this is the case was and deadlines arrive. Although some which-fund-companies-supported-climate-via-
seen in JPMorgan’s perspectives dates and details of reforms remain to proxy-votes
2 JPMorgan, ESG Investing: Momentum Moves
report towards the end of Q4 2020, be finalised and confirmed, the EU is Mainstream – 2021 brings collective demand for
“Build Back Better to Boost ESG” already working on the next phase of change around the globe, 20 January 2021.
5
Responsible Investment Quarterly – Q4 2020 6
Responsible Investment Quarterly – Q4 2020
02 Portfolio Manager’s Viewpoint
invested across all active strategies – closely aligned with the UN Sustainable
December 2020’s total of £1.7 billion Development Goals. We believe these
was itself the highest monthly figure companies have the potential to enjoy
since July 2015.1 better growth and returns, with wider
competitive moats in the long term
The trend towards RI and sustainability versus those companies misaligned
is gaining impressive momentum. with these themes.
However, the headline figures obscure
important underlying trends. RI is a
broad label that covers many strategies 2020’s focus on the net-zero
related to sustainability. Much of the transition
money invested in 2020 went into
funds marketed as ESG (environment, It is common for investors to confuse
social and governance) vehicles, ESG funds with sustainable outcome
Andrea Carzana focusing on measures of companies’ strategies and conclude that they may
Portfolio Manager, performance against these indicators. have missed the boat on investing
Threadneedle Sustainable Outcomes in sustainable outcome. This is a
Pan-European Equity strategy ESG is a long-established investment mistake. ESG has been growing for
theme that is now widely recognised years but it was only in 2020 that, for
and understood. But the fast-growing the first time, investors began to focus
flows into RI include another, less in earnest on the opportunities of a
well-known set of strategies that are net zero transition.
2020 was a landmark year for flows
more recent and much less mature:
into funds focusing on responsible One of the key reasons for the growing
sustainable outcome funds. Many of
investment (RI) themes. Although focus on sustainable outcome funds
these invest specifically in companies
this appetite for funds following RI during 2020 was the succession
that are facilitating the world’s
principles was boosted by the Covid-19 of announcements by governments
transition to carbon neutrality – or
pandemic, it is still growing and should around the world of policies and
net zero – by 2050, particularly around
far outlast the impact of the virus. stimulus packages to enable
power generation and transport.
In December 2020 alone, according economies to reach net zero by 2050,
As such, hidden within the overall
to Calastone, investors poured or 2060 for China. Countries including
fund flow figures for 2020 is a major
£1.1 billion into UK-based actively China, Japan and South Korea, as
trend that is still in its infancy: the
managed equity funds with an RI focus. well as the European Union member
wave of investment into companies
This is roughly equivalent to the total states and the UK, have committed
and technologies that will enable the
inflows to these strategies between to net-zero targets. Approved
world economy to transition to net zero
2015 and 2018. Equally notable is commitments to fund green stimulus
within our lifetimes. Many of these are
that this £1.1 billion inflow accounted and support for carbon-intensive
businesses with sustainable themes
for almost two-thirds of the money industries as of 1 November 2020,
7
Responsible Investment Quarterly – Q4 2020
stood at more than $1 trillion, Beginning a multi-decade 450,000 tonnes a year to 40 million,
with another $644 billion under and investments in clean electricity
consideration by the EU (Figure 1). investment trend need to rise from $380 billion a year
Now that President Biden has taken 2021 will start to see the funding put to $1.6 trillion.3
office, the US is expected to launch a in place to drive the net-zero transition.
major green stimulus package of its The implications for investors are
It is already obvious that far more
own. His immediate decision to take clear. Unprecedented sums must be
money will be needed to transform
the US back into the Paris Climate channelled into the world’s energy
the way the world generates energy –
Accord is indicative of the US’s transition over the coming decades.
which accounts for three-quarters of
direction of travel.2 The sheer scale of the investments
global emissions – than governments
required will necessarily mean that
have announced so far. For example,
The ambitious commitments made this is a multi-decade investment
to reach carbon neutrality by 2050,
in 2020 are vital – but 2021 will be trend, representing an opportunity
the share of electric cars in total sales
a far more significant year for the of unparalleled size. Many of the
must rise from 3% to more than 50% by
net-zero transition than anything we technologies that will be required to
the end of this decade, production of
have seen so far. make the transition possible are yet
“green hydrogen” must increase from
Figure 1: stimulus approved and near completion as of 1 November 2020
Approved green stimulus 179
Draft EU green proposal 644 823
Approved stimulus for
878
CO2-intensive industries
0 200 400 600 800 1,000
$ billion
Asia Oceania EU Other Europe MENA North America Latin America Sub-Saharan Africa
Source: Governments, media reports, BloombergNEF, November 2020.
8
Responsible Investment Quarterly – Q4 2020
to be commercialised. The companies carbon neutrality vary hugely in their Ultimately, public and private
developing them will require sustained quality and ambition – some have investment will flow to those companies
support from government stimulus committed to neutrality by 2030, others making concerted moves to reach
programmes for years to come. not until 2060. Global co-ordination carbon neutrality. They will become
will allow investors to judge companies more sustainable, more resilient and,
The opportunity in sustainable against their peers more effectively, therefore, more valuable over the long
outcomes is, therefore, still in its early which will help to determine where term. As a result they will enjoy a
stages. If investors do not yet fully investment flows. lower cost of capital than their peers.
appreciate its size and likely duration, The global net-zero transition is just
this is entirely understandable. The second major event of 2021 is beginning: it will shape the investment
in November, when the UK will host agenda for decades to come.
the COP26 Climate Change Conference
Raising the tempo in Glasgow. This will seek to
In the coming months, however, we co-ordinate governments’ climate
expect two major events to increase change programmes. It will also ratchet
the tempo of the net-zero effort and to up the pressure for governments to
signal the start of a more co-ordinated keep to the pledges they have made
international drive to achieve the 2050 already, and to increase their size if
deadline. First, in May, the International they are to meet the 2050 goal.
Energy Agency will publish its first
roadmap for the global energy sector The drive to achieve net zero will affect
to reach carbon neutrality by 2050. all companies and all investors over
Companies around the world will treat the coming decades. Some, such as
this document as a framework against oil majors with huge legacy assets, will
Source:
which their transition efforts will be face enormous challenges. Others have 1 Calastone, January 2021.
benchmarked. This is vital because been investing in greener technologies 2 FT.com, What the US rejoining the Paris accord
means for climate policy, 22 January 2021.
individual companies’ targets for for years and are well positioned for
3 Columbia Threadneedle Investments,
the energy transition. January 2021.
9
Responsible Investment Quarterly – Q4 2020 10
Responsible Investment Quarterly – Q4 2020
03 Country head focus –
Austria
There is little doubting Austria’s grand From green bonds to
green ambitions. After the September
2019 election of a coalition between sustainable investment
modern hardline conservatives and the The country’s green financing plots
Green party, a new “super ministry” its path towards creating a sustainable
was set up covering transport, economy. The first issuer of green
energy, the environment, science bonds was Verbund AG, an energy firm,
and innovation. It promised a wave which in 2014 raised €500 million
of initiatives to “green” the economy, for hydro and wind power plants.5
and place environmentally sustainable In 2018, the company raised a further
business at the core of the country’s €100 million from a digital green
growth strategy.1 Schuldschein, which is a private debt
placement.6 Others have included
Perhaps distracted by the Covid-19
Herbert Kronaus crisis, critics say that little has
property bank Hypo Vorarlberg, which
Country Head Austria issued a €300 million green bond
happened yet to fulfil that early
in 2017 7 to finance mortgages on
rhetoric. Even so, sustainable business
low-carbon buildings. In 2021, the
is thriving. The country hosts one of
government has indicated it intends
Europe’s largest “green tech” clusters
to launch a sovereign green bond,
around the city of Graz, with more
providing a boost to the market.8
With strong green than 200 companies developing green
credentials in renewable technologies and services. Further, Over time, the Vienna Stock Exchange
hydroelectric plants generate around has joined the development of green
energy generation and 60% of the Alpine country’s electricity.2 finance. In 2018, for instance, it
technology, as well as a Taking advantage of its mountainous
introduced a green and social bonds
listing, adopting the Green Bond
growing sustainable finance geography, Austria aims to generate
Principles of the International Capital
sector, Austria should be 100% of its electricity supply from
Markets Association. The principles
renewable sources by 2030, up from
well positioned as the world current levels of around 80%.3 In doing
are a badge of quality providing for
transparency and disclosure, allowing
turns to more sustainable so it is likely to turn to green finance.
investors to evaluate environmental
To date, projects have been financed
business models impacts.9 As long ago as 2005
by the European Investment Bank
the exchange launched VÖNIX,10
as well as by green bonds, despite
a capitalisation-weighted index of
Austria lagging Europe’s leading green
Austria’s leading companies, based
bond issuers such as France, the
on their social and environmental
Netherlands and Germany.4
11Responsible Investment Quarterly – Q4 2020
activities. One of the first national A well-positioned economy Source:
1 FT.com, Climate crisis helps burnish Austria’s green
sustainability indices to be launched credentials, 9 September 2020.
by a leading exchange, the index Austria has a long history in 2 FT.com, Climate crisis helps burnish Austria’s green
has helped underpin growth in sustainable investing. The country’s credentials, 9 September 2020.
3 European Commission, EIB and UniCredit Bank
ESG investing. Eco-label for Sustainable Financial Austria finance development of one of Austria’s
Products is one of the oldest of its largest wind farms, 31 August 2020.
4 Bloomberg, 2020.
Turning to asset management, the kind in Europe, and around 130 funds 5 https://www.verbund.com/en-at/about-verbund/
sustainable investment universe in Austria are currently certified with news-press/press-releases/2014/11/14/
verbund-begibt-ersten-oesterreichischen-green-
continues to grow, according to the this label.14 bond, November 2014.
latest report from Forum Nachhaltige 6 VERBUND places the first ESG linked syndicated
Geldanlagen (FNG), an industry But institutional investors are not loan, November 2018.
7 https://www.ebrd.com/news/2017/ebrd-invests-
association promoting sustainable stopping here. In September, the in-green-bonds-issued-by-the-lithuanian-utility-
investment in Germany, Austria and Fachverband der Pensionskassen lietuvos-energija.html, July 2017.
8 New sovereign and corporate issuers cement
Switzerland. In 2019, sustainable called for the introduction of a “green Europe’s green bond leadership. S&P Global
assets in Austria reached €30.1 billion supplementary pension” to encourage Market Intelligence. 19 October, 2020.
https://www.spglobal.com/marketintelligence/
as private investors increased their further investment by pension funds. en/news-insights/latest-news-headlines/new-
investments by €6.75 billion or The idea is that if supplementary sovereign-and-corporate-issuers-cement-europe-s-
pensions conformed to minimum green-bond-leadership-60587041
almost three quarters (77%).11 9 Green and Social Bonds – A Platform for
sustainable investment standards, Sustainable Investments, Wiener Boerse.
But institutional investors still they would attract additional tax https://www.wienerborse.at/en/issuers/bond-
admission-listing/green-and-social-bonds/
own three-quarters of all Austria’s breaks.15 10 https://www.wienerborse.at/en/news/vienna-
sustainable assets,12 with pension stock-exchange-news/voenix-sustainability-index-
So what does the future hold once new-composition-24062019/, June 2019.
funds the biggest supporters. 11 https://www.forum-ng.org/en/fng-the/
A recent survey by the Fachverband the Covid-19 pandemic begins to fade? activities/983-fng-marktbericht-nachhaltige-
Despite a slow start in honouring its geldanlagen-2018-austria.html
der Pensionskassen, Austria’s 12 Markbericht Nachhaltige Geldanlagen 2020, Forum
occupational pension fund association, commitments, environment minister Nachhaltige Geldanlagen. https://www.investment-
Leonore Gewessler has said she is zukunft.at/cms/wp-content/uploads/2020/06/
revealed that Pensionskassen (pension FNG-Marktbericht-2020.pdf
funds) in Austria invest €15 billion committed to using state aid to fund 13 Austrian Pensionskassen association pushes for
green projects.16 Beyond that, sustainable investments, IPE. https://www.ipe.com/
sustainably, representing 61.5% of news/austrian-pensionskassen-association-pushes-
their assets under management.13 Austria’s strengths in renewable for-sustainable-investments/10047630.article
energy and green tech are likely to be 14 The sustainable investment market in Austria is at
historic levels, Born2invest.com.
rewarded if the world shifts to a more https://born2invest.com/articles/sustainable-
sustainable economy. investment-market-austria-historic-levels/
15 Austrian Pensionskassen association pushes for
sustainable investments, IPE. https://www.ipe.com/
news/austrian-pensionskassen-association-pushes-
for-sustainable-investments/10047630.article
16 FT.com, Climate crisis helps burnish Austria’s green
credentials, 9 September 2020.
12Responsible Investment Quarterly – Q4 2020
13Responsible Investment Quarterly – Q4 2020
04 Infrastructure investing in a
post-Covid world
Benjamin Kelly Ingrid Edmund
Senior Analyst, Global Research Senior Portfolio Manager
The nature of sustainable have reached more than $1 trillion This is unlikely to fade as the world
infrastructure investment has been of assets for the first time – with the emerges from the pandemic. There is
changed by Covid-19. The economic third quarter of 2020 alone seeing growing realisation by investors that
impact of the pandemic, as more than €50 billion.1 Heading into infrastructure investments have long-
governments around the world restrict the pandemic, sustainable investment term consequences on communities,
movement and business activity was typically more likely to focus on and ultimately integrating ESG is not
in an attempt to slow the spread the environment and climate change just a risk mitigation tool but a return
of the coronavirus, has prompted mitigation strategies – indeed, when generator and an opportunity to create
unprecedented levels of state spending companies and other organisations further value by shaping positive
in areas of infrastructure ranging talked about their ESG (environment, outcomes.
from healthcare and education to social and governance) performance,
employment programmes. the emphasis in recent years has
been very much on the first of those
Climate change investment
In response, capital markets have three factors. and Covid-19
seen a record level of issuance of
social bonds to raise funds for such But investing to produce more The idea that investing in infrastructure
projects. Morningstar estimates beneficial or equitable social outcomes can benefit the environment and/or
that European sustainable funds is now firmly in the spotlight. mitigate the impact of climate change
14Responsible Investment Quarterly – Q4 2020
is not new. What is different is the This highlights that more needs to be economy such as transportation, which
pandemic has changed some of the done to prevent economic recovery has until now proved challenging with
dynamics. leading to a rebound in emissions. electrification. Europe’s €180 billion
investment to scale up and deploy
Reduced travel, industrial activity and The post-pandemic period is likely clean hydrogen7 could see a sharp
electricity generation during Covid-19 to provide opportunities to increase reduction in costs and promote the
saw global emissions fall by up to investment linked to climate-change scaling up of production and use of
7% in 2020, according to the UN mitigation: the EU, for example, has renewable hydrogen.
Environment Programme.2 This impact indicated it will put the environment at
will likely extend well into 2021. the centre of its Covid-19 economic This will provide additional opportunity
Further lockdowns have already been recovery plans,3 while the UK has in creating a smarter, reinforced
imposed across the world, and it recently announced more ambitious distribution grid and new balancing
may take several years for demand in proposals to meet its emissions solutions that will enable the
sectors such as air travel to return to targets.4 The green stimulus doesn’t integration of more decentralised
pre-pandemic levels. only achieve a reduction in emissions renewables resources. This includes
but also fosters investment which can smart metering and storage
Despite this, atmospheric CO2 is boost job creation in manufacturing, among other things. The European
continuing to rise. This shows that construction and small and medium- Commission estimates that €350
while the measures imposed during sized businesses, and save billion in additional annual investment
the pandemic are helpful in terms of consumers money. will need to be made between 2021
reducing global emissions, they remain and 2030, compared with the previous
far from what scientists estimate is In the US, newly appointed president decade. Most of the extra money is
needed. Joe Biden has said the US will rejoin to finance interconnections to link
the Paris Agreement,5 and several US up countries’ grids and new capacity,
Meanwhile, the downturn in business states already have goals in place to
activity in 2020 has also led to a including replacing old power and
hit at least 50% renewable energy by industrial plants.8
sharp fall in fossil fuel prices, and the end of the decade.6
as economies return to growth there
is the chance that expansion could There are no signs that the tough A boom in social bond
be underpinned by cheaper oil and climate targets put in place by
gas, with a concomitant increase in governments around the world prior
issuance
emissions. Furthermore, while the to the Covid-19 crisis will be watered As a barometer for identifying trends
share of renewable energy production down, which bodes well for the future within environmental and social
has been increasing exponentially, it of sustainable investment. An example investing, look no further than the
only translated into 18% of the EU’s is the endorsement of green hydrogen issuance of specific-use-of-proceeds
gross final consumption in 2018, by governments. Hydrogen has been bonds, especially green, social and
with results in transport and heating/ positioned as the clean technology sustainability. Issuance in 2020 was
cooling particularly below expectations. solution to decarbonise areas of the underpinned by a sharp increase in
15Responsible Investment Quarterly – Q4 2020
the issuance of social bonds (more Covid-19 bonds covering either social Social infrastructure
than 700% year-on-year)9 – where and/or sustainability projects.11
debt financing is channelled to But a record year for social issuance investment after the
specific projects with agreed socially has not been at the expense of green. pandemic
beneficial outcomes. This could And this whole segment of issuance
The socioeconomic impact of the
be the creation of jobs, setting up – ie green, social and sustainability –
coronavirus is likely to be long-lasting:
healthcare programmes or facilities, or was on the cusp of issuing
it already appears to have exacerbated
the provision of education or training. $0.5 trillion in debt in 2020, another
income inequalities in many
The pandemic has had a devastating record. As such the rise in social
communities, with employment among
impact in all of these areas. has not been a zero-sum game,
better paid white-collar workers less
with issuers still raising finance for
By the end of November 2020 a total likely to have been affected than those
environmental and social projects
of $155 billion were issued,10 an in customer-facing roles or jobs that
and increased examination of social
increase of 869% on the same period cannot easily be done remotely.
factors is not expected to be a
in the previous year. Around $100 transitory trend, this is the new But the rise in social investing
billion was raised by issuing dedicated normal for sustainability investing. may have helped create a better
understanding of the interplay between
environmental and social concerns.
Figure 1: social, green and sustainability bond issuance, 2018-2020 ($bn) For example, the EU sees a new green
deal as the route out of the pandemic-
300
induced recession because of its ability
to create thousands of jobs, not just
250
because it will help the bloc reach its
emissions deadlines. Recent research
200 suggests investment in green projects
could create up to three times as many
150 jobs as investment in competing fossil
fuel-based projects (Figure 2).
100
A reduction in reliance on oil and gas
can have additional social benefits:
50 improvements in air quality as a result
of the switch to electric motor vehicles,
0 for example, are expected to deliver
Green Social Sustainability
major health benefits, and these will be
2018 2019 2020
felt disproportionately by those living in
Source: Bloomberg/World Bank, December 2020. more crowded urban areas.
16Responsible Investment Quarterly – Q4 2020
Ultimately, progress in minimising the Source: 7 https://ec.europa.eu/commission/presscorner/
1 Prequin Pro, October 2020. detail/en/QANDA_20_1257
impact of climate change will inevitably 2 https://www.unenvironment.org/emissions-gap- 8 https://www.spglobal.com/marketintelligence/
have huge social implications in terms report-2020, 9 December 2020. en/news-insights/latest-news-headlines/eu-says-
3 https://ec.europa.eu/info/strategy/recovery-plan- higher-climate-goal-requires-350b-extra-energy-
of reducing the prevalence of extreme
europe_en investment-per-year-60382093
weather events, thereby limiting the 4 https://www.ft.com/content/3eda6c6f-265f- 9 Columbia Threadneedle analysis, 2020.
extent to which they can ruin harvests, 4804-a017-a260d1e101cc 10 Bloomberg, November 2020.
5 https://www.theguardian.com/us-news/2020/ 11 Columbia Threadneedle Investments, June 2020.
damage property and displace people nov/08/joe-biden-paris-climate-goals-0-1c
in the decades ahead. 6 Bank of America Merrill Lynch, May 2020.
Figure 2: Jobs per million investing in green projects versus fossil fuels
Source: Will Covid-19 fiscal recovery packages accelerate or retard progress on climate change? May 2020 Cameron Hepburn, Brian O’Callaghan, Nicholas Stern, Joseph.
17Responsible Investment Quarterly – Q4 2020 18
Responsible Investment Quarterly – Q4 2020
05 Solutions to the ever-growing
plastic waste problem
Olivia Watson Drew Kettwick
Senior Analyst, Senior Analyst,
Responsible Investment Research US High Yield
Plastics can bring environmental Figure 1: Plastic production by sector
and economic benefits – for
400
example, in reducing food waste,
cutting transport emissions through 350
Primary Plastic Production (in Mt)
lightweighting consumer goods, 300
minimising packaging costs, and
250
enabling more flexible product supply
chains. These benefits, among others, 200
have accounted for the rapid growth 150
in plastics – typically exceeding the
100
rate of global GDP growth over the
past 50 years (Figure 1). 50
But given the scale of growth, single- 0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
use plastics and plastic packaging Other Textiles Industrial Machinery Consumer & Institutional Products
now represent an increasing proportion Electrical/Electronic Building & Construction Transportation Packaging
of waste streams. The amount
Source: Geyer, Jambeck and Law, 2017, Production, use and fate of all plastics ever made, Science Advances, vol 3/7,
of global plastic waste which has https://advances.sciencemag.org/content/3/7/e1700782
120%
19
100%Responsible Investment Quarterly – Q4 2020
been recycled is estimated at only Most notable among these are: develop new recyclable packaging and
9%.1 These low recycling rates are solutions, will be better positioned.
compounded by a lack of sufficient n Extended producer responsibility So what measures are proactive
waste collection and processing requirements – which shift the consumer brands adopting?
infrastructure in much of the world. costs of managing packaging waste
Most plastic waste is incinerated, sent from taxpayers or consumers to
to landfill or escapes to waterways, packagers and consumer goods Packaging reuse
oceans or land where it can become companies. Diverse companies from Kroger
long-lasting pollution, entering n Plastic taxes – which seek to and Unilever to Burger King are
ecosystems and even food chains. rebalance the cost differential experimenting with packaging reuse
between recycled plastic and lower models – ranging from in-store refill
In recent years, consumers and cost virgin fossil-based materials. centres to reusable packaging for home-
non-governmental organisations The UK plans to introduce plastic delivered or store-bought products, to
(NGOs) have pushed back against the taxes from 2022 3 and the EU roving low-cost product refill services
rising plastic use trend, and regulators recently announced a €0.80/kg tax in urban areas. Such models currently
have joined in at a rapid pace. on non-recycled plastic waste.4 represent a tiny proportion of sales,
The number of countries adopting but the Ellen MacArthur Foundation
n Recycled content requirements –
plastic bag bans or taxes are now estimates that converting 20% of
mandating certain percentages of
too numerous to mention. At the plastic packaging to reuse models
recycled plastic in packaging, such
onset of the coronavirus pandemic could represent a business opportunity
as those in the UK, Europe and
there was some expectation that this in excess of $10 billion.6 Such pilot
California coming in between now
trend would diminish, with consumers schemes provide brands with the
and 2030.5
having a greater appreciation for the opportunity to increase consumer loyalty,
hygiene benefits of single-use items As consumer attention intensifies and in some cases improve consumers’
and plastic packaging. But this was and these regulations ramp up, the experience of their products.
not the case – companies report costs of plastic packaging waste will
that the issue remains high on the gradually be internalised – via taxes
agenda for consumers, and several, and increases in costs, requirements Product and packaging
including Coca-Cola, have accelerated for investment in new technologies, redesign
their plastic targets and plans since and requirements for investment in
Improving packaging or eliminating
Covid-19.2 infrastructure to enable plastics to
unnecessary packaging materials also
become more circular.
While plastic bag bans themselves provides opportunities to experiment
are likely to be limited in impact, other We believe brands that proactively with new products, improve consumer
regulations will shift the plastics and respond to shifting consumer perceptions and reduce costs. Tesco
packaging landscape for companies preferences and secure access to recently highlighted having eliminated
and their investors. recycled content, and those that 3,480 tonnes (or a billion pieces)
20Responsible Investment Quarterly – Q4 2020
of unnecessary plastic packaging Much of the effort is directed toward pandemic. However, there may still be a
from across its product range and meeting voluntary or regulatory targets, shortfall prior to 2025 when availability
those of its suppliers,7 providing which are often focused on 100% of food grade recycled plastic may be
an appealing message to address recyclability and 25% recycled content squeezed. This also comes at a price
consumer concerns while resulting by 2025. Progress against these premium – Nestle has committed to
in cost savings. Brands such as Tide goals is varied, but generally slow. spending up to $1.6 billion over the
have released new products such as Among consumer goods and packaging next five years to source two million
concentrated detergents8 – reducing members of the Ellen Macarthur tons of food-grade recycled plastics.11
packaging as well as transport costs Foundation Global Commitment on Such commitments should help to
and emissions. Plastics, only 6.2% of plastics volume jump start further investment in plastic
(by weight) was from recycled sources recycling infrastructure.
400 10 At the same time, some
in 2019.
Substitution companies have not yet set specific Meanwhile companies such as Britvic,
350
Substitution of plastics with other plastic packaging targets. Figure 2 a UK beverages producer, are seizing
Primary Plastic Production (in Mt)
materials will benefit packagers 300
highlights the varied degree of progress opportunities. The company has moved
offering innovative or recycled and250
the gap to 2025 targets among rapidly with even more ambitious
packaging, as well as those focused some goals – an aim to shift to 100%
200 consumer goods companies.
on other widely recycled materials recycled plastic, to be sourced in part
such as paper and aluminium. The150
gap between current practice and via a co-investment in a PET recycling
Substitution of virgin and non- 2025
100
goals highlights that just as facility.12 This approach positions the
recyclable plastics with recycled and important as setting high-level goals is company well for forthcoming plastics
50
the process of securing cost-effective regulations, enables a clear message
recyclable plastics will also play a
key role, given the significantly lower recycled
0 content supply. The market for to consumers, and potentially offers
1950content
recycled 1955 1960 1965 rapidly,
is growing 1970 1975
with 1980the 1985 1990 1995
company 2000advantage
an early 2005 2010 2015
greenhouse gas profile of recycled
Other Textiles
capacity coming on stream despite the Industrial Machinery Consumer &
relative to competitors.Institutional Products
plastics as compared to virgin Electrical/Electronic Building & Construction Transportation Packaging
materials. Bioplastics are often touted
as a solution, and while they may
have a role to play this can be open Figure 2: 2025 recycled plastic targets vs current levels
to question. Not all bioplastics are
120%
more recyclable or biodegradable than
fossil-based plastics, posing the same 100%
end-of-life challenges and potential 80%
reputational risks for companies
60%
making environmental claims.
The case of Bacardi’s bioplastic bottle 40%
highlighted some of the challenges.9
20%
0%
Increasing recyclability and
Britvic
Coca-Cola Co
Danone
PepsiCo
CCEP
Nestle
Colgate Palmolive
L’Oreal
Walmart
Starbucks
Carrefour
Mondelez
Mars
SC Johnson
Clorox
Kimberly Clark
Target Corp
Lidl
Ferrero
Conagra
Kraft Heinz
General Mills
Amazon
Tesco
Unilever
Marks and Spencer
Reckitt Benckiser
Kellogg
use of recycled materials
Finally, and perhaps most critically,
the focus of much attention lies
in making plastic more circular via 2025 Recycled plastic packaging target 2019 % recycled plastic in packaging
increasing packaging recyclability and
Sources: Data drawn from corporate websites and the Ellen MacArthur Foundation Global Commitment Progress Report
increasing use of recycled plastics. December 2020.
21Responsible Investment Quarterly – Q4 2020
Analyst viewpoint: Procurement of high-quality use plastic packaging will be the most
recycled resins to meet the recycled at risk to the negative consequences
the implications of these content target of consumer products of a shift in packaging demand.
changes for packagers and companies will be a key challenge
Plastic packaging companies will
for plastic packaging companies given
investors the limited infrastructure for plastics need to adapt their businesses for
The changing regulatory environment recycling and lower overall plastic sustainability by offering a combination
and shift in consumer preferences recycling rates, notably in the US. of higher recycled content, bio-plastic
for plastic packaging has far reaching To meet this demand, a more products and improved product
implications for the packaging sector. robust recycling infrastructure will be recyclability to remain competitive
Our view is that growth in plastic needed, especially for post-consumer in the marketplace. Companies that
packaging is likely to continue, plastic waste. can adapt by offering innovative
but at a slower rate as scrutiny on eco-friendly plastic products will be
environmental impacts intensifies. While these changes create risks to net beneficiaries as these more
Global growth will also likely be individual companies and business sustainable options typically carry
more heavily weighted to emerging models, they also create investment a higher margin profile than non-
economies where the market adoption opportunities within the sector. sustainable products, while also
of plastic packaging is lower and We continue to apply fundamental serving as a differentiator to win new
regulations are less stringent. and relative value analysis through business and achieve better growth.
an ESG lens to companies within the
Companies within the packaging packaging sector to determine which Other businesses within the packaging
sector will need to continue to are best positioned to capitalise and sector that are likely to benefit from
adapt to a changing landscape to which are most at risk in this evolving the sustainability push will be those
remain competitive by improving the landscape. Businesses most at risk, that offer cost-effective substitutions
recyclability of plastic, introducing more in our view, are tied to low value- that are viewed as more eco-friendly,
eco-friendly products and promoting add and easily substituted plastic including aluminium cans and cups,
sustainability within their products to products. These are typically single- paper products and other bio-based
meet customers’ demands. This will use products such as straws, plastic or high recycled content products.
also carry associated costs, including tableware, cups, beverage bottles and As an example, Ball Corporation
increased R&D spending to develop non-reusable plastic bags. Companies recently introduced a line of aluminium
new products, procuring supplies of with significant exposure in these beverage cups. They are lightweight
more costly and scarce recycled resins, areas face the highest risk of outright and infinitely recyclable and, while
taxes on waste, and improved ESG product bans or regulatory curtailment, slightly more expensive than a
disclosure to investors and customers but also threat of substitution to other traditional plastic cup, is taking
about plastic packaging manufacturers’ packaging substrates. Companies with market share from plastic as a more
sustainability goals and progress. a combination of elevated financial environmentally friendly alternative.13
leverage and high exposure to single-
22Responsible Investment Quarterly – Q4 2020
What next? such as the Alliance to End Plastic 3 FT.com, UK to introduce plastics tax for packaging
by April 2022, 29 October 2018.
Waste, the Sustainable Packaging 4 https://www.icis.com/explore/resources/
As investors, we continue to engage Coalition, and the Ellen MacArthur news/2019/03/07/10329804/eu-commission-
with management teams of consumer Global Commitment as a positive proposing-0-80-kg-tax-on-production-of-all-non-
recycled-plastics, March 2019.
goods and packaging companies signal of commitment to working 5 https://www.gov.uk/government/publications/
to better understand their relative towards long-term solutions for plastic introduction-of-plastic-packaging-tax/plastic-
positioning and progress towards packaging-tax, 26 November 2020.
packaging. Plastic packaging offers 6 Ellen MacArthur Foundation, The New Plastics
shaping their products and packaging benefits to society and we believe Economy: catalysing action, 2017.
to meet changing regulatory and 7 Tesco removes one billion pieces of plastic –
it will be a viable long-term product, Tesco PLC, 30 December 2020.
customer demands. We also continue but challenges remain. A shift to a 8 Compaction | Sustainability – Tide, accessed
to push for improved disclosure of more circular and innovative model
5 February 2021.
9 Bloomberg Opinion, Has Bacardi Solved the
ESG and plastic-related targets will enable plastic packaging to World’s Plastic Problem?, 2 December 2020.
and metrics to better understand remain relevant and become a more 10 Global-Commitment-2020-Progress-Report.pdf
(ellenmacarthurfoundation.org)
companies’ risk exposure and sustainable option in the future. 11 Nestlé creates market for food-grade recycled
progress on key issues. plastics (nestle.com), 16 January 2020.
12 Britvic announces move to 100% recycled plastic
Consumer goods and packaging bottles in Great Britain by the end of 2022 –
Source: Britvic PLC, 20 October 2020.
companies will be key constituents 1 Production, use, and fate of all plastics ever 13 Atlanta Business Chronicle, Ball Corp aluminum
in the move to a more circular and made | Science Advances (sciencemag.org), cup plant producing for retail launch first half
19 July 2017. 2021, February 2021.
sustainable plastics economy, and we 2 Coca-Cola turns to 100% recycled plastic bottles
view representation within initiatives in U.S. | Reuters, 9 February 2021.
23Responsible Investment Quarterly – Q4 2020 24
Responsible Investment Quarterly – Q4 2020
06 Considerations and obstacles to
climate change risk management
These include: largely limited to equities, credit
and sovereign bonds. Thankfully,
n Determining at which point of the publication of the IIGCC Paris
the portfolio construction process Aligned Investment Initiative will
climate change risk management assist asset managers and asset
considerations should be owners in implementing investment
implemented and whether they policies in line with the Paris
should be a primary or secondary Agreement’s goals.2
consideration. For most, climate
n Establishing what “good” looks
change risk management will be
like. Although the Paris Agreement
integral to manager selection
sets a very long-term target to aim
but perhaps secondary to
at, asset owners will invariably look
considerations such as the
to their peer group for an initial
portfolio’s required rate of return,
Chris Wagstaff risk parameters, diversification
baseline comparison and ongoing
Head of Pensions and monitoring of their chosen climate
and liquidity when determining the
Investment Education metrics. To do so successfully
strategic asset allocation, given
will require greater levels of
the potential to significantly alter
transparency from all, with each
the risk/return, diversification
setting realistic interim milestones.
and liquidity characteristics of
What must asset owners ask the portfolio.
themselves in approaching – and n Whether to align portfolios Three key obstacles to
the challenges they must overcome with the objectives of the Paris assessing carbon and
in implementing – an effective climate Agreement,1 as many asset
change risk management policy? owners are already starting
greenhouse gas emissions
to do, some in anticipation of exposures
Climate change as a global systemic
regulation potentially moving
risk is increasingly integral to asset With the above in mind, asset
in that direction. However, this
owners’ risk management. owners (assisted by their investment
is no easy task given that there
However, in approaching and consultant and asset managers) must
is no single validated approach
ultimately implementing a climate navigate their way around three key
for measuring and evaluating
change risk management policy, obstacles to assessing the carbon and
the temperature alignment and,
asset owners must ask themselves greenhouse gas emissions exposure of
indeed, the carbon intensity of
some fundamental questions while their portfolios. These are: the paucity
a portfolio. Not to mention the
taking on board a number of key of quality Scope 1, 2 and, particularly,
transition pathways of a portfolio’s
considerations. 3 greenhouse gas emissions data
holdings with data availability being
25Responsible Investment Quarterly – Q4 2020
analytics; the inconsistency of ESG ESG factors consistently. Reassuringly, Indeed, with greater disclosure and
(environmental, social and governance) those asset managers with strong transparency comes the ability to better
data, of which climate risk is a key stewardship and ESG credentials assess and price climate-related risks
“E” risk factor; and inadequate are working on class-leading and and opportunities pertaining to each
disclosures by companies of their differentiated solutions which, over business which, in turn, leads to more
greenhouse gas emissions. The latter time, will enable them to provide asset accurately priced securities, more price-
severely compromises the accuracy owners with more accurate data to efficient financial markets and more
of both ESG data and the greenhouse further inform their decision making. efficient capital allocation. Thankfully,
gas emissions data compiled by the direction of travel is for companies
data vendors and analysed by Inconsistent company disclosures to fully disclose the climate risks
asset managers. of GHG emissions However, associated with their activities in a more
this aspiration continues to be standardised and consistent manner.
Scope 1, 2 and 3 emissions data compromised by inconsistent
analytics Measuring emissions is company disclosures of greenhouse Ideally benchmarked to science-based
not an exact science. Scope 3 gas emissions. While there are a targets aligned with the Paris targets,
emissions in particular are poorly number of global reporting frameworks, asset managers and asset owners
defined, largely estimated and subject such as the Task Force on Climate- will be better able to back the winners
to double counting, while there is related Financial Disclosures (TCFD), – those with the technologies and
significant disparity among data that help companies voluntarily report competitive advantages to thrive in the
providers in capturing the data as sustainability information to a wide transition to a low carbon emissions
each adopt different methodologies range of stakeholders, not all pull world. They will also be able to use
and take a different view on the same in the same direction. Of course, this information to make informed
factor. Despite these limitations, given how new the science of climate decisions around excluding or tilting
investors are using the available disclosure is, it is perhaps inevitable a portfolio away from particular
data (principally Scope 1 and 2, but that these bodies are each grappling industries or stocks.
also Scope 3 – often after making with what “good” looks like and which
judgmental adjustments) to formulate metrics best capture the climate-
views on which companies are striving related risks of (and opportunities
Transition and physical risk
to boost their sustainability credentials offered by) reporting entities operating analysis and reporting
and then using the data to track how in myriad sectors. However, each Transition and physical risks analysed
these companies progress over time. continues to adapt in order to provide by asset managers are reported to
investors with the information they asset owners, many of whom are
Inconsistent ESG data As many ESG need to make informed decisions
data providers have inconsistent increasingly analysing these risks
about the sustainability of a themselves and, in turn, reporting
coverage, lack standardised company’s activities.
methodologies and provide subjective the carbon intensity of their portfolios
ESG assessments of companies this (against appropriate benchmarks) to
makes it extremely difficult to measure their members or beneficiaries.
26Responsible Investment Quarterly – Q4 2020
Portfolio exposures to these risks by carbon lock-in. This is where Source:
1 The Paris Agreement’s central aim is to keep a
are typically reported through carbon more analytical effort needs to be global temperature rise this century well below
footprinting. The TCFD recommends concentrated. 2°C above pre-industrial levels and to pursue
efforts to limit the temperature increase even
that asset owners report the weighted
Likewise, physical risk analysis further to 1.5°C by 2100.
average carbon intensity of their 2 The Institutional Investors Group on Climate
portfolios (per individual security can be approached from several Change (IIGCC) is the European membership
different angles. For instance, where a body for investor collaboration on climate change,
weightings) based on Scope 1 whose mission is to mobilise capital for a low
and 2 emissions (those within an portfolio’s assets are “geo-locatable”, carbon transition. The Paris Aligned Investment
organisation’s control) and expressed it is possible to measure exposure to Initiative is led and coordinated by IIGCC with a
steering group of leading asset owners
in terms of tonnes of CO2 equivalent physical risks associated with climate (https://www.iigcc.org/resource/iigcc-paris-
(tonnes CO2e)/$m sales). However, change directly using catastrophe aligned-investment-initiative/)
many asset managers in their reporting risk modelling tools, analysing the
to asset owners, especially for equity portfolio’s physical risks by perils such
portfolios, provide additional metrics as floods, earthquakes and wildfires.
such as carbon emissions (tonnes This, in turn, can trigger more detailed
CO2e/$m invested) and total carbon analysis as to how such a risk exposure
emissions (tonnes CO2e). is managed or insured.
Perhaps the most obvious limitation As an extension of this risk analysis –
of carbon footprinting is that it doesn’t although very much a work in progress
capture the costs associated with and notwithstanding the three limiting
reducing a company’s carbon footprint. factors identified earlier – asset
Indeed, two companies in different managers and asset owners are
industries, or any two industries, may seeking to add to their climate change
share the same carbon exposure but risk management by developing climate
one may find it much easier and less Value-at-Risk (VaR) measures of their
costly to reduce its carbon footprint portfolio climate exposures to estimate
than the other, having a transition potential portfolio losses under a given
pathway that isn’t as compromised climate scenario.
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