What have been the major recent developments in sustainable investing?
The world of sustainability and sustainable investment continued to evolve rapidly during this quarter. I'd like to highlight just three areas of developments. The first one is sustainability reporting standards. So last month we saw the International Sustainability Standards Board released their first set of sustainability standards; both those covering a broad or general set of sustainability risks and opportunities and also some more specific climate related indicators. Now the hope is that these standards are going to help improve consistency. We've certainly already seen a number of jurisdictions indicate willingness to support and to essentially use them as the underpinning of corporate sustainability disclosure regimes. Now that's important because we know a huge amount of the sustainable finance regulation is underpinned by disclosure. How we take ESG issues into account and into our investment decisions requires that as does the informing the large amount of capital allocation changes that need to be made towards net zero. So it's really good news. The question is, though, the extent to which this really will deliver harmonisation. We're already seeing within Europe obviously a slightly more extensive reporting regime and we saw early this month also this question whether they will continue with as I mentioned earlier an extensive, much more detailed set of disclosures, or whether they're going to indeed apply a sort of materiality lens to some of the additional disclosures. Now the issue of materiality is a key one. The ISSB has taken a single financial materiality lens whereas we know that European regulation very much comes from a double materiality view. So taking non-financial or sort of impacts on society environment into account as well. So it’ll be interesting to see how that develops.
The second area is reflecting a bit on the proxy season: so we've now seen quite a substantial amount of this year's companies’ AGMs resolutions. So perhaps picking out a few themes: one is climate continues to dominate on the shareholder resolutions. We seem to have seen a slight dip in shareholders support for those although too early to say whether that's because some of the resolutions themselves are changing, becoming a little overly potentially prescriptive around the climate transition plans and in part because a lot of the regulation is already mandating some of the disclosure of what we've more traditionally seen within the shareholder resolutions. We've seen diversity increase in most markets, focused predominantly on gender diversity but also increasingly seeing a broader concept of diversity come across particularly in the US as well. Other themes have been the rise of so-called anti-ESG resolutions. We've seen about 40 or so in the US, again very much often using the same framing as more traditional shareholder resolutions but in many cases questioning or asking for sort of cost benefit analysis around exactly the disclosures that most shareholders have indeed been asking for. We've also seen very early indications that actually nature and biodiversity may start coming more onto the ballots, but I said quite early days on that and there continue to be moves initially from a voluntary perspective but to encourage further transparency and disclosure around how asset managers, asset owners are indeed voting as well.
So then maybe just to close off on the other area, so Sustainable Finance Disclosure Regime and the broader EU sustainable finance package, we've seen a number of additional developments. We've seen the rollout of the additional sort of four areas of a taxonomy. Definitions are covering water, circular economy, pollution etc and we will see those sort of come through in terms of corporate disclosures in due course. We've also seen the clarification around sustainable investment definition although that did not provide much more detail from what was already there and still very much leaves it open for the market to define what is the sustainable investment provides that it contributes to an environmental social outcome, that it follows good governance practices and that it enshrines this principle of do no significant harm. We've also seen the first consultation already on the SFDR regulatory technical standard looking at whether we expand the principal adverse impact indicators to include additional social indicators and also adding a bit more detail on the climate piece as well. So again an area that continues to deliver in terms of additional guidance and clarification.
What’s your outlook for the rest of the year?
So two areas to focus on. One is the rise of climate transition plans; we are due to see a lot more guidance come out, so in the UK we have the transition plan taskforce which will be releasing their recommendations in the autumn. That is going to be really helpful as we're seeing increasing rise of the climate transition plan votes and indeed in certain jurisdictions including France looking at whether that becomes a mandatory vote for companies to put the transition plans to the vote. Now what constitutes a credible transition plan is obviously incredibly important, not just to ensure that we deliver and achieve the net zero transition but also how asset managers and asset owners deliver their own commitments to net zero as well. Other issues around transition plans that are coming more to the fore are this question around highlighting the interdependencies. Clearly government policy is absolutely key to enabling corporates to transition. Also they're looking at things like nature and how dependent they are as well as the just transition and the social element of achieving any net zero plan.
The second area is a focus on nature and biodiversity. So we saw earlier the publication of the TNFD, so the Taskforce on Nature Related Financial Disclosures. The final version is due out in September. It's been widely trailed and engaged with both from a corporate and investor side, very heavily focused and sort of leveraging off the Taskforce on Climate-Related Financial Disclosures (TCFD) framework that should start providing the sort of underpin and the disclosure framework for a lot more information on biodiversity. As I've mentioned earlier the interdependency and the sort of critical impact of nature in achieving net zero but also the value it brings in itself is becoming more and more apparent and more and more relevant to investors.
Is there one chart that has caught your eye?
Yes so not a new graph but an important reminder graph here from McKinsey really outlining the scale of the investment that's required for the transition to net zero. So USD 9.2 trillion annual investment to deliver against the net zero, a scenario. The important point here is to see that this is both in the low carbon assets but also the high carbon assets, which is again why the point around transition, the extent to which companies will or are able and if so how fast, is really key for investors.
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Christian Munafo of Liberty Street Advisors notes an improvement in market conditions for investors in late-stage private companies; many of these companies are similar to what public market investors used to seek in small to mid-cap growth stocks. He also stresses that many of them are not just high growth, they are also at or approaching profitability.
Goro Takahashi describes the key factors that influenced the Japanese market over the third quarter, particularly the main stock exchange’s ongoing initiative to improve listed companies’ financial indicators, and the areas he thinks investors should focus on into the turn of the year.
Julian Howard reflects on the combination of stretched valuation and a tight equity risk premium that has made equities less attractive in the short term. However, it does not undermine the very long-term case for equities, in his view. He also notes the long-term structural case for China.
GAM Systematic’s Dr Chris Longworth and Guglielmo Mazzola highlight bond sell offs and a commodities rally as significant market events, and note that systematic investment approaches can help provide investors with much-needed diversification for their portfolios.
Atlanti’s Gregoire Mivelaz highlights the three major events of Q3 that impacted his investment universe: earnings, bond call dates and the reopening of primary markets. He believes given we are now in a late credit cycle, credit quality matters for investors. And he notes that market mispricing is continuing to lead to opportunities.
Jian Shi Cortesi notes that weak sentiment in China is keeping Chinese equities at very low valuations, due to the soft economic growth, real estate drag and the ongoing China-US rivalry. However, she is optimistic about long-term prospects, with the conviction that in the long term earnings growth will drive stock prices.
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