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Putting the ABC In ESG - A Call For Clarity

Jackie Bennion, Deputy Editor, 14 November 2019

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Increasing green finance to build a more sustainable world is being hampered by confusing investment terminology. The IIF has introduced new language to clear it up.

Wading into the labeling morass that has become sustainable investing, the Institute of International Finance (IIF) has come up with recommendations. It hopes that these will simplify the proliferation of terms that are confusing investors and becoming a cover for "greenwashers" as all and sundry rush to increase their presence in the booming investment sector.

IIF members, representing around 150 banks, asset managers and insurers across 20 countries, agree that if the industry can work out a simpler structure consisting of a few broad categories, it could provide a massive boost for scaling up sustainable finance and meeting the Sustainable Development pledges that asset managers have become so fond of putting their signatures to.

Few in wealth management are without some form of sustainable investment offering but as BlackRock’s CEO Laurence Fink commented recently, taking it mainstream requires a durable framework for the way in which these managers label their investment strategies.

“Some sustainable investors are looking to use ESG factors to maximize long-term returns, while others are looking to avoid certain exposures or advance a specific outcome. Clearly articulating where an investment sits on the spectrum of sustainable investments will help all types of investors better align their capital with their goals,” Fink said.

To open up the pipes, the IFF is asking the industry to use “Exclusion,” “Inclusion,” and “Impactful” as three baseline labels. It has left “Philanthropic” outside the sustainable investment equation for now. The institute defines Exclusion Investments as those that actively avoid investing in unsustainable corporates/countries based on screens or other ways that identify particular issues or outcomes of concern; Inclusion Investments as those that actively invest in sustainable corporates/countries based on considering underlying data on issues or outcomes; and Impactful Investments as those seeking to have a direct, positive, measurable impact on society and/or the environment while targeting market, or better, financial returns.

Its president and CEO, Timothy Adams, said that simplifying industry terms may not be “the silver bullet” but it will help channel resources into meeting ambitious targets which governments and corporations have publicly set themselves.

Developing a financial system capable of channeling the roughly $5 to $7 trillion which the UN estimates is needed every year until 2030 to get the Earth off its destructive path has taken on North star dimensions more recently as the reality of a warming climate hits home. The International Energy Agency estimates that energy sector investments will need to double in the next decades and that 95 per cent of the world’s electricity supply will need to be low carbon by 2050. These are daunting targets and on the current trajectory the OECD puts annual SDG investment shortfalls at $2.5 trillion.

“Simplification and standardization of sustainable investment terminology is a crucial part of the plumbing needed to grow sustainable finance,” UBS board chair and IIF chairman Axel Weber said. “As the IIF paper shows, this is equally important for both private individual and institutional investors, and is not limited to one geography or market,” he said.

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