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Investors should engage with problem assets not exclude them, report warns

Investors should engage with problem assets not exclude them, report warns
 

A report has urged the UK financial sector to actively engage with firms with a poor ESG record instead of divesting ownership.

The financial industry should focus on companies’ positive contributions and not “blindly” apply exclusion lists, according to All Street Research’s ‘The Voice of the Financial Industry’ report.

“You can’t just wish away today’s brown industries,” the report states. “You can’t change today’s consumer behaviours overnight…investors need to engage with problem assets.”

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Stranded assets and environmentally unfriendly industries are better off in the hands of regulated entities with detailed transition plans that are subject to investor scrutiny, the report added.

“It is also worth remembering that ESG stands for much more than just the environment. It also stands for social and governance behaviour and best practice. It can encompass such things as gender equality, diversity, health and wellbeing, innovation, and business compliance and processes.”

The report, which includes contributions from investment houses such as Aegon Asset Management and Lloyds Bank, outlines 10 recommendations for the financial services sector in order to tackle climate change.

The first is to ensure a 2 degree change in climate is a firm’s base rate scenario, and to allocate capital accordingly.

“The quicker climate risk is priced into capital markets the better.”

However, financial institutions need to start factoring climate adaption into capital allocation decisions, the report added.

“They need processes in place to assess which governments, corporations, projects and real estate assets have adaptation plans in place…just as importantly they need to start disclosing to the market what they are doing to adapt.”

Other recommendations included investing in solutions to climate change, and performing comprehensive sustainability assessments that don’t solely focus on carbon targets.

“It is now clear that all sustainability metrics are interlinked with each other,” it said, adding that the planet won’t be saved by cutting carbon emissions alone, and recommended firms align their sustainability targets to the UN’s Sustainable Development Goals.

Paying attention to emerging markets also features in the list, and All Street Research said adoption of the sustainable development goals in emerging markets was higher in percentage terms in EM firms than those in advanced economies. 

“Not only are EM companies leading the way, but companies in the developing bracket are catching up with advanced economy companies in terms of their ESG footprint.”

Finally, the report urged financial institutions to use their “clout” to pressure governments into providing new infrastructure, bringing in legislation and starting to nudge consumer behaviour.

“Financial institutions cannot take all of the responsibility for fixing the planet’s problems, governments need to step up too.”

sally.hickey@ft.com