Asset management that reflects the sustainability concerns of investors has rapidly emerged as a key growth driver and innovation in financial markets. Nearly one-quarter of issuance in European bond markets now has a green or other sustainability labels, and fund managers have rapidly restyled products to reflect public interest in climate and other sustainability risks. Policymakers also call for a mobilization of private capital as the climate transition unfolds. Yet, investment practices remain in flux and the industry is regularly exposed to allegations of greenwashing. Investment allocations screened with ESG ratings may help in marketing products though often deliver limited impact. So, it was high time to convene our two-day executive seminar in ESG and Impact Investment at Frankfurt School on 25-26 May, complementing the eponymous course in our E-Campus.
Our course was designed to equip investment professionals with tangible skills and expertise to bring greater integrity to ESG-based investment and help investors design financial products that deliver on the shifting values and targets of asset owners.
At the core of our agenda was an extended discussion of climate impact investing. Investment professionals not only need to understand the evolving climate science and scenarios but also the rapidly emerging innovations in low-carbon technologies. For almost half the world’s population, renewables are now cheaper than existing coal and gas-based power. This spells a compelling investment case even though emerging markets require a deep understanding of investment barriers and policy risks. Where financial products remain tied up in the so-called stranded assets of the fossil fuel economy investors will be exposed to sizable risks from the inevitable climate transition.
We built on these insights with in-depth discussions of best practices in ESG investing. Over the past 15 years, the industry has evolved quickly, moving from ethical considerations that motivated the exclusion of certain sectors to the integration of ESG criteria in the investment process, often motivated by claims such a strategy would outperform a more agnostic style. Yet, industry leaders are already focused on the next stage in ESG investing – targeting impact by providing additional capital directed to firms with ambitious forward-looking commitments. This shift is rooted in the recognition that many existing approaches to ESG investing have failed to deliver on initial claims, as demonstrated in the empirical literature that has emerged over recent years. ESG integration rarely delivers outperformance, and impact funds often simply align with impact at the level of the firm but do not enable such impact.
For these reasons, asset owners will increasingly challenge asset managers on ESG and impact claims. For instance, there is now much greater scrutiny of green bond frameworks, and bonds that reward sustainability outcomes are gaining ground. Two further lectures in our course offered detailed insights into the evolving landscape of ESG data and ratings, and the way in which fund products are classed as reflecting sustainability claims under the new European Sustainable Finance Disclosure Regulation (SFDR). Impact investors also increasingly comply with international standards in reporting and evaluation which have been pioneered by development institutions. Only on the basis of such reporting can the many private sectors claim that investment underpins the UN’s Sustainable Development Goals (SDGs) become credible. This increasing linkage between private and public investors also became clear in the lecture on blending, the structuring technique used in any combination of commercial finance with concessional finance which is provided by development institutions and private grant-making organisations.
Overall, these two days of lectures offered rich and engaging discussions in a field of finance that is still young and rapidly evolving. Our ambition of presenting finance research and instilling a greater sense of realism in ESG and impact investing was hopefully met. Participants should now be equipped to play a central role in their organisations’ sustainability strategies, translating values that meet investor sustainability expectations. That said, future iterations of this course will no doubt need to reflect new insights from climate science, technology, economics and policy. In this effort, Frankfurt School should play a key role, drawing on our world-class faculty and the vibrant green finance ecosystem in our home city.