The urgency at COP27 is palpable. The alarm bells have sounded. The reality is sinking in. And government leaders know they now need to move from ambition to implementation.
The problem is that the cost of the required structural changes is expected to be enormous. This, at a time of massive pressure on government pocketbooks and rising inflation.
Perhaps not surprisingly, governments and multilaterals are looking to the asset management and banking industry to help cover the costs. The big question, then, is whether the financial sector is willing and able to help save the world.
It is. And it can.
Let’s start with whether they are willing. The CEOs of the major asset management behemoths are saying they are and have been talking about the financial risks of climate change for years. A recent KPMG survey shows that three-quarters of investment managers globally think they already have a fairly mature approach to climate investing.1
Those who aren’t climate evangelists yet are likely to be soon. In my view, there are not many options for asset managers who hope to keep their jobs for very long. On the one hand, you’ve got the financial regulators and associations who are unprecedently aligned on the role that investment managers must play in the journey to net zero. On the other hand, you have the savers themselves (more often than not, young, environmentally conscious and purpose-driven) who simply won’t keep investing with managers who do not share their commitment to reducing climate impacts.
The question then moves to whether they are capable of helping to save the world. From an assets under management (AUM) perspective, the answer is likely yes. KPMG professionals’ work with asset managers — large and small — around the world suggests many have now incorporated ESG and climate risk due diligence into their decision-making processes. I would estimate that around 30 percent of the deals being done today have some sort of climate-related lens applied. And I’ll be surprised if climate risk isn’t included in all investment decision-making by the end of the decade. Therefore, on the risk mitigation side, I would argue that it is getting there quickly.
At the same time, the more advanced asset managers have moved from risk mitigation to value creation. They are starting to think about how they find the ‘ESG dividend’ in the deals they are making. And they are exploring innovative opportunities to translate their capabilities into long-term value creation. This is particularly true of the most active funds. But many passive funds are also now thinking in terms of value rather than just risk.
Saving the world. One deal at a time.
That being said, ambition and capability are not the same as action And what the leaders at COP27 are most likely looking for is a faster, more equitable and more sustainable disbursement of private capital towards climate mitigation and adaptation activities. Again, I believe the asset management sector is moving in the right direction.
There are two things that can help accelerate the flow of funds. The first is for climate risk to be formally viewed as a finance risk. The second is for better clarity and consistency around sustainability reporting. Here, the foundation of the International Sustainability Standards Board (first announced at COP26) will help drive a more coherent framework. With the recognition that climate risk is a finance risk and broad agreement on the standards for measuring and reporting that risk, the path forward is expected to be clear.
Not the only hero in this story
Through the sheer power of capital, asset managers can play a central role in helping to drive the world’s climate ambitions. But it’s likely they will not be the only actors on center stage. Progress can require governments, multilateral development banks, NGOs and others to come together to find solutions (both physical and financial) to help drive the agenda forward.
In particular, we will need to see more partnership and collaboration to help ensure that the dirtiest assets, the riskiest markets and the poorest people are not left stranded outside of global capital flows. That can require much greater partnership and trust between the private and public sectors. I expect the attendees of COP27 will be thinking the same thing.
