The first UN ‘Conference of the Parties’ (COP) was held in Berlin in 1995. 27 years later, COP27 is being held in Egypt later this year with the UAE hosting COP28 in 2023 at the Dubai Expo City.

 

As the COP events draw nearer, global leaders are vocal in their commitments to climate change. The UAE President's pledge for an additional $50bn towards climate action is a recent example. These pledges are also coming from global investors seeking to exert change. Four of the six founding members of the OnePlanet Sovereign Wealth Fund Working Group (ADIA, PIF, KIA and the QIA) are from the GCC.

 

In the race for change, policy makers AND investors have a role and it is the investors who have the collective size to ensure change is not measured at a glacial pace, but at the pace with which these are melting.

 

Environmental, Social and Governance (ESG) investing has suffered bad press lately. From SEC probes into ‘greenwashing’ and the European Securities and Markets Authority warning asset managers to avoid misleading investors on the greenness of their products, you could be forgiven for thinking ESG investing is more about marketing than an approach to investing.

 

"As regulation on what constitutes ‘responsible’, ‘green’ or ‘sustainable’ evolve, investors should not sit back and wait."

 

David Lynch

 

In fact, local institutions AND institutional investors are driving the conversation. In recognizing that one-set-of-rules-for-all may not work, we acknowledge the conflict between a traditional interpretation of ESG investing – a divestment from fossil fuels – with the importance of the hydrocarbon sector in driving climate transition.

Climate change doesn’t happen overnight but carbon intensive corporates and investors in them, can refine practices and rebalance portfolios far more dynamically.

 

As an institutional investor keen to be well informed at COP 27 and 28, what should you do?

 

First, understand the landscape of institutions and resources available that can help your organization build a consensus set of beliefs on sustainable investing – beliefs which should be documented and adhered to.

 

Next, determine what actions can be taken in your portfolio in order to support the drive towards greater sustainability. Activities and actions could include:

 

  • Stewardship – engaging with portfolio companies, or investment managers that vote on your behalf, to encourage enhancements and understand what is being done to address ESG or climate change related risks
  • Screening – divestment or exclusions from investment products, sectors or companies that fail to align with your ESG beliefs, criteria or time horizon for improvement.
  • Integration – changing how you make investment decisions to include analysis such as ESG risk assessments or climate scenario modelling
  • Allocations to thematic or impact investments – whilst many investors aim to maximize returns, those with an allocation to impact investment also place value on non-financial goals. And ESG investors making thematic investments may do so in the belief that a specific area may benefit from a trend or theme related to climate mitigation or adaptation

Finally, putting in place a monitoring and reporting framework for these activities is imperative. In so doing, an investor’s sustainable investment policy becomes a tangible catalyst for change and improvement.

 

ESG investing needs to change from being perceived as a marketing-label to being a holistic and nuanced approach to adding value and reducing risk in asset owners’ portfolios. Just as GCC governments aim to be at the forefront of efforts to help the world mitigate and adapt to climate change, GCC investors are well placed to innovate and develop thinking on what sustainable investment really means.


Meet the author

david lynch 

David Lynch

Investment Consultant , Mercer