Institutional Investors’ Sweeping Sustainability Suspicions
Ahead of consecutive UN conferences on Financing for Development and the Sustainable Development Goals (SDG) a blue-ribbon panel of investment managers and international lending agency officials released a long-term action plan to mobilize global banking and capital markets participants around environment, social and governance (ESG) returns. Infrastructure alone will need $2.5 trillion over the next dozen years for low-carbon energy and education-health purposes, and current financial assets at $300 trillion and increasing 5 percent annually are an untapped pool ready to look elsewhere with the large negative-yield industrial country sovereign debt category. However a wholesale commercial, regulatory, technology and long-term “reorientation” is needed for outcomes that will only be clear over decades , according to the study under the auspices of the Business Commission on Sustainable Development. New international standards like Basel III do not incorporate SDG criteria, even if the UN Environment Program and related efforts try to transmit practices and principles. The report recommends that banks, rating agencies, stock exchange listed companies and institutional investors with $100 trillion under management apply yardsticks to be created by global accounting and rulemaking bodies. Central banks in Bangladesh, Brazil, China and Indonesia already impose requirements around “green” projects so that lenders duly disclose and monitor benefits and risks. On reporting, following a series of initiatives since the 1990s, over 90 percent of the word’s 250 leading corporations detail ESG performance. Almost 1500 fund houses have signed the UN responsible investment code, but the lack of common universal metrics remains and prevents company comparisons, with 80 percent of managers expressing discontent in a Price Waterhouse survey. Regardless of the gap thousands of empirical studies show a positive correlation between compliance and profitability. Small and midsize enterprises, which have not participated due to cost and information disadvantages, could be specifically targeted in future outreach and standard-setting.
Infrastructure has a $2-3 trillion yearly hole through the SDGs 2030 deadline, two-thirds in emerging and frontier economies, in sectors including energy, transport, telecoms, water and sanitation. The goal is to limit global warming to a two degree temperature rise, as the urban population will roughly double by midcentury to 6.5 billion. Public financing falls short even in the US and Europe, where it is under 2 percent of GDP, one-third the rate to meet developing world demand. The eight major development banks in turn provide just $40 billion annually and they could leverage up to $1 trillion without jeopardizing credit ratings. In seventy five low income countries, mainly in Africa private investment has been only $75 billion the past five years. Insurers are also missing as asset and risk managers for climate change, following a pattern of minimal natural disaster coverage that came to $100 billion in the latest estimate. Regional initiatives like China’s $1 trillion One Belt One Road are in a startup phase and the two big policy banks, each with over $300 billion in assets, charged with credit support are struggling with previous portfolio cleanup in that geographic nexus and elsewhere, particularly Latin America. Private pension fund expansion must go further and sovereign wealth pools should increase infrastructure project exposure with governments acting as the ultimate market maker for sustaining long-term trading products, the group suggests.
