Asset owners from Japan, the UK, and California have issued a statement describing their vision of sustainable capital markets.
By Paul A. Davies and Michael D. Green
In January 2020, BlackRock CEO Larry Fink circulated his annual letter to CEOs in which he noted, “I believe we are on the edge of a fundamental reshaping of finance”. His letter put companies on notice that climate risk and improved ESG disclosures were of fundamental importance to whether companies were “properly managing and overseeing these risks within their business and adequately planning for the future”. Further, where companies do not report such issues robustly, “BlackRock will increasingly conclude that companies are not adequately managing risk”. This message has now been reinforced by a statement issued by three asset owners — the Japanese Government Pension Investment Fund, the California State Teachers’ Retirement System, and the UK Universities Superannuation Scheme (together, the Asset Owners) — in which they noted that companies that seek to maximise revenue without consideration of other stakeholders (e.g., the environment, workers, and communities) will no longer be considered attractive investment targets.
In recent years, Environmental, Social and Governance (ESG) implementation has transformed from a niche to mainstream activity, as asset managers, asset owners, and pension funds increasingly recognize the importance of ESG factors to investors, stakeholders, and shareholders. Issues such as climate change, remuneration, modern slavery, and equal pay have led to the integration of ESG into investment processes.
Pressure continues to grow on asset managers and their advisors to incorporate companies’ environmental, social, and governance (ESG) performance and climate risks in their screening and assessment of any investment. These demands have focused on investments in equities and private equity funds so far. However, a new report by ShareAction — a charity and pressure group that is seeking to encourage institutional investors to invest responsibly — has called on investors in corporate bonds to also incorporate ESG and climate considerations in their decision making.