“The race to net zero is a race to tech innovations,” says Fatima Hadj, chairwoman for the structured finance advisory board at the UN-supported Principles for Responsible Investment (PRI) and goalkeeper at the Bill & Melinda Gates Foundation.
She goes on to explain that tech is now more than a trend, it is a catalyst of change that is going to underpin environmental, social and corporate governance (ESG) integration across all asset classes. Hadj adds that this transformation is also going to have an impact on the entire value chain, with a focus on mass customisation.
We often talk about vision, strategy and planning, but as we are looking to build back better, investors need to come up with a methodology that will help them adapt to the new normal and tackle climate change. Fatima Hadj, Principles for Responsible Investment
By methodology, Hadj means a structured way of tackling uncertainty. “We live in a world characterised by a high degree of uncertainty at all levels, even at geopolitical level,” she says. “To set up a strategy, you need first a methodology, which is a structured way of capturing uncertainty.”
The outbreak of the Covid-19 pandemic is only one of the issues causing an increase in this uncertainty. It is not clear how the market will be impacted by net-zero policies, or any other future policies that focus on social or governance issues. New technologies are set to emerge, and investors’ needs and expectations will change as well.
“To capture future changes and upcoming regulations, having a methodology is significant,” says Hadj. “We often talk about vision, strategy and planning, but as we are looking to ‘build back better‘, investors need to come up with a methodology that will help them adapt to the new normal and tackle climate change.”
For Hadj, the right methodology should be a combination of short-term and long-term thinking, although engagement is also essential. “Investors should engage with their investees and asset owners to help them to transition their business model and adapt to the new climate change regulation,” she says. “Engaging is no longer a concern only for equity holders; all investors are now concerned about it. Even debt holders will have to engage with their counterparts or borrowers.”
Hadj adds that another issue that should be of concern to investors is how risky it is to build a portfolio by only focusing on the sectors that you currently invest in, especially in today’s interconnected world.
Accountability and transparency rise on the agenda
“Accountability and transparency are the two key trends that are going to shape the post-pandemic world,” says Hadj. “The current ESG world is not very well regulated, and that is going to change.”
Accountability and transparency are the two key trends that are going to shape the post-pandemic world. Fatima Hadj
She adds that credit agencies were in a similar situation prior to the global financial crisis in 2008, as there were insufficient regulations. However, this changed in the aftermath of the crisis.
“By making credit agencies more liable for faulty ratings, their accountability increased,” says Hadj. “This happened by increasing the oversight of internal controls and transparency in regard to their rating methodologies and performance. The ESG space is not well regulated, but looking forward there will likely be more regulations that will contribute to increasing accountability and transparency.”
All eyes on the joint committee
Hadj is set to co-lead a newly launched committee between the PRI and the UN Environment Programme Finance Initiative (UNEP FI), which focuses on creating synergies to promote sustainable finance in corporate lending, a key source of global capital.
The committee, which was launched on 8 September, is looking to develop ESG criteria that is consistent across all aspects of the corporate lending sphere. This is significant as it should make implementation of ESG criteria by both investors and lenders quicker and easier, while also reducing the risk of ‘greenwashing’ or ‘sustainability washing’.
The decision to launch the joint committee is also important when it comes reducing the risk that banks end up adopting different standards towards investors when it comes to classifying loans as environmentally sustainable.
The committee will also promote collaboration and partnerships within the financial services industry. By joining forces, PRI and UNEP FI are demonstrating not only how to engage and create value by collaborating, but also how to promote the UN’s Sustainable Development Goals (SDGs), and more specifically SDG17: strengthening the means of implementation and revitalising global partnerships for sustainable development.
Leading by example is essential for ‘building back better’. This is why initiatives where key organisations and market players join forces to promote the benefits of ESG and meeting SDGs targets are so welcome.
Join Our Newsletter
Want more FDI insights?
Sign up to Investment Monitor's weekly newsletter, Eye on FDI, to receive a round-up of the most important stories.