PRI in Person conference in Barcelona - Highlights

One main theme of the conference was the need for global alignment on ESG regulation. Regulators from different continents presented their work and the general consensus was that, although there may be differences in capabilities and starting points, all are working towards the same goal of supporting and increasing sustainable investment. There were also several mentions of the ongoing ESG backlash in the US, highlighting the importance of clear best practices and a shift towards higher standards in a permanent and apolitical way. Roundtable discussions focused on the role of governments in creating incentives for green investments, rather than simply increasing the disclosure burden on companies. The Sustainable Finance Disclosure Regulation (SFDR) which entered into force in Europe in 2021 was also a hot topic, with many expecting increased scrutiny from watchdogs in H1 2023.

However, some raised concerns about the SFDR's lack of clear guidelines for defining sustainable investments, which they argued creates too much room for interpretation by asset managers. We have ourselves been very busy during the last months to make sure we have all disclosures in place to meet the SFDR requirements, not least of all for our two article 9 funds, Espiria SDG Solutions and East Capital Global Emerging Markets Sustainable, whose sustainable investment objectives are enabled and empowered by two proprietary tools: the East Capital SDG Value Chain Assessment tool, recently showcased as a PRI case study, and the Espiria Impact Assessment Tool.

The conference touched on the concepts of greenwashing and green hushing, with a call to integrate companies’ disclosure instead of estimates. This theme resonates well with us, especially in emerging and frontier markets where data disclosure is sometimes still in its infancy. Every year we are a very active participant of the non-disclosure campaign of CDP which collects climate, water and forest data from issuers around the world, and we get a very good response rate from the portfolio companies we target. We hardly ever use external ESG data; we do not find it useful in the assessment of our holdings’ ESG quality as it is completely lacking the forward-looking “ESG momentum” dimension which is increasingly meaningful for investors to consider.

The role of nature in investment decision-making and risk assessments was also discussed, with a recognition that current frameworks do not adequately take nature into account. We do expect to hear much more about this following the COP15 meeting on Biodiversity currently taking place in Montreal and the publication, next year, of the final recommendations of the Taskforce on Nature-related financial disclosures. Meanwhile we cooperate with other like-minded investors committed to the Finance Sector Deforestation Action which we joined last year. We have mapped the deforestation risk in our portfolios, integrated this risk as part of our fundamental analysis and are about to kickstart a few new active ownership initiatives together with several of our holdings as well as taking the lead with one of our Swedish holdings to encourage some best practices. In addition, we have started to incorporate some dimensions related to natural capital as part of our SFDR disclosure.

Climate being, yet again, a key area of concern for responsible investors, there was much discussion on how realistic the 1.5°C scenario still is and how adequate the Net Zero Asset Managers initiative, which now has 291 signatories representing USD 66tn in assets under management (or at least prior to the recent controversial withdrawal by Vanguard, the world’s second largest asset management company) is as a target-setting framework on the road towards achieving net zero emissions. Seen as a positive first step, a commitment is far from enough, there is a recognition that clear strategies and actions are needed to achieve this goal. Some delegates discussed their own efforts towards decarbonization, such as setting a minimum carbon reduction target of 15% for companies added to their portfolios. One striking number to remember: Climate Action 100+ status review shows that capex programs of 90% of the world’s biggest CO₂ emitters are not aligned to a 1.5°C scenario. In this context, the concept of “aggressive ESG” grabbed our attention as an important development in our industry where asset owners and asset managers should cooperate much more to decarbonize companies and sectors instead of piling money into solution-providers and chasing similar green opportunities. Greening the brown, or transition finance ought to take center stage.

"One striking number to remember: Climate Action 100+ status review shows that capex programs of 90% of the world’s biggest CO2 emitters are not aligned to a 1.5°C scenario."

The significance and importance of social factors have been increasing for every year we have been joining the annual PRI in Person conference. Interestingly there is a pronounced focus on the operational, legal, and regulatory risks associated with these issues. The PRI launched Advance, a global collaborative initiative (second largest in the world after Climate Action 100+) to address these areas with a select list of high-risk companies. We, at East Capital Group, have been approved as a participant in one such engagement towards a Chinese mining company we hold in our China A-shares fund.

But in conclusion, the general consensus was that the industry is moving in the right direction. However, there is still room for improvement, particularly in areas such as the clarity of definitions for sustainable investment, the real-world impact of our investments and our stewardship activities, and the integration of nature and social factors into risk and portfolio management. Another conclusion, ironically after 4 days of intensive conferencing, is that it is time to act, not talk. Words that kept resonating in our heads as we were leaving Barcelona was the quote from the recently appointed Chair of the ISSB (International Sustainability Standards Board) Emmanuel Faber: “Don’t complain when you are stuck in a traffic jam, you are the traffic jam”. By working towards global alignment and clear best practices, our industry can continue to promote sustainable investment, which will benefit a vast range of stakeholders.