The past few years have been tricky for sustainable investing.
In the US, a multi-pronged ESG backlash has led to investors withdrawing from climate initiatives, which themselves have come under scrutiny. Meanwhile, Europe’s sustainable finance regulatory architecture has been scaled back.
There has also been a difficult market for sustainable funds, with closures of smaller vehicles and significant outflows.
Optimism is starting to return, however. Richard Manley, chief sustainability officer at CPP Investments, believes the industry is “past the low-water mark” – but should also respond “while the tide is out”.
“I think there are still some evolutions that need to be taken on board over the next weeks, months, years, to ensure that when the tide comes back in, it stays in for good,” he says.
CPP Investments manages the C$864 billion ($618 billion; €551 billion) Canadian Pension Plan.
For Manley, it will be particularly important to codify different shades of sustainable investing more clearly.
He defines this as “norms-based investing at one end of the spectrum, concessionary impact investing at the other, with a large body of institutions seeking to deliver superior investment outcomes by integrating sustainability in the centre”.
Those sitting in the middle ground should be more vocal in protecting it, he adds.
“It will be far harder in future to challenge the legitimacy of sustainable investing when we have clear definitions, particularly for the majority middle group.”
The second evolution is clarity on which sustainable investing beliefs are hypotheses and what is evidenced, Manley says, as there has been “some creep” between the two.
He points to the idea that governments will intervene to decarbonise the economy as an example.
“It is absolutely a legitimate hypothesis that policymakers, consistent with their NDCs [Nationally Determined Contributions], will intervene over time in seeking to support the decarbonisation of their economies. With hindsight, it was probably inappropriate to present that as a certainty or likely to follow any specific pathway.
“Forward-looking statements were made when the policy environment was 1.8C of warming, that look increasingly infeasible as the policy environment approaches 3C today.”
Corporate climate action
As “a consequence of system-level events”, Manley says corporates are struggling to decarbonise in line with prior expectations.
“In the current macro environment, we are seeing energy demand exceeding prior expectations and some policy backsliding on climate policy,” he says. “We are also seeing – as a result of interest rates, permitting processes and bottlenecks in supply chains – some inflation in certain parts of the transition technology stack.”
In this context, Manley says it is “reasonable to revisit shareholder expectations of boards and management” and understand that companies might need to revise plans when the macro environment shifts.
More important is whether they have “undertaken the work” to know how they can respond.
“If demand shifts, if technology costs improve, if policy interventions are forthcoming, if carbon prices run away from them, what are the strategic choices they will prioritise in order to both protect and grow the value of the business?” says Manley.
He notes that while some companies have walked away from climate targets, that does not necessarily mean they have scaled back their climate work.
“I don’t think we’ve seen any examples where companies have downgraded the institutional climate capabilities and capacity that they’ve built,” he says.