Last week Norway’s $1.3 trillion wealth fund announced it may no longer invest in assets from the developing world, also known as the “emerging markets,” in order to comply with a new proposal that seeks to tighten environmental and ethical standards in its investments. While cutting off financing to developing countries may increase their portfolio’s environmental, social, governance (ESG) scores, it would be a missed opportunity for the planet.
Perhaps, if Norway had a forum to discuss ESG issues with countries, also known as “sovereigns,” cutting off funding would not be the top option.
Investors who seek out ESG metrics now represent $40.5 trillion of $100 trillion in total global assets under management, and the movement is leaning from engagement toward divestment. While engagement, or negotiation, is the preferred method for ESG asset managers, it is a difficult and delicate process at the sovereign level.
In an open letter to HSBC, a former bond trader at pension fund AP4, called on investors to engage with the State Bank of India over its $1 billion loan to a coal plant in Australia that had been financed by a previous green bond issuance. Amundi, a global asset manager, warned Indian authorities that it would divest of its bonds if the loan to the coal plant were not withdrawn. The concerted efforts worked and has given Indian authorities pause.
Not all sovereign ESG concerns are so well circumscribed. Most are complex, and politically sensitive.
Last year BlueBay, a subsidiary of the Royal Bank of Canada, announced that it had arranged a group of 29 asset managers totaling $3.7 trillion in assets to engage the Brazilian government on the deforestation of the Amazon. The take-charge announcement did not address how they would engage the European and U.S. interests, two countries that are often drivers of deforestation. Nor did it attempt a diplomatic tone by acknowledging that Brazil is otherwise quite green, being that 80 percent of its electricity is renewable and 73 percent of vehicles run on domestic ethanol.
Advanced economies are largely responsible for the climate crisis due to our excessive consumption of energy. Developing countries, whose citizens have less access to electricity, are largely the victims. Organizing to protect the environment is commendable and needed, but a better understanding of the scope and complexity of the environmental crisis may yield more efficient results.
For decades, several organizations have been involved in political action to stop the deforestation in the Amazon. Adding asset managers to the list is another layer of support. More may be inclined to get involved if there were an appropriate forum for such engagement.
The International Financial Institutions (IFIs), namely the World Bank and International Monetary Fund (IMF), are well positioned to broker an exchange from the private sector and government officials.
Not only is there considerable traffic of people and ideas between the investment community and the World Bank, it is arguably the pre-eminent authority in sovereign ESG concerns, having fought for decades to eradicate poverty and improve the social, environmental and governance fabric of developing countries.
As for the IMF, it is the multilateral lender of last resort to emerging markets, wielding respect and authority — and it has made climate change a top priority.
Both asset managers and government officials are already attendees at the IFI’s hallmark spring and fall meetings. Special forums are also already used during the meetings. Adding an ESG sovereign engagement forum should technically be quite easy.
A solutions oriented approach could include topics such as environmental bond covenants, or a debt relief program in exchange for new green infrastructure loans. The opportunities are endless. The new climate change dashboard, launched by the IMF this month, is a perfect launching pad for a larger conversation.
If we work together, knowing that each one of us is needed to overcome this existential crisis, we can rise above the coming tides.
Bianca Taylor is a fellow with the OpEd Project and the Yale Program on Climate Change Communication. She is also the founder of the Tourmaline Group, an ESG research boutique serving institutional investors and a member of the Bretton Woods Committee.