Given this issue of The Analyst is focused on sustainability, the following interview with Jane Ambatcheer, the global head of sustainability at BNP Paribas Asset Management, is a perfect thematic fit. Ambatcheer has been working in the responsible investment field since 2003, was the partner and chair of responsible investment at Mercer, and a consultant to the UN through the development of the Principles for Responsible Investment (PRI), and has been involved in several industry initiatives. Jane is also an adjunct professor at the University of Toronto and a research affiliate at the University of Oxford’s Smith School of Enterprise and the Environment.

Why should investors care about sustainability?

Investors have a fiduciary duty to those whose assets they manage, with growing evidence suggesting that integrating environmental, social and governance (ESG) factors into investment analysis and portfolio construction better positions the delivery of risk-adjusted returns to clients. This argument just gets stronger if you look ahead instead of looking back.

From a forward-looking perspective, it is pretty easy to figure out that it will be very difficult to deliver stable investment returns in a world facing the worst impacts of unmitigated climate change. As investors, [firms such as] BNP PAM have committed to use our influence with both companies and policymakers to help push towards successful implementation of the Paris Agreement and the UN Sustainable Development Goals. We believe this is in the interest of long-term capital health, and is directly aligned with our role as fiduciaries.

Furthermore, I believe investors have a responsibility to make a positive contribution towards the kind of world that clients and beneficiaries want to retire into. Increasingly, we see individual investors and civil society questioning the impact—usually negative—that finance and investment are having on issues such as climate change, pollution, biodiversity, fair wages, and human rights in the supply chain. I am convinced this scrutiny will continue to grow, pushing more investors to think about their impact—and influence—on the real world.

How would you respond to the pervasive myth that sustainable investing hurts returns?

There are many academic studies making the connection between ESG and company performance, and a growing body of work looking at the specific impact that various forms of ESG information can have on investment outcomes.

Europe has consistently been at the forefront of ESG and sustainability; can you tell us more about what is happening there?

Indeed, and that is now more true than ever given the work of the European Commission’s Action Plan on Sustainable Finance, the backbone of which is the EU green taxonomy and the European Green Deal. In Europe, we tend to see more consistency on the issue of the environment and climate amongst political parties, investors, companies, and citizens than we see in many other regions. This is not to say that there is perfect alignment, but the alignment of climate action with “left wing” governments and climate inaction with “right wing” governments is less clear cut. This is a useful starting point, given that the economics of climate transition are increasingly favourable: first, in terms of growing competitiveness of renewables; and second, in terms of a deepening understanding of the potentially catastrophic cost of unmitigated climate change, driven by events such as the recent disastrous fires in Australia.

Where do you see the greatest risks and opportunities in the transition to a lower carbon economy?

The sub-sectors that have the most to gain and lose from the low-carbon transition are pretty evident. The biggest questions for investors relate to the timing of the transition, which is in turn driven by technological advancement, growing cost competitiveness of renewables, consumer sentiment and government action or inaction. The biggest unknown is arguably the policy environment. Most major governments exist in a state of contradiction, given the gap between their stated commitment to the goals of the Paris Agreement, and the policies and programs they have—or haven’t—put into place to realise those aims.

One of the most important developments in sustainable investment over the coming two to five years will be the ramping up of investor engagement with policymakers in an effort to close this gap. During the recent COP25, held in Madrid, a record-breaking 631 investors managing more than US$37 trillion in assets signed the Global Investor Statement to Governments on Climate Change. This statement calls on governments to price carbon, reduce fossil fuel subsidies, align national energy and infrastructure plans, and mandate climate-related disclosure from companies, and has been issued annually since before the implementation of the Paris Agreement. While the tone of the statement is strong, most investors sign the letter, but do not follow-up with engagement with their local policymakers. Investors are beginning to recognise that posting a letter on the internet isn’t necessarily the most effective way of getting a message across.

One major risk of climate change is stranded assets. Can you briefly explain what these are and the potential implications for the energy sector?

Stranded assets are those whose value is unexpectedly diminished as a result of rapid change in competitive positioning, generally resulting from technological or policy changes such as a breakthrough in battery storage or significantly higher carbon prices, in the context of climate change. [At BNP,] we argue that oil will need to be significantly less expensive to remain competitive, to the tune of US$10 a barrel over the coming 10 to 15 years, as a source of power for mobility. Yet, we also show that virtually no new projects can be developed profitably at this price.

What advice would you give to Canadian investors in managing stranded assets risk, given the continued importance of the energy sector in the Canadian economy and in many Canadians’ portfolios?

Canada is, of course, a unique market. The demand for oil is not going to go to zero in the near term. However, we do see a very significant gap between the predictions of the oil majors for future demand compared to the forecasts of analysts following the renewables sector and the pathways embedded in the climate scenarios aligned with the Paris Agreement. Canada has incubated many clean-energy start-ups, and it would seem that this is a useful field to continue to nurture—not least because of the growing demand for energy, globally, we will see in the coming decades.

The key point is that there is an energy transition underway, and it is important for investors to take steps to understand how their portfolio may be impacted. This can be driven by the development of an organization-wide climate change strategy. At the end of the day, the goal is that portfolio managers, internal or external, have a thoughtful approach to the energy transition, including a perspective on both potential “winners and losers.”

Where do you see the future of sustainable finance?

Announcements about enhanced sustainable investment approaches keep rolling in from major asset owners and managers around the world, be it BlackRock, GPIF, or CDPQ. It’s quickly becoming the new normal. Will it be enough to “turn the ship? In time to achieve the goals of the Paris Agreement and the SDGs? Time will tell. But it gives me a lot of hope, and not only because this is the moral thing for humanity—it’s also the right thing for retirement savings. According to Mark Carney: “The stakes are undoubtedly high, but the commitment of all actors in the financial system to act will help avoid a climate-driven Minsky moment”. 

An interesting feature of the sustainable finance field is that it is more diverse than ‘traditional’ finance, attracting in particular a higher number of women. As the topic rises in prominence, so do they, helping to bring more balance to the field overall.

What advice would you give to those wanting to enter sustainable finance?

The financial sector has both a significant opportunity and an obligation to be part of the solution to the world’s challenges. Get involved—the future is ours to shape. There is no shortage of literature available—from websites of industry publications to professional certifications in ESG, including a new one from CFA Society United Kingdom. Discuss your thoughts with colleagues, share articles and ideas, hear what thinkers such as Jeremy Grantham have to say, review the recommendations from the Canadian Expert Panel on Sustainable Finance, talk to your kids. The active engagement of smart people with an open mind can have a big impact.

Jane Ambachtsheer’s Recommended Reading and Resources

Academic ESG-Review [tool]. Principles for Responsible Investment 

Bank of England–Open Letter From the Governor of Bank of England Mark Carney

Canada.ca

Canadian Expert Panel on Environmental Finance, The.

Global Investor Statement to Governments on Climate Change, The Investor Agenda

Global Research Alliance for Sustainable Finance and Investment 

GRAFSI Events

Jeremy Grantham, The Race of Our Lives Revisited  

Responsible Investor