This paper takes stock of institutional investor experience with mobilising green capital for green investment and mainstreaming green factors across asset classes.

It identifies key drivers for action and barriers preventing progress. It reviews investors’ experience within their own organisations as well as with aligning market and policy frameworks with green investment. It suggests possible options for consideration by G20 members.

Growth and spread of responsible investment

Green issues are a key component of responsible investment, which is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and the long-term health and stability of the market as a whole. Globally, support for the Principles for Responsible Investment has grown consistently, from 100 signatories representing US$6.5 trillion in 2006 to 1,380 signatories representing US$59 trillion by 2015. Although the largest number of signatories is in the US (256) and Europe (696), a significant number are in emerging markets including Brazil (57), South Africa (52) and China including Hong Kong SAR (17).

Key drivers

Investor awareness of the materiality of green issues has progressed substantially since the Rio Earth Summit in 1992 and the launch of the PRI in 2006. There are five key drivers for sustained investor interest in green finance:

  • Long-term value: There is growing belief across the G20 – including for example CPPIB (Canada) and GPIF (Japan) – that consideration of ESG factors is important to long-term value for pension fund recipients.
  • Risk management: This is a driving factor for large asset owners such as CalPERS (US$300 billion in assets), with green risk factors included in investment beliefs as well as for mainstream investment managers such as State Street Global Investors (US$2.4 trillion in assets under management).
  • Client demand: This is growing across markets, including emerging markets. 52% of YouGov survey respondents in Brazil say they would like information on how companies in their funds deal with ESG issues such as climate change, with civil society one driver of beneficiary interest.
  • Strategic policy signals: Investors welcome The Paris Agreement and the Sustainable Development Goals as signals of the policy trajectory.
  • Regulatory action: Within the G20, this includes the French Energy Transition Law and SRI fund labelling, as well as Stewardship codes and developments underway at the EU to improve company and investor transparency. Eight countries within the G20 have pension fund regulation covering ESG disclosure and seven stock exchanges have a sustainability listing rule.

Actions investors are taking

Investors are already considering green issues across G20 countries, asset classes and topics, and also building industry capacity:

  • In 2015, over 900 investors from 48 countries completed PRI’s reporting framework. Investors are considering green issues in infrastructure, real estate, private equity, fixed income and equities. Case studies of Allianz SE (Germany) and Itau Asset Management (Brazil) illustrate how investors are integrating green risks into equities and fixed income investment analysis. Over 305 investors have engaged with companies on green issues in 2015, ranging from water risk in agricultural supply chains to toxic chemicals.
  • The investment industry is building its own capacity on green issues, with CFAapproved training available through the PRI Academy,6 tools such as the Bloomberg Water Risk Valuation Tool and guidance including a Sustainable Real Estate Investment guide and GRESB Infrastructure Assessment Tool.
  • Green investments are small, but growing, with momentum from the Paris Agreement. US$50 billion is registered in low carbon investments by asset owners,10 with US$41.8 in labelled green bonds in 2015. AXA Group recently committed €3 billion to green bonds and New York State Comptroller’s Office has allocated US$5 billion into sustainable investing strategies.

Greening market and policy frameworks

Investors recognise that wider market shifts are needed on green issues and are already making interventions for these.

  • Closer investor collaboration with policy makers includes the industry-led Financial Stability Board Taskforce on Climate-related Financial Disclosures. The G20 Energy Efficiency Investor Statement and a new Green Infrastructure Coalition, both launched in 2015, illustrate investors asking for supportive policy frameworks for green investment.
  • Investor efforts are also underway to harmonise a global understanding through a new international statement on fiduciary duty. Fiduciary Duty in the 21st Century,15 already clarifies that failing to consider long-term investment drivers including ESG issues in investment practice is a failure of fiduciary duty.
  • Investors are stimulating market action and disclosure, with 100 investors representing US$10 trillion calling for 77 stock exchanges to provide ESG guidance for issuers by the end of 2016. Investors are also encouraging credit rating agencies integrate ESG factors into credit ratings formally.

Options to strengthen institutional demand for green investment

  • Principles: promote the increased adoption and implementation of good practice responsible investment and green finance principles by institutional investors across G20 countries, including public financial institutions.
  • Definitions and standards: develop a broad definition of green finance meaningful across the G20, and internationally comparable green finance indicators, and encourage industry development of green standards for bonds.
  • Policy frameworks: identify policy levers and incentives for mobilising private investment across asset classes, while providing policy stability to encourage green investment flows.
  • Investor governance: encourage strong investor governance focusing on fiduciary duty and encouraging responsible investment, stewardship codes and disclosure. Encourage asset owners to be key drivers of green finance through including responsible investment in investment beliefs, strategy and mandates.
  • Capacity: build capacity for mainstreaming of green finance among investment professionals and policy makers within G20 countries, particularly emerging markets, building on existing platforms such as PRI.
  • Transparency: encourage transparency by institutional investors on how they are managing environmental factors as part of their strategies for responsible investment.

Options to expand the efficient supply of green assets

  • Product innovation: facilitate the development of liquid markets for quality green assets, focusing on listed fixed income and equities.
  • Market intermediaries: support integration of environmental factors by key intermediaries such as stock markets, credit rating agencies, sell-side equity research and investment consultants.
  • Risk mitigation: facilitate the development of risk mitigants to crowd-in private investment (e.g. credit enhancement and revenue guarantees) and aggregation of assets.
  • Data: strengthen ESG disclosure by listed companies and issuers.
  • Risk analysis: encourage companies and investors to develop risk analysis methodologies for green issues and to consider the recommendations of the FSB Task Force on Climate-related Financial Disclosure due in December 2016.
  • Investment Agreements, Policies and Regulations: incorporate environmental factors in investment policies, regulations and agreements.

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    Greening institutional investment

    September 2016