Todd Arthur Bridges on how the investment market is changing to promote sustainable finance

Ahead of the Sustainable Investment Forum North America 2019, taking place in New York on the 25 September 2019 during NYC Climate Week, we caught up with Todd Arthur Bridges, Head, ESG Research and Strategy Development at State Street Global Advisors, to discuss how the investment market is changing to promote sustainable finance.

There is more demand than ever from investors to have access to good quality ESG research and data. What are the key developments in the market in the last 12 months helping to bridge this demand gap?

In the last 12 months capital markets and investors have experienced three key developments towards a more sustainable financial system. First, on November 7th, 2018 the Sustainability Accounting Standards Board (SASB) announced they published the world’s first set of industry-specific sustainability accounting standards covering financially material issues. Publishing the standards ushers in a new era for global capital markets in which businesses can better identify and communicate significant opportunities for sustaining long-term value creation, and investors can begin to capture high-quality, consistent, and comparable data for asset allocation decisions. Second, on April 2nd, 2019 the Global Sustainable Investment Alliance (GSIA) released its biennial Global Sustainable Investment Review 2018 documenting the trends in sustainable investing assets in the five major markets. At the start of 2018, there were $30.7 trillion in AUM for sustainable investing and a 34 percent increase since 2016. Responsible investment now commands a sizable share of professionally managed assets in each region, ranging from 18 percent in Japan to 63 percent in Australia and New Zealand. Finally, on June 18th, 2019 the European Commission’s EU Technical Expert Group on Sustainable Finance (TEG) launched reports on an EU Taxonomy, a voluntary EU Green Bond Standard, and voluntary low-carbon benchmarks. These TEG reports will help shape future sustainable capital market regulations and help investors contribute to the ambitious goals established by the Paris Agreement and Sustainable Development Goals. 

How significant is it for investors to integrate ESG factors within their strategies to ensure positive long-term returns for their investments? And what are the challenges in integrating those ESG factors into portfolios?

There is growing consensus across central banks, sovereign wealth funds, state pensions, corporate pensions, and endowments, etc. that integrating material ESG factors can positively impact the risk-return profile of investment portfolios. There is a large body of academic and industry research the empirically demonstrates the benefits of ESG integration into equity, fixed income, and alternative portfolios. In particular, this body of research provides compelling evidence that there is a link between corporate financial performance and ESG performance--strong ESG performance correlates with lower cost of capital, better operational performance, higher stock price, and lower volatility. Additionally, there is an excellent line of research that shows the benefits of ESG integration as a potential source of outperformance (aka alpha) when the strategy design  takes into account only financially material, industry specific information and the ESG trend (aka ESG momentum) in a company’s ESG rating. The most important challenges in integrating ESG factors into the portfolio design are the data quality, data treatment techniques, portfolio construction options, and selection of risk models. As with all investment research process, the devil is in the details and asset owners must consider the potential limitations, risk management, and opportunities with each and every integration technique. With the help of the UN PRI’s resources for signatories, asset owners, asset managers, and consultants have significant resources to justify their integration of ESG and methods for doing so in an empirically rigorous process.     

How does State Street Global Advisors work towards incorporating climate adaptation as well as mitigation in your own investment strategies?

For the last 2+ years we have been making low-carbon and sustainable climate solutions a priority from the research, strategy, and product development perspective. We have developed a comprehensive framework to help global asset owners think through climate change and the potential impacts those structural changes bring to their portfolios. We focus on designing and building custom solutions and products that both mitigate the exposure to carbon emissions and embedded fossil fuels. Additionally, if the client wishes, we also ensure that the these mitigation strategies and products take into account the potential for reallocation away from high-carbon companies to those making the strategic decisions to be leaders in the low-carbon energy transition—to those sectors in the new energy economy or green economy.  For those global asset owners who want to be even more innovative and align their portfolios with the 2 degree scenario and Paris Agreement, we have also designed investment strategies and products that take into account climate adaptation. This additional set of metrics and portfolio construction techniques allow the investment research process to take into account whether companies in the portfolio are currently adapting to the physical impact of climate change and making the corresponding strategic decisions to adapt to climate-related risks.  

What is the importance of events such as the Sustainable Investment Forum for businesses interested in investment?

State Street Global Advisors looks forward to the Sustainable Investment Forum North America event every year because it brings together the greatest minds in our financial system—think tanks, data providers, research providers, regulators, asset owners, and asset managers—to discuss and potentially contribute to solutions to the central issue of our time Climate Change. We look forward to this event to share knowledge and investment solutions but also to learn from the larger ecosystem that is responsible for building a sustainable financial system focused on ESG integration, climate solutions, and systems level change. 

State Street Global Advisors is a Gold Sponsor at the Sustainable Investment Forum North America, taking place in New York on 25 September 2019 during Climate Week NYC, find out more here. 

Visit State Street Global Advisors' website here.