In 2015, the Paris Agreement had a galvanising effect on the financial world. ESG already existed, as did values-based investing, impact investing and socially responsible investing – but thinking and intent seemed to cohere around COP 21 and since then, ESG has rarely been far from the headlines or conference agendas.
But now it is 2023.
In effect, we as an industry have collectively enjoyed a seven-year planning phase. That’s not to say there has been no action, but taking a wide view, those years have been spent understanding, planning and setting goals. They have been spent talking. However, there comes a point where talk must become action, or it will all have been for much limited value, and we risk regressing on our progress.
I believe we have now reached that point for three reasons.
Reason 1: The backlash won’t wait
It is perhaps a sign of ESG’s success as a concept that it now attracts so much criticism. Those who have arrayed themselves against ESG see it as credible enough that it cannot be ignored and must be actively resisted.
However, that resistance cannot be ignored either – it is coming from high-profile places. In the US, Texas went as far as to bar 10 companies and 348 investment funds from doing business in the state because their ESG criteria amounted to – in the words of Republican comptroller Glenn Hegar – a “boycott [on] energy companies]”. Others of similar political persuasions have decried ESG as “woke”.
Even here in Europe, similar thinking is simmering, and in the wake of the war in Ukraine I have even seen some blame ESG as a key driver for the current high inflation levels.
Let me be crystal clear: these people are mistaken. Alecta’s investments and its stewardship work are based on a fundamental analysis of investment opportunities. On the basis of data, we assess the future value-creation potential of each investment opportunity with the objective of procuring maximum long-term risk-adjusted return for the 2.6 million Swedes whose pension capital we have been entrusted to manage. Short-term politics or jumping on whichever bandwagon is going the strongest at that moment is not in our interest when fulfilling our fiduciary duty.
Long-term and wide-ranging thinking is good thinking. It is responsible thinking when you manage the money of others. However, we must not dismiss these criticisms with a wave of the hand – even if they are wrong, they are relevant because they come from people and organisations with real power. That is the first reason why ESG now needs to go further in proving its worth and significance.
Reason 2: The challenges won’t wait
Climate change will not wait on our convenience. Those living in situations incompatible with the UN’s Sustainable Development Goals cannot be asked to sit patiently while we deliberate indefinitely.
That is not to say we can rush in and fix the world’s problems today. These are long-term, systemic challenges. Europe, for example, needs to ensure long-term access to much more sustainable electricity in order to implement the environmental transition. This requires investments in technology and capacity right now to have an effect over the next 10-20 years.
Some have pointed to the war in Ukraine as a reason to deprioritise climate change and the energy transition, as we have more immediate concerns around security of supply. India and China, for example, have accelerated investment on coal plans.
In the short term, it is true that the energy crisis will force us to slow down the environmental transition on some fronts.
However, if anything this underlines the importance of long-term thinking and investment. It serves as a reminder that the path may not be smooth, that significant disruptions may await, and therefore that we may have less room for manoeuvre and less room for inaction than we think.
Reason 3: The regulators won’t wait
It is heartening to see that regulators generally agree with the ESG approach and are acting to embed it into the financial system.
However, we don’t have to wait on the regulators to tell us what to do. In fact – we shouldn’t. The market economy, with efficient capital allocation based on long-term profit objectives of long-term shareholders such as Alecta, is capable and effective in adapting to crises and solving challenges in a way that can contribute to increased prosperity.
It is therefore of utmost importance that we execute quickly, effectively and with a focus on collaboration to avoid being troubled by endless demands for regulations down to the tiniest detail.
Bureaucracy and reporting for the sake of reporting are not helpful for the environmental transition, in fact quite the opposite. If we don’t push ourselves forwards, we will be pushed – and that may not be in the way that is most useful for our firms and the investors we represent. Better we take control than relinquish it through inaction.
So, that is why I think it is time to go beyond targets.
We have targets – great ones, that I am proud of. We have set clear goals ourselves on a five-year basis, aiming to make Alecta’s portfolio climate-neutral by 2050. This year, 36 percent of our limited companies have achieved approved targets by SBT (up from 21 percent last year), and 82 percent of the companies are measuring and reporting their carbon footprint. Several have also set relevant climate or environmental transition targets.
And of course, we can’t stop talking. In fact, in May we are gathering Swedish business leaders and international institutional investors to explore how the Swedish governance model might help ESG efforts more internationally. Talk is still important, but it can’t be all we do.
In short: the targets are set, the plans are in place – now let’s get to work.