Hugh Wheelan: My 2018 RI dream……it may be closer than it seems!

As we wind down 2017, here is my wish-list of responsible investment outcomes for 2018; some more in hope than in optimism…..

The return of serious carbon pricing
French President Emmanuel Macron’s One Planet summit took place last week. An excellent initiative. But for me, there was too much wind (grand statements/declarations of funding, etc.) and not enough rudder (clear, pragmatic pricing and regulatory intent).
Policy steering needs to be deployed deftly if the direction of 2015’s landmark COP21 agreement means anything. Economic externalities like excess C02 emissions and pollution will only be solved through policy (tax/market solution) or spontaneous order (industry-led adoption of standards), and most likely through a combination of the two. In the absence of pricing, I fear great initiatives like the TCFD won’t take root. We have already lost 10+ years with a bust emissions trading model. It behoves everyone to engage with the work of the Carbon Pricing Leadership Coalition and the High-Level Commission on Carbon Prices, which includes Joseph Stiglitz, Nobel Laureate in Economics, and Lord Nicholas Stern. They conclude that the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030, provided a supportive policy environment – notably a carbon price – is in place, and that future paths and policies be clear and credible. Their work on a carbon pricing ‘corridor’ could unblock the current impasse, and boost the green shoots of carbon pricing that are evolving around the world. I expect governments to take note as the first progress measurement period for COP21 (in 2020) nears.
The ultimate ESG data collection coalition
The return of carbon pricing on the political scene will provoke renewed discussion on the quality of carbon data collected from companies – and for that matter all other financially relevant ESG data – leading to a powerful global collaboration of the major current data collection initiatives (CDP, TCFD, GRI, SASB, CERES, PRI, etc.) to work out how to strategically co-ordinate for broad, global, accountably-acceptable, publicly-recognised sustainability information.The public discovers ESG via the UN SDGs
The combined work of the major ESG data/membership bodies is adopted by the UN as its accountability/measurement framework for progress on the 17 SDGs. It knows the support of the private sector is crucial to progress, and what gets measured in the private sector gets managed!
Moreover, the work of the World Benchmarking Alliance, a tech solution through which investors, civil society, governments and individuals can recognise the work of companies that are contributing to the SDGs and critique the laggards gives further incentive for companies to progress the SDGs. I dream of positive feed-back loops.
Green competition breaks out in financial centres
The fledgling peer pressure that started in 2017 as finance capitals started to compete on green bond listings goes viral as Finance Watch and Long Finance launch the Global Green Finance Index (GGFI), a ranking of the world’s financial centres.
The results of the first survey will be published in Spring 2018, and you can help my dream by filling it out.
In addition, the findings of the EU’s High Level Expert Group on Sustainable Finance (HLEG) tap into all of the above regulatory developments as well as the financing and job creation zeitgeist of the EU’s Capital Markets Union project leading to a huge flow of innovative new financing and employment in sustainability solutions.
Fair pay
Regulatory signals tighten on the gender pay gap. A global trend takes hold around companies facing unlimited fines and convictions for non-compliance, such as that announced by the UK Equality and Human Rights Commission just this week.
In turn, investors realise that the overall pay gap in the workforce is a major social problem that is unrelated to durable company economic performance (as opposed to share price fluctuations) and are helped in their pushback by the UK Investor Association’s new public register of companies who have already received a
high vote against or withdrawn a shareholder resolution on executive pay. In addition, we see the results of the first proxies in the US 2018 AGM season based on the SEC’s updated interpretive guidance for companies to calculate the CEO/worker pay ratio.
Fee transparency
My prediction of a revolution in fee disclosure for investors dates back to October 2016 (these things take time….). In 2018, it comes true as the work of the Institutional Disclosure Working Group (IDWG), led by Chris Sier on behalf of the UK’s Financial Conduct Authority becomes public early in the year. There are a lot of eyes internationally on this critical initiative, which will reshape the investment world. Read my 2016 piece.
Fiduciary duty gets real
As RI reported this week, the UK government says it is ‘minded’ to change pension regulations to require scheme trustees to outline their policy on non-financial concerns in their Statement of Investment Principles (SIPs). This is a serious move forward. Everyone should read the paper.

Recommendation 1 would bring about a huge change in mind-set in the pensions industry. It says:

Regulation 2(3)(b)(vi) of the Occupational Pension Schemes (Investment) Regulations 2005 should be amended to require trustees to state their policies in relation to:

  • (1) evaluating risks to an investment in the long term, including risks relating to sustainability arising from corporate governance or from environmental or social impact; and
  • (2) considering and responding to members’ ethical and other concerns.Add this to the significant work coming out from the PRI/UNEPFI/Generation Foundation via the project: Fiduciary Duty in the 21st Century. Its progress report can be found here.
    Then mix in the PRI’s investment consultant services review, which is, of course, where much of the fiduciary advisory influence for pension fund resides, and, where the PRI aims to put forward a robust ‘solution set’ during 2018.
    Top it off with an EU consultation on investor duties.
    That’s a recipe for change in the way the pensions industry looks at long-term issues. Serve with the financial sustainability data coming through my pipe (dream) above, and 2018 will be the year responsible institutional investment became mainstream fare.
    We need to talk about MIFID II
    I do, however, have occasional nightmares that, in Europe, MIFID II (the US has an opt-out, but will undoubtedly be affected), will lead to severe pressure on budgets for investment research, and that ESG research will suffer disproportionately given how much is bundled up into trading cost budgets currently. If just part of my dream scenarios above come true, ESG research should flourish and be properly paid for. If not, we will need to talk a lot more about MIFID II come January…

These are exciting times.

The team at RI wish you all the best for the season and a happy, healthy and sustainable start to 2018!