Moving towards a more sustainable world takes investing in companies transitioning towards more sustainable practices. 

Mirza Baig explains the critical role investors can play in addressing the biggest sustainability challenges facing the world.

Read this to understand:

  • What we mean by a ‘good’ sustainable transition
  • Why asset managers have a dual responsibility to their clients to deliver a good return on capital and use that to try and create a more sustainable world
  • The three ways asset managers can make a difference: through capital allocation, engagement with corporates and governments, and macro stewardship
What does a good sustainable transition look like?

One question I am asked frequently by colleagues and external contacts is: “What does a good sustainable transition look like?”

The answer is relatively straightforward: a good transition is one where we meet the needs of the present without placing future generations and the planet at risk of catastrophe from the triple and interconnected threats of climate change, biodiversity loss and rising social inequality.

How we achieve such a transition is, of course, not so straightforward. It will require absolute commitment, ingenuity, resource and collaboration between governments, regulators and other policymakers, companies, financial institutions and individuals. This is where investors have a critical part to play.

It should be taken as a given that every investor, from individuals to the largest asset owner, wants to secure the financial wellbeing of themselves and their beneficiaries. But increasingly, they also want their hard-earned capital to serve a broader purpose.

As an asset management business, we have a responsibility to deliver a dual and interrelated outcome, where we can offer clients a good return on their capital and use that to try and create a more sustainable, stable and prosperous world.

There are three main ways in which we can do this: in the way we allocate capital; in the way we engage with the companies and governments we invest in; and in the way we engage with policymakers to address market failures. Ultimately, the health of the planet and our own - and by extension our clients’ - success depends on how well we manage the delivery.

To take each in turn, we must first decide where we will not put our clients’ money, which put simply is in companies, sectors or private assets that have no place in a sustainable future.

Second, we need to invest in companies providing solutions to the world’s biggest sustainability challenges. In our natural capital transition strategy, for example, this means investing in solutions that reduce human impact on nature across themes linked to the UN’s Sustainable Development Goals, including sustainable land, sustainable oceans and the circular economy. In our social transition strategy, this means investing in solutions that meet social needs such as education, health and wellbeing, and financial inclusion.

Third, we need to identify transition leaders – companies demonstrating high standards of responsible corporate behaviour – and those that share our ambition to transition and become better. Examples would include energy companies looking to pivot to renewables or clothing companies looking to improve the rights of workers across their supply chains. In real assets, this might involve refurbishing buildings to improve energy efficiency and use more sustainable materials.

Turning to engagement with the companies and governments we invest in, and the borrowers we lend to in our real estate finance business, this is a key input into our investment process, allowing us to identify attractive opportunities as well as mitigate risks. When effective, engagement is good for our clients, our business and wider society.

Let’s take engaging on climate as an example. It would be easy to conclude that, as energy is the biggest contributor to greenhouse gas emissions (around 75 per cent), if we focus on energy producers and pressure them to swap fossil fuels with windfarms, we can solve the climate crisis. However, this is not how the economy is structured or how the energy ecosystem works.

Emissions from energy mostly happen at the point of use; the five-biggest emitting sectors are power, transport, buildings, industry and agriculture. Therefore, a comprehensive climate engagement plan needs to not only target the largest producers and suppliers of energy but also the heaviest users in sectors like steel, construction and shipping.

Unfortunately, those users can’t just flick a switch and immediately convert to renewable energy. It is here where investors really need to be loud and active advocates for change. We cannot issue broad statements about the need for sustainable strategies; we should be more granular and detail specific actions we expect around strategy, capital expenditure, management incentives and so on.

We also need a robust, objective way to assess how companies are progressing, and be bold enough to divest if they are non-responsive to our engagement and move beyond our risk tolerance. This is engagement with teeth and demonstrates we are willing to put our money where our mouth is.

Finally, we must be willing to challenge governments and other policymakers when markets left unchecked lead to sub-optimal outcomes for society - from failing to capture the true costs of carbon, water pollution or air pollution, to the hidden costs of curtailing talent through diversity and inclusion failures.

Although responsibility for ensuring the integrity of markets lies primarily with regulators and other policymakers, investors have a duty to challenge the status quo where their expertise make them well-placed to do so. We describe our activities to drive market reform as macro stewardship, which are fully aligned with our engagement with investee companies and governments at a micro level.

If we are to address the biggest sustainability challenges and avert environmental and societal disasters, tinkering around the edges will not be enough. We need to change the way we invest; change the way we engage; and lead the push for systemic change. That is how investors can help the world achieve a sustainable transition.

Mirza Baig

"We must be willing to challenge governments and other policymakers"

Mirza Biag
Global Head of ESG Investments

Our responsible investment views

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