Introduction to ESG Financial Markets II

Lindsey Matthews

30 years: Risk management & derivatives trading

In this video, Lindsey explains the world of climate-conscious investing. Discovers the importance of understanding climate risks and opportunities, and how they're shaping investment strategies in response to the Paris Agreement. He further explains how emissions reporting enhances transparency and empowers both investors and companies to make informed decisions.

Investment Management Sector

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Introduction to ESG Financial Markets II

16 mins 28 secs

Key learning objectives:

Understand various climate risks and opportunities and how they are identified
Outline the purpose of emissions reporting
Understand the drive to net zero
Outline the growing range of new ESG financial products
Understand the role of ESG indices, benchmarks and ETFs in ESG investing

Overview:

The Paris Agreement, a landmark international treaty, targets global warming to be contained well below 2°C above pre-industrial levels, requiring a peak in greenhouse gas emissions before 2025 and a 43% decline by 2030. In response to this, investors are now reframing their strategies to factor in both risks and opportunities associated with climate change, assessing the physical changes and regulatory transitions that could affect their portfolios, measuring the effects through the likes of scenario analysis. Emissions reporting, advanced by organisations like the TCFD, is now essential for investors to gauge the climate impact of different companies. These entities, including investors themselves, are increasingly setting net zero emissions targets, fostering innovative CO2 reduction strategies and technology development. This strategic shift underscores the integration of ESG factors into traditional investment decisions, leading us towards a future where investments inherently takes account of ESG factors, rather than being a separate consideration.

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Summary

Why is it important to understand climate risks and opportunities and how can they be identified?

Understanding climate-related risks and opportunities is crucial due to their potential significant influence on financial stability and corporate performance. Climate risks encompass physical risks, direct impacts on a company's assets due to climate change, and transition risks, which stem from changes in regulations, customer preferences, and societal attitudes towards a low-carbon economy.

The climate transition can also create opportunities for businesses involved in risk mitigation or green technologies. One key method to identify these elements is through scenario analysis, tool that assesses the potential impact of various climate outcomes on business operations. Initiatives like the Network for Greening the Financial System and the Taskforce on Climate-Related Financial Disclosures use scenario analysis and other tools to help businesses navigate this complex landscape, identifying risks and capitalising on opportunities.

What is the purpose of emissions reporting?

Emissions reporting plays a critical role in maintaining transparency regarding a company's greenhouse gas emissions. This process allows the tracking of a company's environmental impact, as well as its progress in reducing its carbon footprint. Not only does this reporting inform internal corporate strategies around sustainability, but it also provides valuable information for investors, stakeholders, and the general public, enabling them to make educated decisions based on a company's environmental performance. Additionally, regulatory bodies use this information to ensure that companies are adhering to relevant environmental legislation. Emissions reporting is also fundamental in identifying and managing climate-related risks and opportunities, a concept underscored by the Taskforce on Climate-Related Financial Disclosures (TCFD).

What does the drive to net zero involve?

The net zero ambition, adopted by numerous companies and countries, strives for a balance between the emissions produced and those offset by a designated date. This goal entails societal transformations and innovative CO2 absorption methods.

Many investors are mirroring this objective, utilising corporate emissions data to assess portfolio progress. Collaborative platforms, like the Institutional Investors Group on Climate Change, facilitate these concerted efforts, fostering a shared journey towards a resilient, net zero future.

What are some of the new ESG financial products?

The ESG financial landscape is continually evolving, introducing new products such as various types of bonds and ETFs. Green and blue bonds specifically focus on environmental and marine sustainability projects, respectively. Meanwhile, social bonds are designed to address social challenges, and sustainability bonds combine environmental and social objectives. Transition bonds have also emerged, facilitating high-emitting sectors to adopt sustainable practices. Apart from bonds, ESG indices and ETFs, including the iShares MSCI ESG Enhanced ETFs, offer a transparent, low-cost method for investors to gain exposure to a broad array of ESG-compliant companies. Moreover, newer offerings such as ESG-linked derivatives and structured products, including ESG-linked swaps and options, are also gaining momentum in the financial market. These innovative financial tools are creating numerous opportunities for investors to diversify their portfolios and align with their ESG objectives.

What is the role of ESG indices, benchmarks, and ETFs in ESG investing?

ESG indices, benchmarks, and ETFs play a crucial role in ESG investing. They provide investors with a standardised, transparent way to compare the ESG performance of companies and investment products. ESG ETFs, for example, offer a low-cost, diversified means to invest in a basket of companies that meet specific ESG criteria. Such tools allow investors to align their investments with their ESG objectives, track ESG investment options, and gain exposure to the overall performance of the ESG market or specific market segments.

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Lindsey Matthews

Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.

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