Sustainable Investing And ESG Advocates Hope Dire Climate Report Serves As Wake Up Call For Financial Services

Financial professionals that have been advocating for sustainable and ESG investing are hoping that a report released by the United Nations Intergovernmental Panel on Climate Change will serve as a wake up call.

The report, released on Monday, offered a stark picture about the realities of climate change, and was described as a “code red for humanity” by U.N. Secretary-General António Guterres.

Bryan McGannon, the director of policy and programs at The U.S. Forum for Sustainable and Responsible Investment, says that government action will be key to tackling the climate crisis, but sees a large role for financial services. While much of those efforts will be focused on the ESG initiatives advocates have been working on for decades, he said the industry could do much more to help in the lobbying efforts undertaken by USSIF to push the government to act.

McGannon has been heartened by recent government action, from the Biden administration to the Securities and Exchange Commission under recently appointed Chair Gary Gensler, and hopes this report can serve to further awareness.

Jon Hale, the head of sustainability research at Morningstar MORN -0.2%, says that the landscape in the industry has shifted from convincing climate deniers, a rarity in the financial sector these days, to combating resistance to the meaningful action needed to address the problem. Hale thinks much of that apathy comes from an expectation that climate change is an issue for lawmakers to address rather than wealth managers or other financial professionals.

However, he sees some traditional incentives for institutions to pay attention to the risks posed by climate change as it can impact portfolios by harming facilities, operations and the supply chain of various companies and industries. He also calls for the financial sector to marshal its significant resources to push policymakers and large public companies to make the necessary changes to combat the present threat, saying they “need to get off the sidelines.” On the wealth management front, he says climate change should be a part of every client conversation.

One unexpected challenge in the increased prevalence of passive investing, according to Hale, as it makes it more difficult to both divest from specific holdings and use shareholder advocacy.

Iyassu Essayas, who serves as director of ESG Research at fund manager Parnassus Investments, sees the potential for this report to impact asset and wealth management through regulation. SEC Chair Gensler has spoken about the commission’s intention to create mandatory disclosures on climate risks for companies.

Tariq Fancy, the former chief investment officer for sustainable investing at BlackRock BLK -0.2%, made major waves earlier this year when he criticized ESG investing in an op-ed and later in conversation with Forbes. He remains skeptical that much can be achieved through sustainable investing, even in the wake of this dire report. Instead, he thinks the incentives on Wall Street remain misplaced, saying the only incentives are whether an investment will make money and if it is legal.

This means it falls to lawmakers to change that incentive structure through regulation, according to Fancy. He does not absolve the financial services industry, noting that they have have brought significant resources to bear in lobbying for their interests in the past and that the same effort is needed to save the planet.

With this most recent report, Fancy says scientists have done their part and laid out the stakes, leaving it to those with the power to help mitigate the damage.