Opinion ESG

A transformational framework means fund managers have to drive real-world change

Fatima Hadj

As private debt investors, our fiduciary role is about looking after capital, deploying it appropriately and ensuring returns do not undermine the sustainability and liveability of our planet. Because of their capital allocations, private debt investors have an important role to play in helping society address risks such as water shortages, the climate crisis, inequality, population growth, geopolitical uncertainty and technological disruption.

For the debt market, a transformational/impact framework means aligning the incentives for fund managers to elevate their stewardship role and drive real-world change, rather than focus on financial ESG risk management. It is the concept of double materiality: financial, which references what is affecting the value of the company; and environmental and social, which references the impact on climate change and society.

Investors face a Babylon tower of ideas and approaches, characterised by ambiguity about the definition of risk and incorrect alignment of roles along the investment value chain.

Governments, European Union accountants and investors have responsibilities to shape sustainable finance. A transformational framework must ensure that the financial industry and individuals as consumers, citizens or retail investors are clear about what sustainability means. To do so requires the concept of separation of powers to be made relevant for the investment chain.

Governments should legislate with stronger policies on water, climate, inequality, biodiversity, etc. The European Council and the European Parliament should lead by harmonising European ESG regulation. And accountants should measure full ESG in Globally Accepted Accounting Principles (gaap) when auditing countries, companies and investors. Maybe this will start to happen through the International Financial Reporting Standards.

However, the onus is still on investors to implement an investment framework across all asset classes with a clear distinction between ‘do nothing’, ESG integration (outside-in) and impact/transformational investment (inside-out).

We suggest governments should aim to set a positive impact principle within sustainable finance regulation. It’s the opposite of the old polluter pays principle, underpinning the first credit carbon fund I worked on in 2005. The mindset matters. We have moved from “I can buy the right to pollute” to “I demonstrate that I have a positive impact” on the planet and society at all levels.

Principles and regulations are required

Alignment of interests is the cornerstone of logic in the investment world. Therefore we could see lower/no government sustainability taxes for impact investments, intermediate rates for ESG integration investment products and the highest rates for investment products that do nothing.