The Covid-19 pandemic has inspired market participants to think even more creatively about how to achieve meaningful real-life change through finance
Investors recognise that generating financial alpha is possible while meeting societal targets, and post-crisis we expect greater emphasis on the social element of environmental, social and governance (ESG) investing
Blended finance, where development capital spurs private sector investment, allows investors to invest towards a societal objective within their risk appetite
We believe active managers will play a vital role in structuring deals to maximise the impact of every dollar invested – from a financial and societal perspective
The overwhelming humanitarian crisis of the Covid-19 pandemic has forced everyone to recalibrate their priorities. Before the pandemic, there was a question mark over the future of sustainable finance. Now, the crisis has inspired participants in capital markets to think even more creatively about how to achieve meaningful real-life change through finance.
As an asset manager, the topics we are discussing with policymakers, regulators and investors increasingly echo the agenda for wider society. It is through such a shared vision – where benefits accrue not just to the stakeholders directly involved but to broader society – that sustainable finance will secure its long-term success.
Post-crisis, we expect the “S” factors of ESG (environmental, social and governance) – in other words, the social effects of economic activity – to grow in importance. These will sometimes be addressed explicitly within the framework of the UN Sustainable Development Goals (SDGs).
An increasing number of market participants recognise that generating financial alpha is possible while also meeting societal targets – for example, by investing in urban regeneration, enhanced digital infrastructure, social housing, or improved education and health services. Furthermore, by influencing corporate leadership through engagement, asset managers can promote environmental and social priorities.
Dividing up the risk-return benefits in new ways
However, even where different parties share similar goals, they will likely have different responsibilities and distinct long- and short-term objectives. Transformative ventures also tend to be higher risk. We need to rethink how we can divide up the different risk-return benefits and costs to encourage investment into such ventures.
Blended finance – where development capital spurs private sector investment in projects that address societal challenges – can play a crucial role in unlocking shared value in this context. Allianz Global Investors works closely with development banks who take a subordinate risk that helps protect other investors. This enables those investors to invest towards a societal objective within their risk appetite – for example, using investment-grade assets only.
As an active asset manager, we see our role as a vital one in structuring these deals in a way that multiplies the impact of every dollar – from both a financial and societal perspective. There is a clear need for even more new and innovative partnerships to deliver these results.
In addition, we know there must be an educated debate about how to approach the most pressing issues – from the importance of considering ESG factors in risk management and mitigation to the power of ownership through active stewardship. For example, when it comes to decarbonisation, should investors exclude “dirty” industries, engage with them, or invest instead in solutions providers? What if the company with the highest carbon emissions in a listed equity carbon transition portfolio is, in fact, a solar panel company? These examples underscore the challenges faced by investors.
Using today’s sense of urgency to build a new paradigm
The targeted and often thoughtful global responses to the Covid-19 pandemic are an encouraging sign that accelerated change is possible. But we need to press for a new paradigm to shape the future recovery in the right way. Sustainable finance will play a key role in myriad ways.
If the debt burden of climate action falls on future generations, they should also share in the benefits. Public stimulus programmes need to be conditional on financing the climate transition of the economy and addressing the many other societal challenges facing the world today, as reflected in the UN SDGs. Carbon-pricing mechanisms must better reflect the externalities of fossil fuels – the hidden costs that are still not always reflected in the market price.
At the same time, asset managers and investors need to be vigilant that we do not distort asset pricing, creating bubbles and accusations of “greenwashing”.
Now is also the moment to rejuvenate existing infrastructure – such as electricity networks – while building the social, environmental and energy projects that will support the well-being and prosperity of future generations. Blended finance is likely to become a very powerful tool for ensuring a resilient recovery and a more sustainable world, based on innovative public-private partnerships and a new paradigm of competition, collaboration and international cooperation.
Recent growth in ESG fund assets under management shows that people are convinced of the necessity and value of investing sustainably. This commitment will come with significantly higher expectations on the part of investors.
Massive flows into ESG funds show that investors are convinced of the case for sustainable investing – and want their money to have an impact
Rather than distracting attention from sustainability, the Covid-19 pandemic has highlighted real-world issues that investors can help to solve
The challenge for the asset management industry is to help clients seize the opportunities of the new era of sustainable investing
The world is also experiencing a transformational moment – as evidenced by the meaningful, coordinated action being taken on climate change
Investing involves risk. Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks.
The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.