One of the main successes of the UN’s COP27 conference in Egypt in 2022 was a determination to create a ‘Loss and Damage Fund’ to address climate inequality.

The fund, when established, will compensate developing countries that the UN says are the most vulnerable to climate disasters yet have contributed little to the climate crisis.

Financial instruments to help with climate inequality are likely to include contingency finance, catastrophe risk insurance and bonds. More innovative finance tools, such as windfall taxes on fossil fuel companies, philanthropy and government funding, and private finance from international financial institutions, could also be utilised. There were also calls for the private sector to help large emerging economies accelerate their renewable energy transition, both through financial and technical support.

Other topics discussed included water security, with discussions around the role of public–private partnerships to tackle drought, water scarcity and flood protection, mostly in developing nations; and food security, put further at risk by Russia’s invasion of Ukraine.

COP27 president Sameh Shoukry also highlighted the disproportionate impact of climate change on Africa and on rural women who “carry the weight working at home and in the fields, and (who are) hurt by displacement due to climate change”.

Slow progress

In his closing statement at COP27, UN Secretary-General António Guterres said that “climate advocates – led by the moral voice of young people – have kept the agenda moving through the darkest of days”. By extension, governments and the private sector have also played a key role in keeping the climate and social agenda moving forward.

But there are concerns that progress towards meeting the UN’s 17 Sustainable Development Goals (SDGs), which include climate action as well as reduced inequalities, is stalling.

An October 2022 report from M&G Investments finds that the world is on track to deliver only seven of the SDGs by the 2030 target. It outlines that inequalities have widened as a result of Covid-19 and that the cost of living crisis has had a disproportionate impact on developing economies.

"We need to have more balanced opportunities to make sure we are supporting lower income and more vulnerable groups" “The picture is fairly sobering,” says Ben Constable-Maxwell, head of impact investing at M&G, who adds that the pandemic “set back some quite encouraging progress” on social SDGs, such as access to education and nutrition, gender equality, and poverty. On gender, for example, he says girls were the slowest group to return to education post-pandemic.

On the positive side, Ben says that more funds are investing in clean energy tech solutions and renewable energy and “putting pressure on existing energy players to decarbonise”.

Ben adds that risks around the Russian invasion of Ukraine and fears over energy security could lead the world “back the wrong way” (to fossil fuels), but that overall sustainability has become such a central aspect of policy, regulation and business strategy that the private sector focus hasn’t slowed down. “The pandemic helped us recognise how serious issues can become,” says Ben. “Regarding inequalities, it showed that we need to have more balanced opportunities to make sure we are supporting lower income and more vulnerable groups.”

According to Ben, M&G’s Positive Impact Fund focuses on impact areas such as better work and education, climate, and social inclusion. For example, one of the companies it invests in is the Brazilian affordable private education firm Cogna, which aims to help disadvantaged students from areas where schooling has been underfunded.

In Ben’s view, the ‘S’ in ESG (environmental, social and governance) has been somewhat forgotten behind the environment and the effects of climate change. “We are behind where we need to be,” he adds.

“It is gaining momentum, but it is too slow. Investors have a crucial role to play in financing sustainable and impactful investment opportunities, which can prove profitable as well as societally beneficial.”

Industry examples

The KBI Global Investors Water Strategy fund invests in companies providing solutions to the challenges around the supply of clean water. It is centred around three key sectors – utilities, infrastructure (such as irrigation) and technology, including purification.

The Sarasin Food and Agriculture Opportunities Fund looks to the global food economy. Its holdings include AGCO, a precision agricultural technologies firm helping to improve crop yields for farmers around the globe.

On the wealth management side, the Good Ancestor Movement is a UK advisory firm which says it’s dedicated to supporting individuals and organisations with ‘radical wealth redistribution’, by working closely with trusts and foundations. The founders of the Good Ancestor Movement believe that the so-called ‘great wealth transfer’ – which over the next 20 years could see up to US$70tn pass from the baby boomer generation to millennials – presents a unique opportunity for building a more equitable global economy.

"Clients and beneficiaries are asking more and harder questions of their financial intermediaries on human rights"

Further attempts at reducing inequality are being seen in fixed income. In 2019, a guide for practitioners, Bonds to bridge the gender gap, was produced by UN Women, the International Finance Corporation (IFC) and the International Capital Markets Association to increase the number of gender-related uses of proceeds from bonds. The aim is for issuers to integrate gender equality objectives such as socioeconomic advancement and access to financial services for women-owned businesses.

The IFC invested in NMB Bank’s Gender Bond in 2022 – the first such bond listed in sub-Saharan Africa. Kathy Mignano, operations officer, inclusive business, Gender and Economic Inclusion Group at the IFC, explains that 75% of women-owned businesses in Tanzania don't have access to the finance they need and that proceeds from the NMB Bank Gender Bond will finance more than 2,000 women-owned small and medium-sized businesses.

Kathy says that the feedback has been positive. “We are having more conversations on the topic that go beyond niche players. On the sustainability-linked front, we now see more and more bond issuances which integrate gender-focused targets. So far, mostly targets related to women in management positions, but also related to sourcing from diverse suppliers.”

The Principles for Responsible Investment (PRI), a UN-supported network of investors striving to incorporate ESG issues into investment practices, has launched Advance – a collaborative stewardship initiative for taking action on human rights and social issues. With the support of 220 institutional investors, and via collective investor engagement with their holding companies, the initiative aims to drive improved outcomes for workers, communities and wider society. It will focus firstly on the metal, mining and renewables sectors.

Nikolaj Halkjaer Pedersen, senior lead for human rights at the PRI, believes human rights can provide a “central framework” for addressing economic inequality via the improvement of corporate practices. “Similarly, diversity, equity and inclusion, including gender equality, have a clear basis in human rights,” he says, adding that in the past few years, a number of factors have increased the importance of human rights issues for institutional investors, including the pandemic, the invasion of Ukraine and the high levels of inflation driving a cost of living crisis. “Clients and beneficiaries are asking more and harder questions of their financial intermediaries on human rights,” he explains.

According to Nikolaj, this presumption is backed up by figures in the PRI Resolution Database, which he says show that in the 2022 AGM season, almost 50% of ESG shareholder proposals focused on social issues.

Sector challenges

There are clear barriers, however, in the way of tackling inequalities. “Finding companies that are actually set up to solve a social problem are few and far between in the listed market,” says Ben. He concedes there is a lack of availability of investible ideas for investors, while also sometimes a disconnection between the impact a company claims to have and their actual, real-world actions. “You have to walk the walk, or it risks becoming SDG washing,” he adds.

Firms should be measuring the intentions of their holding companies closely, analysing and inspecting their mission statements and purpose, says Ben. They should look at where the capital is allocated, the level of engagement, and whether they mention their purpose in earnings calls.
Finding companies that are actually set up to solve a social problem are few and far between in the listed market

France-based CPR Asset Management runs the CPR Invest Social Impact fund, which invests in global firms best contributing to social progress and inequality reduction. It also stresses the challenges of measuring best practice. “There is no single definition of inequality as there are different ways of categorising it,” states the firm’s website.

However, CPR has created five ‘pillars’ in which to evaluate criteria specific to companies and countries. The pillars are income and labour market, tax paying policy, health and education, diversity, human rights and basic needs. For companies, criteria can include their remuneration policies and training, while for countries they can include approaches to minimum wage and tax progressiveness.

There are 39 criteria in total, and to be part of CPR’s investment universe a company must be among the best companies on average in all aspects linked to inequality and be equal or better in the area than its country’s practices.

According to Yasmine de Bray, a manager at CPR Invest’s Social Impact fund, engagement with the holding companies is carried out by the team’s ESG analysts, who interrogate both the company’s financial and social performance, as well as looking at its sustainability reports. “We need qualitative data from the companies, which can be a challenge in certain areas, such as the number of people who are disabled in a workforce,” she says. “There are many social issues we would like to add. It is such a wide domain.”

Other less direct approaches include that of Invesco, which is a strategic partner to, and investor in, alternatives investment firm o15 Capital Partners, which provides capital to minority-owned businesses in the US. “These little initiatives can make a big difference,” says Henning Stein, global head of thought leadership and market strategy for Invesco. “We also take a systemic approach, partnering with organisations that deal with challenges such as animal welfare, and the related government regulations, in depth.”

Government cooperation

Yasmine explains that government and public sector direction is vital, and calls on the EU to keep working on producing a ‘social taxonomy’, outlining the Union’s social goals, including around developing more ‘humane’ supply chains. “We look forward to these discussions resuming because, unlike for the environment, there is not a scientific approach to measuring social impact,” she says. Yasmine would like to see a flourishing sector with more social funds created. “The marketplace should work on creating an industry-standard social footprint index,” she says, adding "it will happen.”

Ben is confident further progress will be made. “It is our responsibility to be social actors,” he says. “There are things in this world that we have to be better at, and companies which recognise that will do well.

“For investors, it is the investment opportunity of a lifetime.”

CISI makes a stand
In November 2022, at the climax of COP27, the CISI partnered with the London Stock Exchange to host the event ‘The wealth of nations: beyond sustainability – the role of the markets and investors in fostering sustainability’.

Speakers at the Wealth of Nations event included George King, senior wealth manager at Maseco Private Wealth, who told the audience that he continued to see capital allocations happening along a “values-infused line”. He said: “What I'm noticing in the marketplace as a practitioner is that sustainability right now, certainly over the last year or more, has become equivalent with climate change."

Another speaker, Stella Cox, managing director at DDCap Group and chair of the Islamic Finance Advisory Group at TheCityUK, a UK trade body for financial services, explained that the “ever increasing” focus on sustainable finance has had a positive impact on the Islamic financial industry in the UK. She said: “The Islamic Development Bank was a bit of a beacon amongst its multilateral peers during the pandemic,” adding that it issued US$4bn of sukuk (Shariah-compliant bonds) that were focused specifically on mitigating the social and economic impacts of Covid-19, and supporting economic recovery after the pandemic in its member states. Meanwhile, Stella says that according to the UK Islamic Finance Council, between US$30bn and US$50bn of additional capital can be raised through green and sustainable issuance for delivery against the SDGs by 2025.

In another CISI event in January 2023 called ‘Sustainable finance – the world in 2023’, speaker Katya Gorbatiouk, head of investment funds at the London Stock Exchange Group said: “All finance needs to be sustainable and we are making substantial progress. You can hardly find a corporate purpose which doesn’t contain sustainability.”