An Open Goal for Investors

Richard Gardiner, EU Public Policy Lead at the World Benchmarking Alliance, says CSDDD offers a rare opportunity to improve corporate human rights risk accountability.

The EU’s recently approved Corporate Sustainability Due Diligence Directive (CSDDD) has the potential to systematically change the way corporations approach their human rights risks, both within their operations and supply chains. It will do this by setting a legal baseline outlining exactly how the largest multinationals operating in the EU are expected to address these risks across their global supply chains.

The passing of this law has been hailed as a significant victory in the sustainability community. Investors in particular should be paying close attention to these developments, as CSDDD presents both challenges and opportunities that can significantly impact their portfolios.

Why CSDDD matters to investors

One of the most compelling reasons for investors to care about and invest time in understanding CSDDD is the enhanced leverage it provides. The law offers a legal and political framework to mandates companies to proactively tackle their human rights risks, which investors can utilise to push for greater corporate accountability. By directly referencing these legal obligations, investors can exert pressure on companies to engage more deeply with human rights issues within their value chains. Unlike the existing voluntary global standards, the leverage provided by CSDDD is not just theoretical. It has practical implications for improving corporate behaviour and, by extension, protecting the long-term value of investments.

Investors are not merely passive observers of corporate performance but have a proactive role to play. By incorporating CSDDD in their responsible investment practices, investors can ensure that the leverage provided is not just a by-product of the law but becomes a mainstream expectation across the investment community. This mainstreaming is vital for preventing and addressing both current and potential negative impacts on people, managing financial risks, and meeting the evolving expectations of beneficiaries, civil society, regulators and clients.

Current landscape and investor opportunities

This pressure point is more important now than ever. Data from the World Benchmarking Alliance’s Corporate Human Rights Benchmark (CHRB) underscores the urgency of CSDDD. Although 66% of benchmarked companies in high-risk sectors have demonstrated improvement on key human rights indicators, a staggering 40% still disclose no or insufficient evidence of a human rights due diligence process. This indicates a significant gap between current practices and the standards that the CSDDD aims to enforce. Investors, armed with the

Join the Retrofit Revolution

Collaboration on energy efficiency can tackle the crisis in the UK’s private rented sector, says Iryna Pylypchuk​​, Director of Research and Market Information at INREV.

Earlier this month, the RICS Residential Survey for May once again confirmed continuing expectations for rental price increases, alongside an imbalance between tenant demand and available supply. But when people can no longer afford to live in their homes and houses are not fit for purpose, do we need much more evidence to accept that the UK is facing a housing crisis?

Despite supply gaps being identified across the full spectrum of housing in the UK, for several years the private rented sector (PRS) has been badly affected. This has been caused by lagging housing policy that has failed to adequately react to significant shifts in socio-demographics.

Delays in family formation, rising divorce rates, and an increasingly mobile population have led to sharp demand increases for affordable, centrally located housing units or co-living solutions not only for sale but also for medium- to long-term tenure. And this demand has only been compounded as house price growth and high interest rates in the UK have constrained owner-occupation, particularly among younger or single households, and more recently broadening to middle-income households.

These factors, on top of population growth and rapid urbanisation have fundamentally changed demand for housing across location, tenure, and quantity. This is by no means a problem unique to the UK. Our recent research also highlighted a clear opportunity – and need – for institutional capital to positively contribute to the ongoing housing crisis across Europe. The excess housing demand on the continent requires the rapid acceleration of housing supply across all segments, especially the affordable intermediary PRS.

However, the free market in the UK means that it also has no form of rental regulation and weaker security of tenure – greatly exacerbating existing challenges. For instance, the National Housing Federation (NHF) estimates that approximately eight million have some form of housing need in the UK, and of these, 3.6 million require social or affordable housing.

Bridging affordability and sustainability  

Alongside supply imbalances in the rental market, there are ongoing questions about what should be considered ‘affordable’ rent. In the UK, this is broadly defined as homes let at least 20% below local market rents or let at rates set between market rents and social rents.

However, this unfortunately remains unaffordable to many in

South Korea’s Gas Gamble Risks Stranded Assets

IEEFA Energy Finance Specialist Michelle Kim explains why the country’s East Sea gas development will not strengthen its energy security.

South Korea’s Yoon Suk-yeol administration recently announced the exploratory drilling of potentially massive oil and gas reserves in the East Sea, estimated to hold up to 14 billion barrels of oil and gas. This project aims to address the country’s natural gas demand for 29 years and oil demand for four years.

The government will launch the project, which costs around ₩100 billion (US$73 million), by the end of the year, with initial results expected in the first half of 2025. However, as South Korea’s natural gas demand declines, large oil and gas developments in the East Sea could become stranded assets due to the country’s accelerating decarbonisation efforts.

In the long term, the transition to clean energy will better support national energy security and sustainability rather than an overreliance on fossil fuels.

Declining gas demand amid energy transition

By the time the East Sea gas field becomes commercially operational around 2035, South Korea’s natural gas demand will have significantly decreased due to the energy transition. The country’s natural gas demand is already declining, falling 4.9% in 2023 due to higher nuclear and renewable power generation and reduced city gas demand, impacted by high import costs.

Given South Korea’s strengthened decarbonisation targets, this trend will persist in the coming years. The recent 11th Basic Plan for Long-Term Electricity Supply and Demand (BPLE) implementation guideline indicated that the share of liquefied natural gas (LNG) in the power mix will decline to 11.1% by 2038, a substantial drop from 26.8% in 2023.

South Korea’s Ministry of Trade, Industry and Energy also estimates that natural gas demand will decline to 37.66 million metric tons per annum (MTPA) by 2036, with an average annual decline of 1.38%, due to a shrinking population and slowing economic growth rates.

In addition, the global natural gas market is expected to face an oversupply from 2026 onwards, driven by massive expansions from the US and Qatar. The Institute for Energy Economics and Financial Analysis (IEEFA) estimates that the world’s total nameplate liquefaction capacity could reach 666.5 MTPA by 2028. This suggests that cheap natural gas supply will be available in the market, with existing contracts and purchases from the glutted spot market able to cover future gas needs.

Growing stranded asset risks

Investing taxpayers’ money

Horses for Courses

Winning the renewables race is all about location, according to Richard Lum, Co-CIO, Victory Hill Capital Partners.

The transition to a low-carbon economy is creating a once-in-a-generation dislocation in energy markets, fundamentally bringing the longevity of current energy infrastructure into question. For example, whereas energy systems designed for oil, coal and gas were predicated on centralised power generation, there is now a burgeoning need to upgrade or reform power grids to a distributed model, accommodating the growth of renewable energy sources as we progress towards net zero goals.

This gap between legacy energy infrastructure and a sustainable, low-carbon future provides an opportunity for astute investors. But capitalising upon uncertainties like supply security and price volatility at peak times is not as simple as swapping every coal-powered energy plant for a wind farm. Globally, the energy transition is taking place at varying speeds in different locations, leading to profound differences in how renewables assets perform.

These differences are partly due to inherent regional characteristics that render some methods of clean energy generation more effective than others depending on where you are. For instance, France’s robust nuclear power infrastructure, supported by strong policy and regulation, has lessened the demand for new sources of renewable energy in its electricity grid. Or China, where expansive land mass and suitable climate conditions have allowed renewables developers to build 2,919GW of solar capacity.

But identifying beneficial investment opportunities requires more than locating wind farm projects where there is wind, and solar fields where there is sun, or ‘copying and pasting’ one lucrative project framework into regions with physical and regulatory similarities.

The value drivers are local

While a broadbrush approach to green infrastructure investment might go some way towards meeting global energy needs, the drivers of value are inherently local. Taking a broad approach could come at the cost of investor returns, ultimately jeopardising the long-term financing prospects for the transition. Investors will need to evaluate each project at a granular level, assessing its merits in consideration of its location by looking at everything from weather, geography, politics and regulation, to the stage of the energy transition journey that the country is currently in.

In other words, varying market conditions mean that to fruitfully participate in transition projects globally, investors must account for the fact that renewable technology will perform differently in different places, with direct knock-on effects on performance and investor returns.

A good example

IGGiQ Targets Level Playing Field for UK Pension Funds

Data-driven platform seeks to empower mid-tier trustees and sponsors with rollout of ESG-focused module.

The information shortfalls facing smaller pension schemes when developing sustainable investment strategies are the inspiration for Independent Governance Group’s (IGG) recently released IGGiQ tool, which aims to improve ESG data integration and management. The UK-based pensions trusteeship and governance services provider has partnered with ESG data and investment solutions firm…

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Impact Investing Emerges as Priority

UK-based asset manager Schroders has been named as one of the “best-in-class” for this type of investment strategy. 

Investors’ management, measurement and monitoring of impact investing strategies has been steadily improving.  This is according to intelligence provider BlueMark’s fifth annual ‘Making the Mark’ report, which assessed the best practices and trends of impact investment strategies worth a total US$234 billion in combined assets – equivalent to 20% of…

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A Virtuous and Self-sustaining Cycle

Early-stage investors must focus on the ocean economy to make waves in the climate race, according to Ed Phillips, Investment Director at Future Planet Capital. 

As we move into the summer months, we can expect headlines to be filled with record-breaking temperatures and unprecedented wildfires driven by climate change. While what happens on land will make our changing climate visceral to many, the damage happening to our oceans may continue to go unheeded and unnoticed.

This year’s World Oceans Day was therefore a helpful moment to reflect on the need for action and to put our oceans higher up the climate finance agenda, not only to mitigate the damage happening to this vast and important resource, but to also capitalise on the solutions it offers.

The ocean, which covers more than 70% of our planet, is the natural engine room when it comes to climate management. It produces 50% of the world’s oxygen, absorbs 30% of global carbon dioxide emissions, and captures 90% of the excess heat produced by these emissions.

Beyond these capabilities that must be protected, we should also be turning more to the ocean’s additional climate potential. Ocean-based climate solutions, such as ocean-based renewable energy and utilising low-carbon food from the ocean, hold the potential to reduce the emissions gap by up to 35% on a 1.5ºC pathway.

The economic argument is also strong. The global ocean economy is estimated to sit at around US$1.5 trillion per year, making it the seventh-largest economy in the world. With the right expertise, motivated investors could access ocean assets that total out at an estimated US$24 trillion!

Despite all this, what has been labelled the world’s greatest ally against climate change, still finds itself snubbed when it comes to investment. The ocean receives less than 1% of all climate finance, and the UN’s fourteenth Sustainable Development Goal – Life Below Water – remains the most underfunded of all.

Clear blue future

As headlines will remind us, there is a clear imperative to unlock the potential of our ocean if we are to take timely strides against climate change. But vast amounts of capital are still required to achieve this. So, how do we get more capital floating into the ocean economy?

Part of the solution might seem quite simple – putting the ocean at the forefront of the global climate change regime. Given its known importance – and potential – you’d be forgiven for thinking this was already the case. Not

In Search of the Exclusion Premium

Cheng-En Li, Research Analyst at MainStreet Partners, explores how market performance of large-cap companies is influenced by poor ESG practices.

While grappling with uncertainty in capital markets caused by the exacerbation in inflation, mounting policy rates, and geopolitical tensions in 2023 and 2024, many institutions are now looking to align themselves more closely with good ESG practices in response to increased regulation and market demand. But a question in the mind of any investor is how ESG-related controversial behaviours can affect performance over the medium term.

Recently, we conducted research analysing data from 2023 to investigate this relationship between ESG behaviour and capital market performance, using the MSCI ACWI large-cap index as a benchmark. The study first examined whether the share prices of companies flagged for negative ESG behaviour show any discernible trends over the ensuing six months and over the full year in 2023. We then analysed the distribution of companies that have been flagged to determine if certain industries are more prone to ESG-related controversies.

Furthermore, leveraging sector return data, we assessed the performance implications of flagged companies in various industries, examining whether such industries underperform and if there is evidence of an ‘exclusion premium’. This is when outperformance is generated by ‘being selective’ and excluding companies with relevant ESG-related controversial behaviour.

Finally, we created sub-universes based on different ESG flags to explore how incorporating ESG behaviour into investment strategies can enhance performance and mitigate risk.

The findings indicate that this approach may affect the risk and return profiles of large-cap firms.

Negative impact of ESG controversies

ESG controversies/negative ESG behaviour refers to company practices that raise ethical, environmental or social concerns. We developed a framework to classify controversial events based on severity. The framework has five key performance indicators — scale, frequency, response, effectiveness, and transparency — to rate the news for the company with numeric score (ie, severity score) ranging from one to five; the company is assigned a yellow flag/red flag once the severity score exceeds the corresponding threshold.

We would then issue a red flag to a company that has engaged in any controversy that poses a significant threat to the company’s business and future performance, alternatively issuing a yellow flag to a company if the controversy is likely to develop into a material ESG risk.

Among the companies that were newly flagged in 2023, those with controversies over accounting standards and human rights

From Tango to Salsa – or Silent Disco?

Transmission mechanisms hold the key to adapting asset allocation models to dual materiality, contends Joseph Naayem, Managing Partner, Kalmus Capital.

In the good old days of single materiality, investors could afford to incrementally take a linear approach to how they integrated sustainability into their decision-making processes. As we enter an age of double materiality, allocators all along the investment value chain may find themselves having to go back to first principles and rethink their entire approaches to asset allocation, portfolio construction, fund and security selection and engagement.

If we separate the definition of sustainable investing into ESG integration, or ‘outside-in’, where the focus is on how the outside world affects financial risks and opportunities, versus impact investing, or ‘inside-out’, where the main focus is on how economic activity affects the outside world, we can single out an important parameter that had never held much importance in allocation models: transmission mechanisms.

The art of investing is based on how we allocate risk and accordingly deploy the appropriate resources to oversee it. In the old world of single materiality, relative size was everything: the larger the exposure, the greater the capital at risk, the greater the importance, the more resources, time, fees, effort and sophistication it deserved. It is little wonder that the maturity of sustainable finance, mirroring typical allocation models, started with listed equites, then fixed income before percolating through private markets and finally touching hedge funds last. This assumption – that size equals importance – has underpinned every capital allocation model to date.

Differing transition mechanisms

As impact takes on more importance in a dual materiality world, size is no longer the overriding determinant of importance, be it assets under management, relative portfolio weight, value at risk exposure or revenue line. Each asset class, investment strategy or fund structure has a different transmission mechanism that traces the causality of how capital can influence outcomes rather than just be aligned to them. This causality extends beyond the basic difference between primary investments and secondary market transactions. The level of ownership, levers of influence, credibility and knowledge when engaging on specific topics as well as level of concentration and holding period all play a pivotal role in enabling fund managers to shape outcomes on the ground.

Regulations such as Europe’s Corporate Sustainability Reporting Directive are laying the foundations for how dual materiality is measured and reported, but like many other disclosure-related regulations

Gender Equality: A Compelling Case for Impact Investment

Undervaluation of and underinvestment in women is leaving money on the table, says Sandra Osborne Kartt, Deputy Chief Investment Officer, ImpactAssets Capital Partners.

Sound the alarm – we stand to miss out on US$290 billion a year in the US economy.

In an era focused on capturing every bit of economic growth, it’s almost inconceivable that such a vast sum – the equivalent of nearly US$800 million every day – could slip under the radar. And yet, that’s exactly what may happen with the care economy.

According to BCG, the care sector commands a valuation of up to US$6 trillion, nearly a quarter of the total US GDP. Roughly half of care work – which underpins much of the economy at large – is unpaid, and it is disproportionately performed by women. Addressing the issue requires solutions that reduce the unpaid care burden as well as boost the supply of paid care. For example, improved access to child and elder care would enable more women to enter and stay in the workforce. But the way our mainstream discourse often overlooks the sector represents a glaring blind spot about work and productivity.

And unfortunately, the care economy oversight is just the tip of the iceberg – one element of a broader social disregard to pervasive and systemic gender inequality. Persistent undervaluation of and underinvestment in women is leaving money on the table and holding back progress toward true equality.

For the world’s four billion women and girls, there is too much at stake to stall any longer.

Catalysing gender equality

While impact investing alone cannot be a panacea for gender inequality, it is an indispensable component of a larger solution. There are three essential areas of need where the patient and flexible capital of impact investors can be most effective at driving gender equality: advancing economic inclusion; delivering products and services that improve lives and outcomes; and increasing representation and voice.

Gender equality is, fundamentally, a moral imperative. It is an objective worth striving for, even in isolation. But it also supports a host of broader global goals – driving progress toward a healthier, less violent, increasingly productive, and more stable society.

And yet, at our current pace, the UN estimates it will take an unacceptable 286 years to achieve such equality. To make meaningful progress more quickly, impact investors must focus on the targeted areas of need where they