Event-Summary: "The Future of ESG"

Sustainability in the portfolio context - known in the specialist jargon as "responsible investing" and across the board as "ESG investing" - is a very dynamic topic. ESG has also become highly relevant for all departments and the C-suite from a corporate perspective. A large number of changes have been made in recent months, particularly with regard to reporting, data and overarching regulation. At the same time, the now high level of complexity quickly leads to confusion, prejudices and stumbling blocks.

Even more exciting is the question of what trends are emerging in ESG and responsible investing, where the financial industry is heading and what is happening in the areas of reporting, regulation and jurisdiction.

Participants at the Sustainable Investors' Circle's annual kick-off event 2024 on March 19 in Munich experienced many current insights into selected topics and lively discussions with experts. The event area hosted by ReedSmith in a central location on Odeonsplatz provided an excellent forum for this.

KEY TAKE-AWAYS:

Future of Climate Risks and Investments. A reinsurance perspective.

— Keynote speech: Tobias Grimm (Head Climate Advisory & NatCat Data, Munich Re Group/Munich)

• Losses in the windstorm, forest fire and flood segments are rising sharply as a result of demonstrably higher air and water temperatures
• 2023 was by far the warmest year since records began in 1940, and 2024 promises to continue this trend - with already very worrying consequences in this decade
• The "new normal" for climate-related insurance claims is now USD 100 billion.
• The increase in insurance claims is driven, among other things, by the fact that building density in industrialized countries has increased significantly over the last 20 years.
• The monitoring and measurement of physical climate risks are increasingly becoming key success factors for companies.
• MunichRe Group is involved in the global community through its conventional business units in order to support the proactive prevention of physical (climate) losses.
• Insurance premiums continue to rise globally
• For primary insurers and reinsurers, one of the top issues at present is the future premium structure and thus the dynamic marginal benefit for policyholders, up to which point it is still worth insuring losses - and from which point the premium is no longer affordable.

The Future of ESG Ratings

— Presentation: Martin Raab (Board of Directors, Chairman Ratings Committee, GGX AG/Switzerland)

• Sustainability and ESG have increasingly become topics strongly linked to political ideologies, and "pseudo" providers of fundamentally well thought-out, innovative models and approaches have also emerged within the financial industry in recent months

• Anti-austerity and anti-climate opportunity movements are clearly perceptible, particularly in the USA, as a result of a greatly exaggerated definition of sustainability.

• The qualitative assessment of the question "How sustainable is a company?" is very individual - practical example Starbucks Corporation. 100 tons of plastic saved by not using plastic straws but still using PE lids and 1 million trees felled per year for paper cups.

• There is a clear trend towards transparent, comprehensible rating models. In case of doubt, "reported" figures from companies are better than pure assumptions ("estimated") and interpolated fantasy figures when evaluating companies' ESG parameters.

• GGX, the pioneer of the world's first quantitative ESG ratings that disclose weightings and data points, is continuing its expansion and will soon be covering twice the number of ESG ratings globally: around 2,000 companies (including from the Stoxx 600, S&P 500, Nasdaq 100, Dow Jones Industrial Average Index, Straight Times Index, Nikkei and Hang Seng).

• A specific real-life example of the high-yield combination of ecology and economy is the GGX Sustainable Dynamic Leaders Europe Index, which is operated jointly with Solactive and listed on the Swiss Exchange for Leonteq Securities as a deposit-secured financial product (ETP+) under the ticker ESGEU.

• The modular GGX rating model can now also be used cost-effectively by asset managers and portfolio managers as a white label ESG model and ESG scoring model with coverage of up to 5,000 companies worldwide.

The Future of Indexing: Net Zero Sector Pathways

— Presentation: Sebastian von Reinersdorff (Head ESG Solutions, Solactive AG/Frankfurt)

• Paris-aligned benchmarks (PAB) and climate transition benchmarks (CTB) have dominated investable indices in the EU to date. However, these are subject to various challenges that do not always meet the requirements of ESG investors.
• The new index benchmarks developed by Solactive are based on the University of Technology Sydney model and are used by the Net Zero Asset Owner Alliance.
• Using the real estate sector as an example, it is clear that it is possible to invest in companies that will successfully achieve the climate pathway - by using the Solactive Sector Pathways Indices.
• Furthermore, existing Net Zero indices can also be optimized with the help of Solactive's Sector Pathway concept.
• Solactive, as a leading independent provider in the creation and design of customized indices, will also continue to expand the area of ESG and sustainability indices.

The Future of ESG Litigation

— Presentation: Oliver Rathje (Partner, ReedSmith LLP) and Caroline Grosch (Head Business Development, ReedSmith LLP/München)

• Key trends in the area of ESG, particularly in the financial sector, are an increasing "industry division" into strict ESG advocates and ESG detractors; the latter have been motivated to turn around by political action (e.g. certain US states exclude ESG-oriented asset managers from mandates)
• Significant increase in the need for information and thirst for knowledge in terms of raw data collection and data sources on the part of users of ESG information.
• Verification of ESG-relevant statements and data is more important than ever in order to avoid creating "home-made" ESG compliance risks.
• From a legal perspective, the increase in settlement amounts concluded in settlements with financial market regulators (in particular the SEC) can be noted.
• Associations/NGOs are also appearing as a fixed factor in lawsuits with an ESG background and will continue to be part of (ancillary) lawsuits in the future.
• A Peruvian farmer's lawsuit against a German energy company (pending at the Higher Regional Court of Hamm), which has been pending since 2015, has caused quite a stir. According to the plaintiff, the climate change caused by energy companies should be compensated proportionately in the form of a monetary payment (around EUR 20,000). The potential for a wave of lawsuits is high and the decision-making process remains exciting.
• So far, there have been no noticeable initiatives in the area of "competition claims" relating to ESG. In other words, legal action by a competitor against a competitor engaging in greenwashing or greenwording. However, this could change in the near future.
• Overall, companies in all sectors should develop a clear strategy for dealing with ESG litigation risks in the present. It is also advisable to take stock of potential ESG risks.

Ongoing information and event announcements of the Sustainable Investors' Circle can be found on the LinkedIn page of GGX.