Up next in 10
ESG funds seemed to be all the rage in 2010, as people flocked to invest their money in investments which are kinder to the planet and more likely to exclude firms such as tobacco companies, arms manufacturers, and other non-righteous businesses.
However, since the global rise of populism, perhaps best personified by Donald Trump, there’s been less of a focus on the environmental impact of business.
That’s why Sam Norman asked Paul Stepan, head of sustainability consulting at real estate and investment management firm JLL, whether he’d seen businesses pull back on their climate commitments.
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0:00
At the beginning of the decade, the Net
0:01
Zero Banking Alliance was forged. Around
0:04
43 global giants came together and
0:06
united in a bid to slash emissions
0:09
across the financial services industry.
0:11
This noble endeavor included the likes
0:13
of HSBC, Barclays, JP Morgan, and more.
0:17
But 5 years later, oh how the times have
0:19
changed. Last year, the group ceased
0:22
operations amid a member exodus. It
0:24
marked a clear sign that the industry
0:26
was withering on their more green
0:27
commitments. Or are they? I'm joined
0:29
here today by Paul Stefen, head of
0:31
sustainability consulting at real estate
0:33
and investment management firm JLL.
0:36
Well, he argues that financial services
0:37
firms are still going hot and heavy for
0:39
ESG policies. That's environment,
0:41
social, and governance policies, of
0:42
course. Despite a change in the
0:44
political headwinds. Paul, thank you
0:46
very much for joining me today. So, I
0:48
guess we'll jump straight into it then.
0:49
I mean, I'll start on that last point,
0:51
this changing of political winds. I
0:52
mean, I think the obvious we saw when
0:54
President Donald Trump returned to the
0:55
White House, he did so almost on a
0:57
mandate, would you say, to tear down
0:59
ESG. What have you seen change in the
1:01
financial services industry over the
1:02
last few years since he returned?
1:05
I think um
1:06
personally, our our view is that it's
1:08
not a one-size-fits-all, and the market
1:10
hasn't just followed one direction at
1:12
all. I think it's a lot more nuanced,
1:14
actually, when you look at the detail.
1:15
Actually, the language has shifted from
1:18
ESG to risk management, to value
1:20
creation, and implementation. And you've
1:22
seen that across the board, in fact, as
1:24
people have maybe stepped back from some
1:25
of the one-size-fits-all frameworks.
1:28
And maybe some of those frameworks also
1:30
have a level of assurance and governance
1:32
behind them to really focus more on
1:34
roles that drive integration behind the
1:36
scenes and action behind the scenes. And
1:38
a lot of those big commitments that you
1:40
touched on, covered by green funds and
1:42
others, for instance, actually a lot of
1:44
those sustainable transition finance
1:45
goals still stand behind the scenes with
1:47
JP Morgan and others. Those haven't
1:49
changed. Do you think so let's talk
1:51
about the Net Zero Banking Alliance that
1:53
I touched on there. Do you think so this
1:55
one-size-fits-all approach, do Do think
1:57
the collapse of something like that is a
1:59
is a rejection of this one size fits all
2:01
sort of mentality?
2:03
I'm not sure about collapse is quite a
2:05
strong word. And
2:06
>> What is it? It's not operating anymore.
2:07
Yeah, but but but what I would instead
2:09
focusing on is well, whatever tangible
2:11
goals and metrics that a lot of these
2:13
banks have set. And when you look about
2:15
those have stayed the same. And I think
2:17
when you step back for a moment and you
2:19
think well, where's the action really
2:21
going to be driven? I think one of the
2:22
problems was
2:24
that um you were finding there was an
2:25
enormous amount of frameworks out in the
2:27
market and there wasn't enough action.
2:29
So, instead the shift has happened that
2:31
you've had a lot of these roles move
2:32
into integration with a core business
2:35
practices. And there they're starting to
2:37
drive much more demonstrable action.
2:39
I'll give you one example. We work with
2:40
Lloyds Bank Right. Um with their
2:42
residential financing arm. We've been
2:44
working with them for 25 years looking
2:46
at the most sustainable home builders in
2:48
the whole segment. We've just just
2:50
celebrated the 25th year of that program
2:52
in next generation. And we're continuing
2:54
strong. That's cuz there's still a real
2:56
need for that.
2:58
So, the integration side you touched on.
3:01
I guess if if if we're looking at this
3:03
shift as you said from a lot of these
3:05
targets, a lot of these banks and
3:07
financial services giants sort of set
3:09
years ago start of this decade. And
3:11
we're kind of now are seeing them
3:13
change. Is that more of a
3:15
And and as you touch on this integration
3:17
and and change in mindset, were these
3:18
targets ever realistic when they first
3:20
set them then? And are they only now
3:22
realizing now as you say they change
3:23
their approach? Hold on a second. Maybe
3:25
2030 net zero HSBC wasn't a realistic
3:28
idea in the first place. I'm not sure
3:30
actually. I wouldn't go that far again
3:32
because actually what I'd say is
3:35
you set these long-term targets. There's
3:37
a lot of factors that go into that and
3:39
there's a lot of change that can happen
3:40
over that time. So, let's just roll back
3:41
over last 5 years and we look at COVID
3:44
for example. We look at the impact now
3:46
of AI. And the truth is you have to
3:48
adapt and you have to evolve your
3:49
strategy. When we look at the substance
3:52
of what's being driven, well, actually
3:53
there's some players in the market who
3:55
still take a long-term view. And when I
3:57
take those short-term targets around,
3:58
say, climate finance and JP Morgan, they
4:01
still have 2.5 trillion committed in
4:03
this space. I'll just shift it another
4:05
way. If I look at commercial real estate
4:07
right now, which is an area clearly
4:09
we're focused on,
4:10
when we look at how they've now
4:12
integrated these large financial
4:14
services
4:15
uh with really the sustainability
4:16
requirements into their real estate
4:18
goals, we now see that 84%
4:21
of leases in London are green lease
4:23
clauses, have green lease clauses in
4:24
them. And that's a transformation. That
4:26
happens because you integrate
4:28
sustainability in your space strategy.
4:30
You integrate it into the wider business
4:32
planning. And that's the benefit when
4:34
you take an integrated approach. So, do
4:36
you reckon the health of some of these
4:38
portfolios and these funds that are
4:39
centered around sustainability and ESG?
4:42
Do I mean, obviously you touched on with
4:44
the JP Morgan uh figure. Do you reckon
4:46
there's there's still weight behind
4:47
them? Cuz I mean, we're seeing sort of
4:49
the outflows uh of these sort of funds
4:52
are quite telling. I mean, specifically
4:53
last year, I think the outflows were
4:54
quite strong for some some of these
4:56
sustainability funds.
4:57
Well, again, I can only really focus,
4:59
you know, most of our advice is with the
5:01
major real estate asset managers. And
5:05
when we look at there, actually it is a
5:07
really significant agenda that many of
5:09
the value-add funds are really growing
5:11
and successful across Europe. And those
5:13
are coming in and often they're having a
5:14
decarbonization mandate behind them. And
5:16
those are driven by capital across the
5:19
market looking at that as a significant
5:21
opportunity across Europe where you have
5:22
to reposition buildings in light of
5:24
future regulation, which is getting more
5:26
and more severe in Europe. And then
5:28
alongside, we're seeing occupier demand.
5:30
So, for instance, we see a significant
5:32
shortfall of dark green buildings across
5:34
almost every market we operate in. And
5:36
that's just a straight-out business
5:38
investment opportunity. We actually see
5:40
the same thing right now around on-site
5:42
generation and vehicle electrification.
5:44
We're we're seeing huge opportunities
5:46
for real estate funds to invest in their
5:48
segments and they're just part of a
5:49
transition and they're often driven by
5:51
economics, not just by some high-level
5:54
agenda. Um so from a real estate side,
5:58
actually we've just seen that narrative
5:59
strengthen if anything as a really
6:01
important part of the differentiators.
6:03
Which is just one point on on this point
6:04
though.
6:05
Talk about like the value of some of
6:07
these portfolios and these funds are
6:08
doing. Just there's been a bit of a bit
6:09
of a misconception when people are
6:10
getting involved with them and then just
6:11
from the point I touched on with the um
6:13
the outflows. I've got it here but
6:14
Morningstar data uh shows global
6:16
sustainable funds there's a massive net
6:19
outflow in the last uh two quarters of
6:21
last year. So it was a 55 uh billion
6:23
dollar drop in quarter three and a 27
6:25
billion dollar drop in quarter four. I
6:27
mean those are quite harrowing
6:28
statistics and is this people realizing
6:30
hold on a second these aren't as
6:31
valuable as they were talked up to be uh
6:33
maybe a couple of years ago. It's hard
6:35
to get specific you have to get quite
6:37
specific there to be quite specific by
6:39
market, by asset class. And again when I
6:42
go back to the real estate side, what
6:44
we're seeing is really significant
6:46
accretive strategies that are based on
6:48
real fundamentals, things like power
6:50
access constraints in different markets,
6:52
but also significant on-site generation
6:55
and revenue creation opportunities. And
6:57
actually there we've seen a huge growth
6:59
in our advisory requirements across the
7:01
board, across all our markets in Europe.
7:03
And so I I could I don't recognize while
7:07
I hear those wider statistics, I think
7:10
in the segment we're operating in, we
7:12
really see a real strength.
7:13
>> So is it a chance that the real estate
7:15
uh segment might be bucking a trend as
7:16
opposed to leading a trend?
7:19
I think with real estate you're seeing
7:21
that this is really aligning with some
7:22
of those core fundamentals and that
7:23
actually you're seeing a real alignment.
7:25
>> these core core fundamentals that it's
7:26
aligning with? Because like it does sort
7:28
of seem like if from what what your
7:30
points and some of the evidence you've
7:30
got here, the real estate argument is
7:32
yes that these financial services are
7:34
committed in using this part of their
7:35
portfolio to sort of flex their muscles
7:37
in the the green finance and the green
7:39
policies. But is is that translating
7:41
wider across?
7:43
Uh think I can only touch on for
7:45
instance that residential case study I
7:47
gave earlier where what we've just seen
7:49
is that Lloyds continues to be really
7:50
committed on their decarbonisation
7:52
agenda and seeing this as an important
7:54
part of just risk management, effective
7:56
risk management and what they see as
7:57
more resilient assets underneath this
8:00
and that gives them better return. On
8:01
the other side of things when I go back
8:03
to the real estate conversations that
8:05
we've been talking about, well actually
8:07
it just um
8:09
continues to be an area where um we see
8:12
attractive straight out investment
8:14
returns. So we don't see a conflict
8:16
really between what you would just
8:17
consider to be core business practice,
8:20
good custodial care. I'll give you
8:22
another example. We're working with all
8:24
the heads of financial services in their
8:26
commercial real estate functions, the
8:27
commercial real estate functions of the
8:28
major financial services firms around
8:30
the world. When we asked them what's
8:32
important when they select sites, they
8:34
say, "Well actually 40% of them say
8:36
energy cost is really important. They
8:37
need to drive that down." When we then
8:39
work with them in a workshop, they say
8:40
climate risk is one of the top items on
8:42
their agenda. And some of our clients,
8:44
some of our financial services clients,
8:46
weight the price cost of occupancy, but
8:49
they also weight the climate risk almost
8:50
at the same level as the two. So you're
8:53
really seeing a really tight alignment
8:55
between cost and these broader risks
8:56
that they're looking to manage. On the
8:58
Lloyds point, I'm curious and there
8:59
might be no relationship here, but when
9:01
I think of Lloyds of a lot of the
9:02
traditional high street banks as you
9:04
would I Lloyds is quite one that's
9:06
bullish on the tech, very want very much
9:09
what they wanted to beef up their
9:10
digital offering. Do does that
9:12
particularly have any relationship do
9:13
you think with um how they are committed
9:16
to sort of ESG and climate policies? I
9:17
mean it's just a it's just a tie I
9:19
thought between the two of Lloyds being
9:20
quite a um more tech advanced than maybe
9:24
some of their peers who are on the high
9:25
street and then they're also being
9:27
singled out as one who's quite committed
9:29
on that side. I I mean for me I think I
9:31
see it as it's been a strategic priority
9:33
for for a long time and you know that's
9:35
why this has been a 25 year program with
9:37
them. Next generation has been assessing
9:40
homebuilders in a way that actually even
9:43
across Europe is quite except-
9:45
exceptional. And then what they've been
9:47
using is to really drive that
9:48
intentionally with how they're working
9:49
with their clients and how they're
9:51
lending to those clients. So we really
9:53
see them integrate it. So I'm think this
9:55
is less about any short-term alignment.
9:57
This has been a long-term game. And
9:59
that's cuz they've seen a really
10:01
important part of this around value
10:03
creation as well.
10:04
>> Do you think that's because they've had
10:05
that long-term vision in sight of where
10:07
where they were and where they wanted to
10:09
be? And maybe that's why they're
10:11
I have to adjust the ropes now.
10:12
>> I mean, that's right. And maybe that
10:13
steps right back to where they started
10:16
with what you were saying, which is this
10:18
whole agenda has been driven by the
10:19
science. And actually the science is
10:20
incredibly predictable. It's much harder
10:22
to predict inflation. It's much harder
10:24
to predict anything else in the market.
10:25
But actually science has been driven all
10:27
along. And the science has been clear
10:28
for an incredibly long period of time.
10:30
>> But why are so many of them now delaying
10:32
their commitments? I mean, just just
10:34
this week I uh I cover also a lot of
10:36
FinTechs and we saw Starling uh they
10:38
come out with their annual report and
10:39
they said it was exceptionally
10:40
challenging to I think it was by 2030
10:42
they wanted a third to cut their
10:44
emissions by a third and then 2050 net
10:46
zero. They said they're putting that
10:47
2030 target under review because literal
10:49
quote exceptionally challenging.
10:51
OakNorth couple of weeks prior they as
10:53
they they built up their expansion I
10:55
think they've put their target under
10:56
review weekly. It it So so on those
10:59
specifics, again, I'm not familiar with
11:01
those firms directly. But what I would
11:03
say is as people have moved to
11:05
implementation, they're really genuinely
11:07
and deeply committed to the execution of
11:09
these strategies. I'm sure there's some
11:11
calibration that anyone does. You know,
11:13
you review that. You test how fast you
11:15
can go. But at the same time it doesn't
11:16
mean the commitment doesn't stand. Often
11:18
people are just moving by a few years.
11:21
They're trying to work out
11:22
>> Some few [snorts] decades. I mean, here
11:23
just we see the delay there by 20 years.
11:25
I mean, I just feel the commitment might
11:26
be there, but were we a bit bit too
11:27
excited? If you're if you're delaying it
11:29
by 20 years and some
11:30
um equal to another 10 years. Are you
11:32
just getting a little bit excited with
11:33
your first initial goal?
11:35
No, I would again I I would step back
11:37
actually because I think we've got to
11:39
come back to these are long-term targets
11:41
and the market factors change a lot over
11:43
this time period. And actually as part
11:45
of that, you just calibrate and you get
11:47
more and more deeper and in some cases
11:50
people have gone further with their
11:51
commitments and in other cases what
11:52
we're also starting to see is regulation
11:55
like CSRD for instance in Europe. What
11:57
that forced was level of governance and
12:00
position around target setting and
12:01
talking about targets. That's made
12:03
everyone try to get just really really
12:05
precise on what they mean. So, I think
12:07
this is probably more a calibration in
12:09
response to that level of precision,
12:11
wider market forces. But that doesn't
12:14
mean that the fundamental drivers are
12:15
not there.
12:16
One last thing I just want to touch on
12:17
before we wrap up then. Something
12:19
interesting we've got to touch on the
12:21
Bill Winters comment from I think about
12:22
over a year ago. He had out at some of
12:24
his rivals. Shame on them he said, the
12:26
ones who embraced ESG policies and green
12:29
finance when it was fashionable. How
12:31
much of
12:32
I guess these sort of policies and these
12:33
sort of commitments do you think are
12:35
part of like a marketing ploy and how
12:37
much do you think are actual real
12:39
embedded into their balance sheet and
12:41
their long-term visions?
12:43
Honestly, we're seeing every day in
12:46
those real estate funds it's an
12:47
important part of the value thesis. It's
12:49
an important part when you're capital
12:51
raising. It's an important part when
12:52
you're executing and driving value and
12:54
driving returns. It's even more of the
12:56
case now in the current market
12:58
conditions more widely. And then on the
13:00
other side, when we're working with
13:01
large financial services firms, I can
13:03
just react to what I see in practice
13:05
which is
13:06
84% of leases now in London have green
13:09
lease clauses in and that's also what
13:11
we're translating into concrete capital
13:13
investment plans with these banks as
13:14
well where we're really trying to take
13:16
an integrated approach. So, if anything,
13:18
I'm seeing an acceleration in what's
13:20
happening
13:21
actually in terms of the execution end
13:23
of it.
13:24
And maybe people are having to simplify
13:25
their language elsewhere, but that
13:27
doesn't mean the execution is going.
13:29
Nice one. Well, thank you very much for
13:30
joining me, Paul. Thank you very much
13:31
for very interesting conversation. Uh
13:33
we'll leave it over to you guys. What do
13:35
you think? Are the financial services
13:36
industry rowing back on climate
13:38
commitments, or was it all just a
13:39
marketing ploy all along? Let us know in
13:41
the comments, and thank you for
13:42
following along.
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