The Sustainability Story: Monika Freyman, CFA – Practical Advice on Investing for Net Zero
Podcast Information:
- Title: The Sustainability Story
- Host: CFA Institute (Hosts: Deborah Kidd, Nicole Gehrig, Paul Moody)
- Episode: Monika Freyman, CFA: Practical Advice on Investing for Net Zero
- Release Date: November 23, 2024
- Description: Intimate conversations with thought leaders in ESG investing and sustainability, exploring the intersection of finance with environmental, governance, societal, and climate-related issues.
1. Introduction
Debra Kidd welcomes listeners to the episode, highlighting the significance of the climate transition in the current global landscape, especially with the convergence of nearly 200 countries at COP 29 to advance climate change solutions. She introduces Monika Freyman, Vice President of Sustainable Investing at Addenda Capital, noting her extensive experience, including her tenure at Mercer and Ceres.
2. Monica Freyman's Sustainability Journey ([02:15] - [07:14])
Monika shares her transition into sustainable investing, emphasizing a pivotal moment during a biology and ecology class where she recognized her limited understanding of natural and planetary processes foundational to the economy and society. This revelation led her to pursue a Master’s of Science instead of an MBA, merging her investment acumen with ecological insights.
Notable Quote:
"I realized as an investor, I had been really trained about looking at companies and business practices, products and services... But I was completely ignorant on the natural biological process and planetary processes that are foundational to the economy and to society."
— Monika Freyman, [04:30]
Monika underscores the importance of curiosity and risk-taking in her career shift, highlighting the emergence of sustainable investing frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD) that facilitated her integration of sustainability into finance.
3. Asset Owners' Concerns and Challenges on Climate Change ([07:14] - [13:20])
Monika discusses her role at Mercer Canada, where she collaborated with a diverse range of asset owners—from pension funds with dedicated climate teams to foundations embarking on their sustainability journeys. She identifies the primary challenges asset owners face:
- Complexity of Sustainability Issues: High ambiguity and variable data quality compared to traditional financial metrics.
- Establishing Robust Processes: Developing sustainable investment policies requires time, typically between six months to a year, involving deep conversations and peer learning.
- Implementation Strategies: Monitoring managers, engaging in proxy voting, and integrating sustainability across the entire portfolio rather than isolated asset classes.
Notable Quote:
"Sustainability issues are unbelievably complex. There's a lot of unknowns. The data quality is not as high as in traditional financial modeling."
— Monika Freyman, [09:10]
Monika emphasizes the importance of a structured, incremental approach to integrating sustainability, advocating for steady progress and continued engagement with investment managers.
4. Evolution of Climate Transition in Asset Management ([13:20] - [16:29])
Transitioning from asset owner to asset manager, Monika observes a significant shift towards embracing the "climate transition" rather than solely focusing on low-carbon strategies. This broader perspective acknowledges the necessity of engaging with high-emitting sectors to foster comprehensive economic decarbonization.
Notable Quote:
"We've been really seeing the big physical impacts of climate change already... record-breaking insurable losses this summer."
— Monika Freyman, [14:30]
She highlights the increasing recognition of both physical and transition risks, driving asset managers to adopt more holistic strategies that balance emissions reduction with economic resilience.
5. Managing Portfolios for Climate Change: Risk Identification and Mitigation ([16:29] - [27:06])
Monika delves into the practical aspects of managing climate-conscious portfolios:
- Climate Transition Risks: Involves carbon pricing, regulatory changes, and the adoption of new technologies.
- Physical Climate Risks: Includes damage from extreme weather events, water scarcity, and other direct impacts of climate change.
- Opportunities: Investing in climate bonds and other solutions-oriented financial instruments to mitigate risks and capitalize on emerging opportunities.
She outlines the importance of comprehensive assessments for each security, evaluating both transition and physical risks, and leveraging frameworks such as the Net Zero Asset Owner Alliance (NZAOA) and the Transition Pathway Initiative to guide investment decisions.
Notable Quote:
"Every security you're looking at, think about climate transition risk exposure, physical climate risk exposure, what are the opportunities around that."
— Monika Freyman, [19:45]
Monika also emphasizes the value of collaborative networks and proactive engagement with policymakers and companies to drive meaningful climate action within portfolios.
6. Practical Strategies for Investing in Net Zero ([27:06] - [32:09])
Summarizing her approach, Monika presents a three-pronged strategy essential for achieving net zero investments:
- Climate Risk Awareness: Building internal understanding and education around climate-related risks.
- Net Zero Commitment and Transition Approach: Developing clear strategies to mitigate both transition and physical risks.
- Engagement: Actively engaging with companies and policymakers to ensure alignment with climate goals.
She advocates for a holistic view that integrates sustainability into all aspects of investment analysis, moving beyond simple emissions tracking to evaluate companies' readiness and strategic positioning for a low-carbon future.
Notable Quote:
"It's like going from seeing the world in grays to colors... It just gives you better insights and more granularity on what companies are doing."
— Monika Freyman, [29:00]
7. The Role of Fiduciary Duty in Sustainable Investing ([29:27] - [32:09])
Monika addresses the intersection of fiduciary duty and sustainable investing, clarifying misconceptions and outlining key considerations:
- Long-Term Perspective: Sustainable investing requires a multi-year view, aligning with fiduciary responsibilities to manage risks and opportunities effectively.
- Balanced Approach: Ensuring that sustainability goals do not compromise fundamental investment principles, such as risk management and return objectives.
- Value-Added Partnerships: Building meaningful relationships with investment managers that prioritize both fiduciary and sustainability objectives, rather than merely fulfilling checklist criteria.
Notable Quote:
"Don't buy into sustainability solutions or climate solutions at any price. Be an investor and wait for the right opportunities."
— Monika Freyman, [30:10]
Monika advocates for integrating sustainability into fiduciary duties by aligning climate goals with risk management and long-term value creation.
8. Resources and Support from CFA Institute ([32:09] - [35:12])
Monika praises the CFA Institute for its Net Zero resources and research, particularly highlighting the Global ESG Disclosure Standards for Investment Products. She encourages listeners to utilize these tools to enhance transparency and consistency in ESG disclosures.
Debra Kidd expands on these resources, explaining that the Global ESG Disclosure Standards aim to streamline ESG and climate-related information, facilitating better comparability and decision-making for investors. Additionally, she mentions the newly launched Net Zero Investing Hub as a valuable resource for further exploration.
Notable Quote:
"We find it's just a really great way to build a partnership between investors... We all need a lot more transparency in sustainability."
— Monika Freyman, [33:00]
9. Conclusion
Debra Kidd wraps up the episode by reiterating the practical advice Monika provided on climate investing, emphasizing its applicability for both asset owners and managers. Monika offers parting encouragement to embrace curiosity and stakeholder engagement, highlighting the supportive role of the CFA Institute in advancing sustainable investing practices.
Final Notable Quote:
"No wrong questions or approach. Just starting to walk down that journey of deeper understanding and talking to your stakeholders."
— Monika Freyman, [32:35]
Key Takeaways:
- Integrative Approach: Successful net zero investing requires merging financial acumen with ecological insights.
- Structured Progression: Developing and implementing robust sustainability policies is essential for long-term investment resilience.
- Holistic Risk Management: Evaluating both transition and physical climate risks, alongside identifying investment opportunities, enhances portfolio robustness.
- Collaborative Engagement: Active dialogue with companies and policymakers is crucial for driving systemic climate action.
- Alignment with Fiduciary Duty: Sustainable investing must complement, not compromise, fundamental investment principles and risk management.
This episode provides a comprehensive guide for investors seeking to navigate the complexities of climate-related investments, offering practical strategies and emphasizing the importance of collaboration and continuous learning in achieving financial sustainability.