A summit representing the interests of institutional investors was held in Sydney recently to understand and act on the risks and opportunities associated with climate change and their portfolios.
The Investor Group on Climate Change (IGCC) recently held its biannual summit in Sydney with the two-day program centred around the theme of Catalysing Action on Climate Change. The IGCC is a coalition of Australian and New Zealand investors focused on the impact of climate change on investments. The coalition represents institutional investors with total funds under management of over A$2 trillion and seeks to encourage government policies and investment practices that address the risks and opportunities of climate change.
So, what were the key takeaways from the summit?
1. Climate change is happening now
Climatologist Dr Michael E. Mann – Distinguished Professor of Atmospheric Science at Penn State – gave a timely and thought-provoking reminder of the science of climate change. I highly recommend you watch his keynote speech here . Climate change has often been framed as a future problem but it is clear that we are seeing the effects of climate change now and there is more to come. Although the Paris Agreement seeks to limit temperature increases to 1.5⁰C, the actual emissions reduction pledges made by countries currently have the world on track for a 3⁰C temperature rise before the end of the century. The projected impacts of this increase in temperature on food security, resources, biodiversity, ecosystems, tourism and people are extreme (you can read more about them here) and underscore the urgent need to drastically reduce carbon emissions, globally.
2. Divestment versus engagement
Can a tiger change its stripes? According to the summit attendees, maybe. Throughout the summit discussion frequently touched on the merits of an engagement strategy – that is, seeking to influence the behaviour of an investee company – versus divestment – in order to reduce climate change related risks. For example, companies in emissions intensive industries such as coal-fired power generation face risks related to the introduction of carbon regulation. And yet they also have the unique opportunity to benefit from the shift to a low-carbon economy through pivoting their fleet to renewable energy based alternatives. This tilting can be encouraged and supported through thoughtful and productive engagement by investors with those companies. On the other hand, a company involved singularly in mining thermal coal is also exposed to the risk of carbon regulation, however may not have the same opportunities to alter their business model. For investors, engagement in this instance may be less successful and so pursuing a low-carbon investment strategy may necessarily involve consideration of divesting from such companies.
3. The importance of the details
There is general agreement that headline goals such as “net zero carbon by 2050” are true and correct but there is also general agreement that such goals can be ineffective when it comes to implementing a carbon reduction strategy. The pathways to “net zero” differ between countries and between sectors – Australia’s emissions are largely driven by the energy sector whereas in New Zealand they are driven by agriculture.. The effectiveness of sector-specific policies and targets is evidenced by Norway’s fleet of plug-in electric vehicles. Norway’s adoption of zero emissions vehicles is the direct result of carefully crafted policy since the 1990s which introduced incentives such as exemptions from sales taxes, free parking and use of public transport lanes. Approximately 10% of Norway’s passenger cars are plug-in electric vehicles and the Nissan Leaf was the country’s best-selling new passenger car model in 2018.
4. Seeking a “just” transition
As long as there are workers and communities at risk of being left behind by the transition to a low-carbon economy – including those working and living in areas whose local economies depend on carbon intensive industries – such a transition will be highly political . The challenge is to achieve a fair, or “just”, transition. Both Germany and Chile offer good examples of what a just transition can look like. Coal mines in Germany’s Ruhr Valley have been progressively closed down with no workers forced out of work – some were moved to other mines, some were retrained and those over 50 were offered a generous payout for early retirement. The communities where the miners came from benefitted from universities being built, new transport infrastructure and the conversion of mine sites and coking plants into parks and other public spaces. There was strong agreement at the IGCC summit that the transition to a low-carbon economy needs to be a just transition.
5. Benchmarks potentially a noose?
As investors seek to de-carbonise their portfolios they invariably tilt their funds further away from conventional performance benchmarks – particularly in Australia where we have a relatively emissions intensive economy and listed equity market benchmarks. Some investors have started to move away from standard market benchmarks towards more goals-based or absolute return focused benchmarks but they are the exception rather than the norm. The summit highlighted the conundrum of leaving the perceived “safety” of using a recognised performance benchmark or staying wed to a benchmark which is likely to be impacted as the rest of the world moves towards a low-carbon economy. Consideration of moving towards low-carbon or Paris Agreement-aligned market benchmarks was given however it is proving hard for most to convince their clients (and, in some instances, themselves) to break away from the herd.
6. Natural capital (beyond emissions to water, biodiversity, etc)
Investor discussions on the impacts of climate change have historically been focused on big ticket items such as an increase in the frequency and severity of extreme weather events, temperature increases and rising sea levels. The summit highlighted that the thinking has become much more sophisticated with investors now also considering the effects on biodiversity, insurance, agriculture and particularly water. Thinking about how “natural capital” is likely to be impacted by the effects of climate change is contributing to a more complex, but perhaps more useful, discussion around the systemic nature of climate change.
All up, a lot of territory was covered. The summit was perhaps best summarised by IGCC CEO Emma Herd, “Investors and financial regulators have identified climate change is a systemic risk to the economy, the financial system and the long-term returns for superannuation holders. Around the world, investors are actively managing climate risks and momentum is growing. However, much more needs to be done.”
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