Changing Climate: from risk to opportunity

Author: Niki Natarajan, Communications Advisor, Phenix Capital

“Climate change increasingly poses one of the biggest long-term threats to [pension, life insurance and nest egg] investments and the wealth of the global economy” ~ Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change

Google climate change and you are likely to get some 350 million articles in 0.38 seconds. The overarching consensus is that current global warming has a greater than 95% probability to be the result of human activity since the mid-20th century, according to the findings of the Intergovernmental Panel on Climate Change Fifth Assessment Report in 2014.

Hardly a surprise to those involved in sustainability of any kind, but worth noting because if you are researching the topic in any great depth for the first time, it is easy to get lost down the rabbit hole of ‘scientific’ evidence and various ‘ClimateGate’-related conspiracy theories.

For visual impact, NASA’s website, provides striking imagery to evidence the physical phenomena such as shrinking ice caps, rising ocean levels and temperature rises.

Climate change became the cornerstone of a number of political agendas, from the UK’s Tony Blair to America’s Barack Obama under whose administration the US committed to a 26% to 28% reduction of greenhouse gas emissions below its 2005 level by 2025. Based on 2012 data, the US was the second largest greenhouse gas emitter in the world, after China.

More recently, France’s President Emmanuel Macron pledged to shut down all coal-fired power stations by 2021 and give €700 million to solar energy projects by 2022. But the key way countries committed to climate action was to become signatories of the Paris Climate Agreement, which sets out a global action plan to coordinate efforts to keep global warming to well below 2°C.

Two years later, at the One Planet Summit in 2017, an event hosted by France’s Macron aimed at mobilising financing for climate-related projects, 237 companies with a combined market capitalisation of more than $6.3 trillion committed to support the Task Force on Climate-related Financial Disclosures. This includes more than 150 financial firms, responsible for assets of more than $81.7 trillion.

Ironically, in an era of Donald Trump’s decision to withdraw from the Paris Climate Agreement, China, whose carbon emissions are among the fastest growing, is aiming to be a leader in the climate change field. China now accounts for 15% of total green bond issuance, making it the second largest green bond market in the world.

Not everyone in the US agrees with Trump’s decision, however. Edmund Brown, Governor of California announced his state’s intention to host the world’s global climate leaders at the Global Climate Action Summit in San Francisco on 12-14 September, 2018.

The Global Climate Action Summit, which marks the first time a US state hosts an international climate change conference with the direct goal of supporting the Paris Agreement, aims to be a launchpad for deeper worldwide commitments and accelerated action to push down global emissions by 2020 to reach zero emissions by mid-century. 

Whether or not global warming—the ‘greenhouse effect’ was first described in 1824 by French physicist Joseph Fourier—is a natural Milankovitch cycle, or man-made thanks post-industrial C02 emissions, is largely irrelevant. The fact is the climate is changing and this will impact investments.

According to the World Economic Forum’s The Global Risks Report 2018, over the 13 years of publication, environmental risks have grown in prominence. According to Munich Re, total losses for natural catastrophes in 2017, including hurricanes Harvey, Irma and Maria, as well as the earthquake in Mexico, will amount to $330 billion, the second highest number after 2011.

In the most recent World Economic Forum survey, all five risks in the environmental category were ranked higher than average for both likelihood and impact over a 10-year horizon.  At Davos this year, climate and the environment were key topics given that the world has seen high-impact hurricanes (which affects insurance premiums), extreme temperatures (2017 was the third hottest year on record) and the first rise in CO2 emissions for four years.

But climate change is not just a political topic. It is also now part of the fiduciary responsibilities of many institutional investors. According to Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change, climate change is one of the biggest long-term threats to pension, life insurance and nest egg investments and the wealth of the global economy.

So, what is currently being done to help institutional investors invest with the climate in mind? From a corporate perspective, the Task Force on Climate-related Financial Disclosures, led by Michael Bloomberg and established by the Financial Stability Board, which is chaired by Bank of England Governor Mark Carney, will help to bring transparency on corporate climate-related information, thereby giving investors one tool with which to make investment decisions.

Investors such as AustralianSuper, California Public Employees’ Retirement System, HSBC Global Asset Management, Ircantec and Manulife Asset Management have grouped together to form Climate Action 100+, a five-year initiative that aims to push 100 of the highest-emitting companies worldwide to do more to tackle the threat of climate change.

So far, 289 investors from across 29 countries, who together manage more than $30 trillion, have signed the initiative, which targets fossil fuel producers such as ExxonMobil, Royal Dutch Shell and Coal India as well as other companies such as Toyota, United Technologies and Korea Electric Power. The lobby seems to be working as ExxonMobil, the world’s largest listed oil company, announced plans publish reports on the potential impact of climate policies on its businesses.

The current trend among institutional investors is fossil fuel divestment, a movement that was accelerated in 2015 by both the Paris Climate Agreement, and  Pope Francis’ Encyclical Letter Laudato Si, on Global Environmental Risks and the Future of Humanity. The value of assets pledged for divestment totalled more than $5 trillion at the end of 2016, doubling the value pledged 15 months previously, according to Arabella Advisors’ Global Divestment Report.

Some investors, however, are only divesting because of the investment risk to the value of their fossil fuel-related holdings, not any environmental concerns. Most notably, the Norwegian central bank, which manages the $1 trillion oil fund, asked to have oil and gas stocks removed from the Government Pension Fund Global’s benchmark index to make the government’s wealth less vulnerable to a permanent drop in oil and gas values.

But despite some $5.2 billion divested, negative screening and exclusion is only a tiny part of the climate change investment discussion. To make a sustainable impact, investors need to change the way they look at climate change. Speaking in Davos, Anand Mahindra, chairman of the Mahindra Group, a $19 billion conglomerate in Mumbai, said “Climate change is the next century’s biggest financial and business opportunity”.

But some institutional investors still need to be convinced of the return potential of sustainable investing, which is one of the missions of US vice president Al Gore’s business, Generation Investment Management.

In addition to carbon pricing and direct allocations into clean and renewable energy investments, impact investing has emerged as the way to move from exclusions towards positive impact allocations that benefit both the climate and portfolio.

One new framework that has emerged is the United Nation’s Sustainable Development Goals (SDGs). With Climate Action, the 13th SDG, stating “Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy," a positive climate-related investment strategy can be created.

In fact, Dutch pension managers APG and PGGM have already identified investment opportunities linked to 13 of the 17 SDGs, and hope to kick-start the conversation for a market standard for this kind of impact investing.

PGGM’s main client Pensioenfonds Zorg en Welzijn, the Dutch pension fund for the healthcare and well-being sector, has publicly committed to putting €20 billion towards the themes of climate change (SDG 13) and pollution as well as food security (SDG 2), healthcare (SDG 3) and water scarcity (SDG 6), which map to the SDGs highlighted.

Like most institutional investors that want to be responsible investors, PGGM’s intentions have evolved over time, said Piet Klop, senior adviser, responsible investment, at PGGM and Peter Borgdorff, managing director of PFZW, In an interview with IPE Magazine.

PGGM too began by excluding investments that do harm, through negative screening or accounting for ‘ESG externalities’. Today, through PGGM’s proprietary CO2 Index, it also excludes from its portfolio persistent violators of the Global Compact Principles, as well as the least carbon-efficient companies.

In addition, PGGM tries to minimise negative impacts on people and planet through active ownership of its investments, engaging with its investees. To date PGGM has invested about €12 billion towards the €20 billion target set for 2020.

PFZW’s Borgdorff will be sharing the Dutch pension fund’s journey to impact investing as a keynote speaker at Impact Summit America on 11 September in San Francisco, which taking place alongside PRI in Person. As an official affiliate of the Global Climate Action Summit, Impact Summit America is a forum for institutional investors to engage in peer-to-peer dialogue on the challenges and opportunities of integrating climate-related impact investing into an institutional portfolio.