Private View Blog: The critical role financial services can play in tackling the climate crisis
Greta Thunberg’s words must have resonated strongly with people sweltering through Europe’s record breaking heatwave in June, the hottest ever recorded. “I want you to act as if our house is on fire... I want you to panic,” said the 16-year old Swedish climate activist, addressing world leaders and economists at Davos earlier this year, urgently demanding they should tackle global warming.
Once again, scientists have linked recent extreme weather to the human-caused global average temperature increase. If this is not limited to 1.5C above pre-industrial levels, it is expected to cause catastrophic damage from rising sea levels, floods and droughts, driving unprecedented large-scale migrations and hindering efforts to tackle poverty, raise living standards and achieve peace. Poorer people, in particular, would suffer, as the threat of food and water shortages increase in some parts of the globe. The world has already warmed by about 1C since the start of the industrial age, largely because of greenhouse gases released from the burning of fossil fuels.
While the recent G20 Osaka summit was yet another missed opportunity for world leaders to tackle climate crisis, the financial industry can play a critical role. As oil and gas companies are under scrutiny like never before, an increasing number of asset and wealth management firms are choosing to divest from them all together, under increasing pressure from both the public and their clients.
But is the concept of divestment the most effective? “I feel one of the best things the investment community can do is use our influence and lending books to help companies transition,” believes Marisa Drew, CEO of the impact advisory and finance department at Credit Suisse. The world is still dependent on fossil fuels, and it is not possible “to turn off the taps” and move to alternative energy, she says.
What the asset management industry should be doing is financing and supporting the transition. “Obscure industries” need to be part of that migration, across all sectors. Shareholder engagement can help transition a fossil fuel company towards alternative energy, drive an agriculture firm towards more sustainable farming, or help a consumer company reduce the use of plastic in its packaging.
Identifying companies most likely to move from a lower to a higher sustainability score is also the approach that most pays off in terms of financial return. The impact of the improvement in ‘rating’ of a company by index-provider MSCI is particularly evident in emerging markets, which have the biggest concentration of companies in lower categories. Developed markets account for a higher number of stocks in the above average ESG category, according to analysis by Irish asset management firm KBI Global Investors.
“Stewardship is the only way through which we can produce change, and our sweet spot is undervalued companies that are able to improve their fundamentals,” stated Rick Lacaille, global CIO of State Street Global Advisors, speaking at Fund Forum in Copenhagen in June.
But it is imperative to act fast. Global energy-related CO2 emissions rose to a historic high last year, according to the International Energy Agency, and have been growing at their fastest pace since 2013.
Asset managers must engage with companies but take strong action with ‘laggards’ and divest from them. This is the path taken by LGIM, the UK’s largest asset manager, which introduced its ‘climate impact pledge’ three years ago. It has since divested from several companies due to “unsatisfactory results”, explains Meryam Omi, head of sustainability and responsible investment strategy at the firm. “Talks without action are no longer fit for purpose given the urgency to address climate change.”
Elisa Trovato is deputy editor of PWM. Follow her on Twitter @elisa_trovato
