Whether you believe in climate change or not, Emma Cusworth explains that investors can no longer ignore its impact on portfolios.
Does it matter anymore if you don’t buy the science behind climate change? Is it possible anymore to ignore climate change and still claim to be doing your fiduciary duty? There are plenty of investors who still do not integrate climate policies into their portfolios.
The trouble is, the world is already changing regardless of what individual investors believe or don’t believe. And that means certain risks and opportunities are coming down the pipeline at you whether you’re ready or not.
With every big climate conference that goes by, it becomes more and more clear the direction of global policy is already set when it comes to protecting the environment.
COP 21 in 2015, which resulted in the Paris Accord, marked a turning point in global policy. Since then, governments, states, cities, businesses and many investors have taken steps, or announced plans to, that are designed to increase transparency around carbon emissions and cut them.
In December 2017 – the second anniversary of COP 21 – there were a string of meaningful announcements made that will change the course of many companies in the coming years. The World Bank, for example, will no longer finance upstream fossil fuel projects from 2019. The same event saw California and Washington join Canada, Mexico, Costa Rica, Colombia and Chile in agreeing to use a carbon emissions price as a central economic policy.
Europe reached a similar point shortly before when member states came to a landmark agreement on the European Emissions Trading System that is expected to increase the price of carbon on the continent to the point where it becomes investment relevant.
President Macron’s Paris conference also saw the launch of Climate Action 100+, an investor initiative aimed at engaging with the world’s largest greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen disclosure. The group includes Candriam Investors, the Church Commissioners for England, the Environment Agency Pension Fund and the BBC Pension Trust among its long and prestigious list of members.
On the same day the initiative was formally launched, Exxon announced it would begin publishing details about how climate change could affect its business.
What is really interesting about these developments is that they underline a structural and secular shift in global policy towards a low-carbon future. That is going to have an impact on how assets are valued. And that, in turn, has investors worried. Hence the need for initiatives like Climate Action 100+, who will continue to pressure the companies they own to change their policies.
Can any individual investor choose to ignore this? It’s increasingly difficult to see how they could defend such a stance as being within their fiduciary duty.
Consider, for example, the movement to phase out the internal combustion engine in the UK, France, India, Norway, China and the state of California. This has significant implications for the valuation of automakers over the next five, 10, 15 years. The share prices of companies that are not well prepared for the move will struggle to keep up.
The same will be true of their suppliers. Commodity allocations will also need to be adjusted to reflect, for example, the expected 300% increase in demand for lithium from the mid-2020s. Mines are not that easy to open. Metal prices will change meaningfully as this legislation starts to bite. And then there are all the service stations on every road in every one of those countries. It will take massive infrastructure spending to get enough charging points in place and to decommission the thousands of petrol pumps that will be displaced.
What this all means is risk. Real risk to financial returns. And massive opportunity of course, but it is the risk that really bites when it comes to fiduciary duty. Can a fiduciary really ignore the consequences of this secular shift in global policy when they are so clearly linked to financial performance? The question of whether environmental or governance considerations are part of fiduciary duty is now a mute point.
So it really doesn’t matter whether you believe the science or not anymore. So many people do now believe that the impact on portfolios will be profound whether you agree or not.
