We often talk about climate resilience with investors – protecting investor portfolios from the very real risks presented by climate change. However, this phrase, climate resilience, can be frustrating. “Resilience” suggests something that must be endured. It implies a degree of inevitability to global warming and its consequences – water stress, wildfires, more frequent and possibly violent storms and threatened ecosystems.
The pragmatist in me understands why the conversation is framed in this way, but the optimist in me can sometimes feel let down by it. Is this an outcome we should be accepting, or one that we should be challenging?
That’s why I’m encouraged by the conversations we are having with a growing number of investors who don’t just want to invest in such a way as to mitigate the financial impact of whatever climate change scenario emerges, but are looking for ways to invest that can positively influence a transition to a lower carbon world, maybe help mitigate the physical impacts of climate change, whilst at the same delivering a profit. Making investment choices that might improve our chances of limiting the damage we inflict on our collective home, benefiting us all. We call these investors future makers.
But what does it mean to be a ‘future maker’?
It’s not an easy path to take. For aspiring future makers, the complexity of climate change and its physical and social impacts can weigh heavily, and measuring the impact of any action taken is far from an exact science. But, typically, it starts with a (seemingly) simple process – engagement.
For most asset owners, it’s simply not practical to engage directly with the management of all the companies they invest in, or lend to, with the resources at their disposal. It’s more common to exert an indirect influence on these companies by encouraging the asset managers they employ to engage positively with firms on their behalf.
The pressure from asset owners to engage with the companies they invest in, particularly on climate issues, has been rising steadily for some time. And we are getting some positive responses from investment managers. But I don’t believe we’re getting enough. I use the word believe because sometimes it’s hard to know.
Asset managers, often with significant holdings in many companies and with potentially hundreds of shareholder meetings every quarter, each with multiple resolutions to assess and respond to, are in the relatively early stages of using this power to effect change. This means that information about how they’re voting at shareholder meetings isn’t always forthcoming, making it hard for asset owners to hold investment managers to account. As asset owners, and even as individual savers, we can, and should, apply pressure in a positive manner on those responsible for the stewardship of our savings and investments.
Asking for improved transparency, and confirmation they are doing what they say they are, from our asset managers is one way we can do just this.
The next step is to take asset allocation decisions to both reduce exposure to the most pollutant firms or industries and also to invest in sectors that could positively contribute to the transition to a lower carbon economy, such as renewable energy or forestry.
Screening out and divesting from certain undesirable investments, whether environmental or other reasons, is a relatively blunt tool, as you lose any ability to influence management decisions when you disinvest. However, certain business activities can simply be too difficult for some investors to justify staying invested with. The moral maths is easier when it comes to positive investment though, with a growing number of attractive green investment opportunities, particularly in private markets.
And why act now?
Climate change can feel like a long-term issue, with long-term consequences, for long-term investors. We believe that the risks for investors, however, are clear and present. Even if the physical effects of the climate crisis are outside of your investment time horizon (and remember for young pension savers they probably are not), the inevitable policy response is unlikely to be.
We encourage all of our clients to assess the impact of climate change on their portfolios, as we do for many risk factors. However, there is a crucial difference between an adverse climate scenario and an adverse economic scenario such as a recession or inflation – by investing positively to contribute to a just transition to a lower carbon economy, investors can actually influence the likelihood of that scenario occurring. The power is in our hands!