Investors are reappraising their portfolios and weighing up the risks associated with climate transition. But the question remains: can they use their investments as leverage to put companies on a cleaner path?
"Investors potentially have a huge impact on climate change," Whitney Voûte, head of investor relations at US Solar Fund, said.
Voûte believes the industry has the power to drive change, but, historically, the bigger question has been one of interest and will. Not anymore. "The amount of capital flowing into the space makes it clear that the power and willingness are now both there," she said.
Banking on climate change
The role that financial services can play must not be misunderstood or overstated. The sector is responding to changes but there is a limit as to how much it can do.
"Investors [are] mostly investing in areas that support climate change solutions because the returns are good," said Ben Guest, head of the new energy division and fund manager at Gresham House. These areas are becoming increasingly investable because of government policies that ensure attractive returns.
For some investors, climate change is not just a money problem but also a moral one; they want their investment decisions to aid the transition to a greener economy.
"There are many final investors that are creating positive change by, for example, avoiding investment in fossil fuels or targeting investment renewables directly. This is very positive indeed," Guest added.
Yet investors and advisers who have created portfolios that take the climate into consideration paint a picture that is not black and white, but more nuanced.
These portfolios do not mean that every investment must be focused on clean energy or energy efficiency. Most include companies that are trying to improve their governance.
Financing the future
Asset managers' greatest impact on climate change comes via the greenhouse gases emitted by their investment holdings. Still, the redirection of capital can have a limited scope for real-world decarbonisation.
"We believe that, for some industries, especially those such as utilities - which are currently high emitters but with credible pathways to net zero - structured and long-term engagement is far more effective," Carlota Garcia-Manas, head of engagement at Royal London Asset Management, said.
She argued that excluding this sector would be the easiest way to reduce emissions, but that such a move would not actually lead to any decarbonisation in the
real world.
"We believe that avoiding utilities companies would have little impact, because it would remove our ability to influence their behaviour and ignore their key role in the world's energy transition," she added.
Over 30 per cent of RLAM's weighted average carbon intensity for its equities and fixed income investments stems from exposure to the utilities sector.
However, Alex Rowe, lead portfolio manager of the Nomura Global Sustainable Equity fund, warns that investors' attempts to push companies to do better has been met with varying degrees of success.
Citing the limited success investors have had in changing the course of some mega tech companies, Rowe highlights an unpleasant truth.
"The industry should be honest that what it has tried to do has not really had much influence and think differently as to how its efforts could be maximised," he said.
"The number of hours that can go into these engagements across a vast number of investment houses could be put to much better use," he added.
The cost of doing nothing
After a summer of extreme heat, wildfires and floods in Europe, the costs of climate change - human and financial - have become increasingly stark.
"It is impossible to quantify but a world in turmoil is clearly going to be hit hard. The probability of this happening is rising as temperatures, ice cover and sea levels are all heading in the wrong direction," Guest said.
Still, investors alone do not have the power to engender the necessary change.
"The global finance industry plays an important role. However, it needs a coordinated approach to deliver results," Pascal Dudle, head of listed impact and portfolio manager at Vontobel Asset Management, said.
Guest agrees. "It requires public pressure and opinion, political will, regulations, laws and subsidies combining to drive change," he said.
As the investment community comes under increasing scrutiny with regards to the actual impact it is having, Dudle warns that investors need to allocate resources to solve the problem.
"It is not a matter of beating a benchmark and obtaining attractive returns, it is a matter of survival."
This article first appeared at Investment Week.
