Changing climate, changing investments

Turning up the heat

Amid the US China trade war and worries of a UK recession, the summer might not have been the best time for the dollar or sterling, but it was a remarkable period for Celsius, with the hottest July and September in recorded history.

Galvanised by Greta Thunberg and the Extinction Rebellion movement, six million protesters took to the streets around the world in late September, with an estimated 100,000 in London alone, calling for climate action. For its part, the UK government has passed landmark legislation targeting net zero greenhouse gas emissions by 2050, and over half of local councils have now declared a climate emergency.

As Bank of England Governor Mark Carney warns that companies which fail to adapt to the low-carbon economy ‘will fail to exist’, regulators are also sounding the alarm. In 2018, the Department of Work and Pensions (DWP) asked pension fund trustees to report on how they are managing material financial risks, including those from climate change. In July this year, all financial regulators issued a joint statement saying they will be closely watching firms’ approaches to climate change. 

Shining a light

But there are rays of sunshine through the clouds, for example as ‘clean tech’ continues its remarkable progress: wind and solar are the cheapest source of new power in more than two thirds of countries globally. In the UK, renewables have for the first time produced more electricity than fossil fuels.

Faced with public and regulatory pressure, changing markets and the changing climate, how can investors take effective actions to mitigate climate risks and take advantage of new opportunities?

Building a sustainable future

We believe that changing company behaviour requires more than excluding certain industries and businesses from investment portfolios. This is why we prioritise company engagement as an effective, long-term means of encouraging companies and stakeholders – from oil and gas producers to banks and IT companies – to adapt their business models for a sustainable future.

Voting is an important part of engagement, but it is a means to an end, not an end in itself. It is important to assess how effective investors’ engagement with companies is, and also to broaden collaboration with both peers and regulators to speak as one voice.

Reporting and accountability

All investors, from asset managers to pension trustees and insurance companies, could improve understanding of and accountability for ESG integration by improving the quality of reporting on their approach to climate change. Information about how they invest, how they seek positive change and how they measure their results can be used to help the end asset owner be more engaged with and better informed about their investments.

An LGIM survey found that 53% of respondents said they would engage more with their pension if they knew it had positive social impact.[1] Moreover, this option seems increasingly less of an “option” and more of a requirement, as the UK Government has outlined an expectation that all large asset owners issue a climate report in line with the recommendations of the Task Force on Climate-related Disclosures by 2022.[2]

Joining the dots

Both policymakers and the general public recognise that large asset owners have a responsibility to drive positive climate policies through their investments. But it is important for all investors to ensure that their investment beliefs, including their stances on ESG issues and climate change, are reflected in their investment strategy, and also are aligned with the practices of their chosen asset managers. A joined-up approach can help promote better outcomes for long-term investors.

[1] Source: LGIM survey of ~1,000 contract-based pension scheme members, Mastertrust members and Legal & General staff members

[2] BEIS - Green Finance Strategy, July 2019