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How can investors balance climate change goals with providing growth for retirement income?

With COP26 now over CAMRADATA’s latest whitepaper, Climate Aligned Investing asks what more long-term investors can do to become climate-aligned, given the size and nature of climate change, as well as their fiduciary responsibilities to provide retirement income to beneficiaries.

The whitepaper includes insights from firms including GAM Investments, Sarasin & Partners, Aon, Ario Advisory, Climate Policy Initiative, Coal Pension Trustees and Redington who attended a roundtable hosted by CAMRADATA in November.

The report highlights that the socio-economic shocks caused by COVID-19 has drawn the attention of leaders to restoring economic growth. Annual emissions of carbon dioxide are now higher than for 2015, the year of the historic Paris COP summit. Also China, by far the biggest emitting nation, still relies on coal for two-thirds of its electricity production.

MSCI estimates that within six years, public companies will have exceeded the carbon budget for holding a 1.5-degree temperature rise this century.

Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “The owners and financiers of these companies, pension funds, insurers, foundations and their asset managers have to decide how they influence corporates’ alignment with climate change.

“Following the science, the evidence so far suggests that in aggregate we are failing. Our latest whitepaper explores what long-term investors can do to maximise their contribution to tackling climate change whilst at the same time providing growth.”

The event began with a stark reminder of the gap between current commitments to abating climate change and what humanity has left to do, with a warning that there lacks a sense of urgency. Then followed a discussion on what investors were currently doing to be climate-aligned and the challenges they are facing.

The panel explored how asset managers can thoughtfully align their investments with expected climate change. In the spirit of COP26, the panel was then invited to state the case for one single policy to accelerate mitigation or adaptation.

The final topic was mining. The panel were asked whether those cashflows generated by mining companies meant that pension fund trustees faced tricky decisions about when to include their bond issuance to meet cashflow requirements and when to avoid them because of climate-alignment.

Key takeaway points were:

  • In 2019/2020, $632bn was poured into climate positive investments, according to the Climate Policy Initiative (CPI). This was 10% up on commitments for 2017/18, but worryingly short of the $4.3trn required by 2030 to keep global warming this century to 1.5 degrees.
  • A panellist urged asset owners to avoid fallacious short-term measures such as carbon foot printing when measuring their portfolios’ climate alignment and warned that the Capital Asset Pricing Model, on which asset allocation has long relied, does not account for climate risk.
  • A manager stressed that while some market participants see green bonds as an easy way to be climate aligned, “the incremental impact comes from the issuers.”
  • In response to a call for greater alignment, it was noted by one panellist that in private equity, investors were spoilt for choice of climate positive opportunities, but these were heavily concentrated in energy.
  • A consultant noted two big trends. First, they are nudging clients towards Climate Aligned Investing – it’s the default advice. Investors have to opt out, not in. The second is growing expertise to help clients in climate solutions.
  • A global price on carbon would incentivise behavioural change, with a panellist adding that the IMF has said a price on carbon should happen, with variations dependent on a country’s GDP.
  • There are already more than 60 pricing schemes globally although it was noted that currently the average price (not weighted) across those schemes is $3 – it needs to be above $100.
  • The G20 countries alone provided an average of $584 billion per year in fossil fuel subsidies between 2017 and 2019. But private-sector money was also needed for innovations against climate change; and the $100bn pledged by rich countries to help developing countries tackle climate change has been slow to appear.
  • Adapting the system requires societal changes such as habits around transport and food. Sixty per cent of emissions depend on behavioural change. Twenty per cent of land in the UK needs to have its use altered for the likes of renewable energy. That reduces the area that can be dedicated to agriculture, wilding and animal rearing.
  • A panellist also warned that mass migration upwards of one billion people meant there has to be greater international co-operation: the pressures of adapting to a hotter world could not be solved exclusively within national borders.
  • Another said it’s all about risk. There is societal risk and financial risk; the gap between them is massive. Macro stewardship by pension schemes, foundations, charities and insurers is needed, plus asset owners have to up their game too. The panel were also reminded that asset owners’ beneficiaries, as citizens, have a stake in the world.
  • The correlation between GDP and carbon dioxide emissions has historically been very strong. Reducing emissions has big challenges. It was suggested that bond investing could fare better than equities in a world of shrinking GDP given the risk-return profile of bonds.
  • Investors are going to use other lenses alongside financial returns on the pathway to net zero, including ESG risks and carbon metrics. It was noted that mining included minerals and rare earths for batteries. Backing the best companies in the sector rather than excluding them all was advocated.
  • The irony was also pointed out that the worst industries tend to have the best capital allocation plans because they are cyclical and so need to plan.
  • A final comment by an investor was they found more awareness in Growth managers. Value managers are too rigid – they include miners in the transition, so finding owners that are climate aware is critical. They suspected that it may be because Value managers tend to have stable teams that have spent so long together, they have a single mindset.

Additional insight is offered in the whitepaper with two articles from the sponsors:

  • GAM Investments: Green bonds: Actively Investing in the Energy Transition’
  • Sarasin & Partners: ‘Our net-zero commitment to managing your portfolio’

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