High-carbon companies may lose the support of long-term investors, if they push back against growing pressures to disclose their carbon emissions, and to change their boards and corporate direction.
To date, the most visible investor impact of climate change has been a fossil fuel divestment movement, targeting coal stocks. But a bigger, quieter shift may have started, away from less engaged polluters, towards lower carbon, and more “climate aware” higher carbon, companies.
The question is how quick the shift is.
Businesses, investors and regulators are gathered in Paris on the side lines of a UN conference, where countries are meant to reach a new global climate agreement this week.
Investors meeting in Paris claim that their attitude to climate risk is changing. They point to the following pressures.
First, there is growing pressure for both companies and investors to measure their carbon footprints. Notably, the global Financial Stability Board (FSB) last week said it would standardise rules for companies to report their carbon emissions and climate exposure. While the FSB code would be voluntary, it would be effectively mandatory if widely adopted.
Regulators are motivated to head off a climate crisis, and avoid the kind of mispricing of mortgage assets that led to the global financial crisis.
The FSB follows France, which earlier this year passing an “Energy Transition Law” rule, requiring companies, their lenders and investors, to disclose climate risks. Sweden’s minister for financial markets said in Paris last week his country would legislate, too, if the private sector failed to regulate itself.
Second, there are new tools in the market for investors to re-allocate capital, where the classic example are green bonds. These are a pin-prick in the global bond market to date, with $66-532 billion of issued green bonds outstanding, depending on how these are defined, compared with a global bond market worth tens of trillions. Nevertheless, the green bond market is growing rapidly.
Third, investors are increasingly sharing best practice, through groups such as the Carbon Disclosure Project, the Institutional Investor Group on Climate Change (IIGCC) and Ceres.
It seems that, when it comes to climate change, investors are motivated by a combination of profit maximisation and fear.
Regarding profit maximisation, a low-carbon transition and declining cost curve for renewables may imply a sweeping reallocation of resources and technological revolution, with all the opportunities that may bring. Regarding fear, if one day polluting companies are held liable for contributing to climate change, so might their investors. The New York Attorney-General’s investigation of whether Exxon misled investors shows why considering climate risk will become a part of standard fiduciary responsibility.
So much for the drivers. What are investors doing?
First there is a divestment movement which this year drew two of the world’s biggest asset owners. In May, the French insurance firm, AXA, which has 1.3 trillion euros of assets, decided to divest from 500 million euros worth of coal-related assets. And in June, Norway’s parliament agree that the country’s $900 billion sovereign wealth fund should divest from coal.
Divestment got a further push in September this year when the state of California passed its “Investing with Values and Responsibility” ruling, requiring state public pension funds to sell coal miners.
Second, investors are pressuring company boards. Two of the biggest U.S. pension funds, CalPERS and CalSTRS, have coordinated a campaign to request “proxy access” rights to nominate board members. The idea is either for shareholders to nominate their own executives, to secure more “climate confident boards” in the words of CalSTRS CEO Jack Ehnes in Paris last week, or more likely, exert greater influence on a company’s own nominations.
And third, by measuring the carbon emissions of their portfolios, they are increasingly equipped to act, by exiting the worst performers. An example of the trend is the growing list of investors signed up to the “Montreal Pledge”, to measure and disclose annually their portfolio carbon footprint, and the related Portfolio Decarbonisation Coalition, which aims to eliminate carbon emission from a select portion of managed assets.
For sure, there are limits to the impacts of these new trends.
In particular, institutional investors tend to focus on liquid assets such as bonds and equities, rather than infrastructure. But many low-carbon projects, in efficiency and renewable energy, are capital-intensive infrastructure projects which need upfront cash.
Securing all of the trillions need to finance a low-carbon transition may require greater political focus, abandonment of fossil fuel subsidies and the introduction of carbon prices, as well as an ambitious Paris deal – a big ask for governments this week.