Asset owners and their managers can play a major role in mobilising capital for sustainable investments and seize the “opportunity of a lifetime” to make a real impact on climate change, according to a panel of experts at the Milken Institute 2022 Global Conference last week.
They can do this by allocating the massive capital available to environmental, social, and governance (ESG) portfolios, holding investee companies to high standards of accountability, and supporting businesses in their transition to a net-zero economy, said the panellists.
About 450 financial firms representing 40% of global banking assets, had pledged at COP 26 — the United Nations Climate Change Conference in Glasgow in November 2021 — to make over $120 trillion of private capital available for investment, in order to achieve global net zero by 2050 or earlier, and cap the earth’s temperature rise to within 1.5 degrees Celsius.
OPPORTUNITY OF A LIFETIME
“This is the biggest movement of capital in our lifetime. It is the greatest opportunity I’ve ever seen in my career,” said Dan Barclay, chief executive of BMO Capital Markets, a subsidiary of Canada’s BMO Financial Group, with $806 billion in total assets.
“We’ve seen more change on climate in the last 12 months than we probably saw in the last 20 years before that,” he added.
BMO uses incentives instead of penalties as a general approach to drive the green transition. “Penalty systems have a slow flywheel for change. Incentive systems create rapid change,” Barclay explained.
To this end, BMO has created the BMO Climate Institute to formulate ideas on sustainability and provide its clients with the best possible advice on investment decisions and net-zero transition plans.
Meanwhile, CPP Investments, which invests on behalf of the Canada Pension Plan, is increasing its exposure to green and transition assets from $67 billion currently, to $130 billion by 2030, said its chief executive and president John Graham, another panellist, adding that the company has committed to having a net-zero portfolio by 2050.
Graham said CPP adopts an active investment strategy and will sell its stakes in companies that do not meet its green standards after engaging with their board and management. But he added that the company will not adopt a blanket divestment policy against oil and gas companies, because it wants to be exposed to new scientific and engineering innovations in this sector as it transitions to clean energy.
Similarly, BlackRock had bought a 49% stake in Saudi Aramco’s natural gas pipelines for $15.5 billion in February 2022 as part of a deal to explore low carbon energy projects, said Edwin Conway, its global head of alternative investors, who was also on the panel.
Conway said BlackRock made this conscious decision despite gas being a fossil fuel because “it wants to inject new capital to an area where gas is really required to help with the transition.”
British oil and gas company BP’s Giulia Chierchia, the only member of the panel from the industrial sector, gave her take on the company’s transition from fossil to renewable energy.
“A few months ago, we announced we’d be allocating 40% of our CapEx in 2025 to transition growth engines, and that number goes up to 50% by 2030,” said the executive vice-president for strategy, sustainability, and ventures.
BP has made clean energy investments such as bio-energy plants in the US and EV charging stations mostly in Europe; and increased its renewable energy capacity from 6 GW to 24.5 GW in just over two years. Other pipeline projects include green and blue hydrogen energy and electrification technologies that are still evolving.
“We are not short of availability of projects… we are not short of capital offered to us to invest in those opportunities,” she said.
A major challenge faced by investors in green investments is the lack of common reporting standards and ESG criteria. “What we need is transparency and comparability,” said BMO’s Barclay.
He said portfolio companies should be tracked on their ESG performance over periods of say, three, five, and 10 years for better visibility of their commitment.
CPP Investment’s Graham said the pension fund faces difficulties in measuring the carbon intensity of its huge portfolio, as only about 35% of the companies in the portfolio provide carbon disclosure information.
On whether green bonds are an effective tool to attract capital to sustainability investments, Pictet Asset Management’s chief investment officer for fixed income Raymond Sagayam, another panellist, said it is critical for the issuer to provide full disclosure of the percentage of the funds that will be used for the green projects to prevent misuse and fraud.
“You need to be able to reconcile the use of the proceeds of the sustainability-linked bond with the good behaviour and transition path which is credible at the issuer level,” he said.