Climate investors grapple with challenges of 'portfolio alignment'
It is becoming clear to many in the global investment community that, without a much more concerted effort towards decarbonisation and the transition away from fossil fuels, climate change targets will not be met.
According to some investors, while the US Inflation Reduction Act has been helpful in driving opportunities in renewable energy, without a concerted energy transition effort by fossil fuel generators, the global climate could still warm by 4-5 degrees. This would be catastrophic for many parts of Asia.
“If we don’t decarbonise the (traditional fossil-fuel) energy industry we aren’t going to decarbonise full-stop,” said Kristina Church, global head of sustainable solutions at BNY Mellon, speaking at the Climate Investment Summit earlier this month co-hosted by the London Stock Exchange.
She added that investors, energy industry leaders and regulators must work together to drive significant policy change.
Investors have two main goals with regards to climate: lower emissions and lower portfolio risk.
GIC Group Chief Investment Officer Jeffrey Jaensubhakij, in an interview posted on the Singapore sovereign’s website, said, “For fund investors announcing a net zero by whichever year, there’s an easy way to get there, which is to sell all the companies that are high emitters.
"Unfortunately, that means you sell a lot of the emerging markets, because these countries haven’t yet been able to transition to cleaner but costly technologies.”
He added that divestment would achieve nothing: “What we sell may go at a lower price and somebody else will pick it up. They might just let the company run as it is."
The Sydney-based CEO of the Asia Investor Group on Climate Change (AIGCC), Rebecca Mikula-Wright, believes that shareholders have a special role to play at carbon-intensive companies.
“While investors can redirect their investment decisions to favour companies and projects that will accelerate the necessary clean technology translation, they also have a powerful opportunity to affect behaviour change, diversification and transformation among the most carbon-intensive companies,” Wright said.
BALANCING ACT
Striking a balance between the need to reduce portfolio carbon and to engage with carbon-intensive companies is at the heart of one of the current buzz phrases around climate investing for large asset owners: portfolio alignment.
The Net Zero Investment Framework is an accepted methodology used by investors when setting net zero targets. Regardless of the framework chosen, there are two underlying approaches in net zero investment strategies; reducing greenhouse gas emissions in the portfolio and increasing investments in climate solutions.
“Both are crucial in aligning portfolios (not one or the other), and approaches should cover corporate engagement, climate solutions and financing a just transition,” Monica Bae, director of investor practice at AIGCC told AsianInvestor.
Jaakko Kooroshy, head of sustainable investment research at the London Stock Exchange suggests asset owners think about portfolio alignment in two ways.
The first is in terms of exposure to current emissions, as measured by Scope 1 and 2, as well as emissions from value chains. The second is in terms of exposure to future emissions reductions and ensuring the investor is part of the transition finance process.
“That is a different way of thinking because you are looking at where are the large emissions today and how do you gain exposure to those companies that are reducing those emissions,” Kooroshy said.
“You’re looking at a different set of metrics, you’re looking at transition plans, target commitments, management quality around climate change. You’re really focused on where might those emission reductions occur, and building your investment approach around that.”
GIC’s Jaensubhakij agreed: “I think we are engaged and very concerned about the issue of how the world gets to that lower emissions level to maintain an acceptable temperature path.”
He noted that investing in solutions that will facilitate the transition of the global economy is a major part of the effort. However, he noted that “for most companies, there isn’t a real need to put transition policies in place yet. So long as that need isn’t there, then the technologies that can help, or the capital expenditure that can help, won’t get spent.”
As reported by AsianInvestor, large asset owners are under increasing pressure to show their teeth and push for change.
Church said asset owners can be very specific in what they are asking their asset managers and ensuring those managers are doing all they can to press investee companies about their transition pathways.
“Also they can help push the regulators to create rules that are supportive of the transition. If we want to see capital flowing to the right areas, we need that supportive environment so that we don’t just focus on the risk in our portfolios. That is why the Inflation Reduction Act is so important,” she said.