Investors hold the purse strings to climate action

It’s been a bad year for big oil. Infamous for explosive booms and busts, oil and gas stocks haven’t underperformed so badly in the S&P 500 stock index in more than four decades.

The downswing owes in part to the coronavirus pandemic which has laid waste to oil-reliant industries, and partly to a long overdue reckoning for companies with unsustainable business models.

According to the Intergovernmental Panel on Climate Change (IPCC), it will take around $2.4tn of investment in clean energy every year until 2035, among other actions, to avoid catastrophic climate change. But incentives for such investment go beyond combating climate change. Environmental, social and governance (ESG) investments, also known as sustainable investments, have both environmental and economic merit.

In fact, a majority of sustainable funds now outperform traditional ones over multiple time-horizon scenarios. The Harvard Business Review reports that ESG considerations – including material issues like climate risk and board quality – have become far more mainstream, particularly among “long-term investors” in the past few years.

As a result, the market for green investments is ballooning. According to research by BloombergNEF, a record-high $465bn of sustainable debt was issued in 2019. More than half of that was green bonds, the proceeds of which are earmarked for environmentally friendly projects. Initiatives such as the UN-convened Net-Zero Owner Alliance, a group of institutional investors supporting net-zero greenhouse gas emissions by 2050, are also gaining traction.

How investors can take the first step

To take full advantage of sustainable investment, investors must first get a grasp of their investment portfolio’s climate impact and exposure to fossil fuels. One way to do this is the Paris Agreement Capital Transition Assessment (PACTA) tool, developed by the 2° Investing Initiative, a non-profit think tank. Users can upload their portfolios to the platform to see how their investments align with the IPCC’s 1.5C scenario.

Quick guide

Resources for ESG investors

1) The Paris Agreement Capital Transition Assessment (PACTA) tool by the 2° Investing Initiative: Determine how your financial portfolio aligns with various climate objectives, including if your investments meet important criteria outlined by the Paris Agreement and the IPCC’s 1.5C scenario.

2) CICERO Shades of Green: Assess the impact of bond frameworks on a scale ranging from “light green” (e.g. early emission responses) to “dark green” (e.g. fully moving away from fossil fuels).

3) The Task Force on Climate-Related Disclosures' Knowledge Hub: Investigate TCFD’s recommendations, including guidance for companies regarding climate-related disclosures, peruse case studies and find helpful articles.

4) Carbon Disclosures Project (CDP) Scores: Check out the companies and cities setting an example as global leaders of environmental performance.

Christa Clapp, managing partner at CICERO Shades of Green, which provides independent reviews of the green bond market, says that renewable energy is an “obvious, clear answer” to where to start with viable ESG investing. She notes that green bonds can be rated for their climate impact. “We rate bonds as either light, medium or dark green,” she explains. “That stems from climate research showing that we need all kinds of initiatives, including at the ‘light green’ end – e.g. early emission reductions – all the way to the dark green, where we’re shifting completely away from fossil fuels, in order to reach our climate targets.” These ratings can help guide investment decisions.

Investors might, for instance, choose to put their money into companies that are shrinking their carbon footprint by reducing direct emissions from energy use, improving energy efficiency or greening their supply chains. Companies building out electric vehicle infrastructure, implementing circular economy solutions or bolstering the recycling industry within the consumer goods sector are more examples of investments with a robust ESG profile.

The Task Force on Climate-Related Disclosures (TCFD) offers another set of resources. It outlines a framework for disclosing climate-related risks and opportunities based upon four pillars: governance, strategy, risk management and metrics and targets. The TCFD’s recommendations comprise 11 specific climate-related disclosures that companies should include in their annual reporting to provide decision-useful information to investors. TCFD’s “Knowledge Hub” provides a wealth of information for investors looking to make their portfolios greener.

Christine Sobieski, head of ESG engagement at Ørsted, one of the world’s largest renewable energy companies, recommends three considerations for investors getting started with ESG investment: committing to a greener portfolio, reporting on your progress via the TCFD framework and actively encouraging change in companies featured in your portfolio.

Why companies should attract sustainable investment

Business people shaking hands across tableLarge group of corporate business people

Ørsted can serve as inspiration for companies looking to attract sustainable investments – and ultimately, become more profitable.

“Over the past decade, Ørsted has transformed from a fossil-based energy company to a renewable energy company,” says Sobieski. “Reducing carbon emissions is central to our strategy, both for the health of our planet and to stay competitive as a business.”

Ørsted tripled its market value over the past three years to more than $75 billion and was named the most sustainable company in the world in the 2020 Global 100 index. “We’ve demonstrated that it’s possible to significantly increase profitability and market value by making decarbonization the cornerstone of business strategy,” says Sobieski.

For other companies looking to engage with climate action, resources like TCFD’s 2020 Status Report, the recently-released Guidance on Scenario Analysis for Non-Financial Companies and Guidance on Risk Management Integration and Disclosure may be useful.

“Understanding, identifying and ultimately addressing the financially material risks that climate change poses is becoming mainstream in the global business community,” says Didem Nisanci, the global head of public policy at Bloomberg L.P. and member of the TCFD Secretariat. “Sixty percent of Fortune 100 companies either support the TCFD recommendations or report alignment with them.”

Consistent disclosures, Nisanci says, benefit companies in many ways. For one, they help increase awareness and understanding of climate-related risks and opportunities, which may result in better strategic planning. Secondly, companies that transparently report on climate risks can proactively address investor demands for climate-related information. This may ultimately lead to a boost in investor and lender confidence.

Sobieski notes that tackling the climate emergency is not only about technological solutions and financial viability, but also the will to act – now. “If companies and investors join forces to reduce emissions at unprecedented pace and scale, they can help make the 2020s a decade of green action to stop global warming at 1.5C,” she says.

“It’s never been more urgent and profitable to invest in climate action,” she adds.