Low carbon transition – ESG Feature


pollution. “The cost of climate change over the coming decades will be significant,” Atkinson says. “There are going to be increased costs one way or another.” So achieving the transition, just or otherwise, is not only in the interest of governments. Action needs to be co-ordinated across politics, industry, investors and consumers as this is everybody’s problem.


This is especially an issue for investors. Keeping temperature rises low and improving air quality make good business sense for those with a long-term horizon. The economic disruption that Covid-19 is causing markets and the global economy shows what could happen if there is a series of natural disasters. And then there is regulation. Indeed, the Bank of England estimates that as much as $20trn (£16.8trn) of assets are at risk of being stranded by transition- driven regulation.


Investors need to look at their assets and wonder if their value could suddenly fall in the years to come. No investor wants to be holding the wrong assets when the music stops. This is not just about oil and gas companies; sustainability should be a consideration in every investment decision made across equities, all debt and real assets, such as backing real es- tate and infrastructure made from sustainable materials and which use less energy and water.


Private capital is at the heart of the Bank of England’s plans to help achieve the government’s goal of eradicating carbon from the economy. The now former Bank of England governor Mark Carney said in February: “To identify the largest opportunities and to manage the associated risks, disclosures of climate risk must become comprehensive, climate risk management must be transformed and investing for a net-zero world must go mainstream.” So news that most defined contribution schemes are failing to explain how they are protecting savers from the effects of cli- mate change will not be welcomed by the Bank and those push- ing for private capital to influence a just transition. Yet some stewards of trillions of dollars in assets are pressur- ing companies to change their practices, through networks such as Climate Action 100+ and the Net Zero Asset Owner Alliance, while a survey by the Prudential Regulation Authority found that almost three quarters of UK banks are treating the risks from climate change like other financial risks rather than viewing them simply as a corporate social responsibility issue. The message, it seems, is getting through.


Transitioning your portfolio


There is more to achieving the transition than starving oil and gas companies of funding or refusing to insure their assets. “Di- vesting from fossil fuel companies does not solve the problem. It is more nuanced than that,” O’Neill says. “Supply chain logis-


We need to have a just transition; in that it is socially equitable as well as being economically feasible. Jennifer O’Neill, Aon


tics and transport are exposed to petrochemicals, so the question of dealing with climate change is not simply restricted to one or two sectors, it is much broader than that,” she adds. So the political will to end climate change should be factored into every decision an investor makes. “There is a lot more to the transition than renewable energy and banning fossil fuels,” Anderson says.


Investing in the creation of a low-carbon economy is not limit- ed to renewable energy. Electric vehicles, energy efficient build- ings, energy storage, infrastructure such as inter-connectors and recycling as well as sustainability consultancies are other specialist options, but there are only a few general companies that will not be affected by this law.


“The transition effects every sector of the economy and compa- nies are looking for a way to participate,” Anderson says. For Manulife, decarbonising portfolios is a company-by-com- pany call rather than a sectorial strategy. “We are looking at how companies within any given sector are playing it, are put- ting the transition in their strategy,” Anderson says. O’Neill points to the trend toward cloud computing, which consumes a lot of energy, as a potential area for innovation, while Lees describes the potential in transport as “exciting”. “There are lots of interesting places to invest across the value


Issue 92 | April 2020 | portfolio institutional | 29


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