Feature | ESG
Bacon sandwiches are dangerous. Aside from the well-publicised threat to your arteries, one once helped to damage the political aspirations of a former leader of the Labour Party. Now the breakfast staple has a new victim in its sights: the environment.
Indeed, if you add sausage and egg to your bacon sandwich, the amount of harmful carbon dioxide released into the atmos- phere is equivalent to a 12-mile car journey, the Eating Better Alliance claims. These emissions are believed to be fuelling the freakish weather events that many around the world have had to endure in recent years. In 2018 this included snow falling in the Sahara, wildfires in California claiming around 100 lives while in Japan 22,000 people were hospitalised with heat- stroke, which was followed by floods that killed 179 of its citizens. There were also floods and heat-waves in Europe while Africa saw cyclones.
temperature rises below two-degrees Celsius.
This will not be easy. The target would be missed if all of the UK’s known oil and gas reserves are burnt, Friends of the Earth Scotland says. So to meet the commitment that was first agreed in Paris three years ago a huge re-alocation of capital is needed. “If some companies and industries fail to adjust, they will fail to exist,” Bank of England Governor Mark Carney wrote in The Guard- ian earlier this year.
A company that does not have a carbon footprint is rare, so all industries may have to “adjust”. However, oil and gas, mining, utilities, transport, aviation and IT busi- nesses are particularly vulnerable to the re-allocation of capital needed to help move the world to a low carbon economy. There are several risks associated with cli- mate change that investors cannot ignore anymore, MSCI head of climate research
Climate change not only damages your health it also damages your wealth. Mark Lewis, BNP Paribas Asset Management
If such extreme events become the norm the impact on investors’ pockets would be huge. Climate change could wipe up to $4trn (£3.1trn) off the value of oil company assets and around $20trn (£15.7trn) across all sectors globally, the Bank of England has warned.
Losing money would be the least of peo- ples’ problems if man-made damage to our planet continues. In December, naturalist Sir David Attenborough described climate change as the greatest threat to humanity in thousands of years. It could, he believes, cause civilisations to collapse and wipe out most of the natural world. To help avoid such catastrophe, almost 200 countries have signed a commitment – known as the Paris Agreement – to cut greenhouse gas emissions to restrict global
Dana Sasarean says. “Half of the coal being produced in the US is by companies that are bankrupt. That is recognising lower demand for coal – market forces,” she says. So the message is clear: a company that is not phasing harmful gas emissions out of its operations will become an increasingly risky investment. “Climate change not only damages your health it also damages your wealth,” says Mark Lewis, head of climate change investment research at BNP Paribas Asset Management.
NEW DIRECTION Considering climate change when making investment decisions should not be an afterthought, it is part of institutional investors’ fiduciary responsibility, says Vic- toria Barron, a responsible investment ana-
26 | portfolio institutional | May–June 2019 | issue 84
lyst at Newton Investment Management. “Investors should be concerned from a holistic and existential perspective because the whole point of institutions investing is that they are investing for the future, for future generations,” she adds. “When a mine is flooded from huge, unex- pected rainfall or a retailer has to scramble to find alternative sources for their raw materials, that’s likely the impact of climate change. It is not a one-off impairment,” Barron says. “It will continue because we don’t know how climate change will impact operations globally and that impact will feed back up to investors.” And this impact is challenging conventional wisdom, Lewis says. “I am 55 now and when I was at university the standard man- tra was that the closest thing to a risk-free asset was a utility share. Utilities are meant to be low risk companies and you didn’t expect your capital to lose value.” Yet he points out that in the past 10 years the European utility sector has lost between 50% and 60% of its value. “It has tradition- ally been regarded as the ultimate widows and orphans’ sector,” Lewis adds. So, if it has happened in that sector, is any industry safe from the pressures that cli- mate change brings?
Lower demand and higher costs are why utilities in Europe have lost so much of their value. This is the result of pro-renew- able energy and energy efficiency policies set by governments, while putting a price on carbon has pushed up the cost of fossil fuel-based power. “That is going to ripple through the rest of the energy system,” Lewis says. “It starts with the power sector and is now happen- ing in transport with electric vehicles becoming a bigger part of the mix. “Electric cars pose an existential threat to the long-term demand for oil, which is predicated on the assumption that China and India will adopt the same consumption patterns as in the West. The jury is out on that.
“There is a massive amount of disruption to come,” Lewis warns. “That is before we get the big breakthroughs in energy stor- age. When that happens and renewable
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