The divestment angle is well understood, but we must accept that these externalities will come at a direct cost to business at some point. It is less about stranded assets and more about how every company in the world competes on an economically resilient basis. If they have less externality to price in, they are better positioned on margin and market share, which goes to fiduciary duty. Burger: We have been talking for years about the increased cost of capital that comes from the internalisation of externalities. We are seeing more metrics coming through that can impact financial viability and resilience. The more examples of that we see, the more it needs to be managed.


There are regional biases in Indonesia, for example, where, because of the localised impact signing-up to an initiative would have; we have to recognise that this is a global problem and a concern. It is a global problem that requires a global solution. We cannot get away from that.


Bringing it down to an investment angle, back in the late 90s and early 00s, capital flows into wind power were fantastic, but they were overpriced and the management of a lot of those businesses was not great. So, just because a company has great green credentials does not mean it is a viable investment. Rawson: I am going to slightly challenge that in saying that we are ignoring the signs. In one respect, the IEA (International Energy Agency) has made it clear that if we are going to keep global warming to 1.5oC above pre-industrial temperatures, there can be no new fossil fuel expansion. If you are an asset owner choosing to pick up cheap assets in oil, gas or coal you need to be transparent about that trade-off.


On the point of the just transition, it is critical that investors create opportunities for those effected by the transition out of these legacy industries – but these are also the populations who are going to be most affected by climate change. So, there is a lot we could do while waiting for the frameworks, while waiting for things to align. Committing to no further investment in fossil fuels would be a great first step. In some respects, the renewables coming on stream means that we have solved a lot of that in the energy market, but there are a lot of heavy industries at the beginning of their transitions. We need to create the transparency around the trade-offs. Loriot-Boserup: Pension schemes are increasingly under pres- sure to do what seems to be the “right thing”. This should not be the goal of responsible investment. Rather, responsible investment is about recognising your fiduciary duty and acting to maximise the long-term interests of your clients or shareholders. However, local government pension schemes are inherently political organisations and so they may approach responsible investment as a result of their political agendas rather than attempting to maximise long-term returns. This could create sub-optimal strategic asset allocations, not only from a fiduci- ary


perspective


Just because a company has great green credentials does not mean it is a viable


investment. Ian Burger, Newton Investment Management


but also in terms of their climate


responsibility. We have seen a flurry of net-zero commitments in the past 12 months with some local government pension schemes target- ing net zero as early as 2030. Net zero is not a race, such strategies should focus on reducing carbon emissions in the real economy and support assets and companies that help deliver that transition. We need a smooth decarbonisation rather than a rapid shift towards net zero. Removing the most carbon intensive invest- ments from your portfolios could be considered greenwashing as you are not delivering impact in the real economy. That is why setting bottom-up targets in your net zero investment strategy, such as engaging with heavy polluters or retaining key sectors in your portfolio, such as mining or energy, are incred- ibly important in delivering a low carbon economy.


Feb 2022 portfolio institutional roundtable: Sustainable investing 17


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