PI Partnership – M&G Investments


Ben Constable-Maxwell is head of sustainable and impact investing at M&G Investments


DOUBLING DOWN – CLIMATE ACTION THROUGH IMPACT INVESTING


Whether it’s the rising number and inten- sity of hurricanes or floods, forest fires or droughts, it’s increasingly untenable to ignore the causes and consequences of climate change. Much as the coronavirus pandemic has highlighted how interconnected our eco- nomic prospects are with the health of society, the effects of rising global temper- atures demonstrate our dependence too on the health of the planet.


As policymakers grapple with how to ensure society becomes more resilient to challenges like the pandemic, we believe investors should consider how companies can play a part. We believe those that pro- vide solutions to the most pressing global challenges stand to not only deliver a pos- itive impact, but also be financially successful.


Are we at a turning point? The effects of global temperatures rising to 1.5 degrees Celsius above pre-industrial levels, as projected by the International Panel on Climate Change, are severe. At 2 degrees, the impact looks grave. The pandemic-induced shutdowns of the global economy in 2020 and into 2021, ar- guably offer hope that we are not on an irreversible trajectory towards breaching the goals of the international Paris Agree- ment on climate change.


Although restrictions on economic activity have curtailed growth in global


40 | portfolio institutional | February 2021 | issue 100


demand for energy, electricity generation from renewable sources, such as wind and solar, is expected to have risen by nearly 5% in 2020. This is because of low operating costs, preferential access to the grid, and the addition of capacity. A recent report by research service, Bloomberg- NEF, found that two-thirds of the world’s population lives in regions where wind and solar power represent the cheapest option for new electricity generation. While there is a long way to go, it reflects an encouraging direction of travel that is reinforced by the growing number of companies aligning their strategies with the Paris Agreement.


Around 1,000 companies have pledged to reduce their emissions in line with the Science Based Targets initiative (SB- Ti), which encourages companies to specify how much and how quickly they will reduce their greenhouse gas emis- sions. More than 400 have approved sci- ence-based targets that then have two years to be approved and published by the SBTi. The shift away from a carbon-intensive economy, however incremental, is being encouraged by policy. As we start to emerge from the pandemic, it looks likely that there will be pressure from govern- ments – and perhaps from voters – that we rebuild a cleaner, greener economy. Given the global imperative to address cli- mate change, it is hard to believe that the post-pandemic government stimulus will not have some focus on encouraging sus- tainability, especially in Europe. The European Union’s Green Deal and Green Recovery programmes aim to cata- lyse the transition to a low-carbon econo- my by advocating substantial public investment in clean energy, green infra- structure, low-carbon transportation, sus- tainable agriculture and biodiversity pro- tection. It is hoped that large-scale public sector investment, combined with regula- tory changes, will galvanise private sector investment that helps the EU reach its goal of being climate neutral by 2050.


For Investment Professionals only


Targeting climate change By investing in listed equities with the potential to deliver a positive impact, alongside the pursuit of financial returns, we can invest in companies that offer so- lutions to the world’s most pressing chal- lenges. To identify impactful stocks, fund managers may look to assess the extent to which companies explicitly aim to address societal and environmental issues. Their impact must be intentional, not accidental.


Impact investors can look to gauge the positive impact that a company delivers against the United Nations’ Sustainable Development Goals (SDGs). These are a universally recognised articulation of the most pressing challenges facing people and the planet. We can map a company’s activities to a primary SDG – in this case combatting climate change – and quantify their con- tribution towards achieving it. Seven of the 17 SDGs directly relate to climate change. By establishing key performance indica- tors that are pertinent to that company de- livering an impact against that SDG – for instance, carbon emissions per gigawatt- hour (GWh) of electricity generated by an energy company – we can assess whether we are making a positive contribution through our investment.


How investors can keep up the pressure Active investors like M&G have long held company management to account on cor- porate strategy and governance. In the same way, we can hold feet to the fire on climate change. Companies need to properly understand the risks, and we believe it is the role of investors to persuade company manage- ment to make positive changes. Frank dis- cussion about the material risks that cli- mate change poses to a company – for instance, if rising sea levels might inun- date its coastal assets – can shape opin- ions and strategy.


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