“Our neglect of socio-environmental issues will shock future generations, just as our predecessors’ neglect of slavery shocks us today” said the chief investment officer at a French pension plan participating in the latest KPMG/CREATE report on sustainable investing.
But he was also quick to point out one salutary lesson from history: when lofty ideals clash with on-the-ground reality, progress can only come in small steps, even when the direction of travel is clear. And so it is with climate risks. Three contributory factors stood out in the interviews I did with asset owners and asset managers.
The first one involves a lack of reliable data on three foundational concepts: materiality, intentionality and additionality. Respectively, they seek to assess three things: how material climate change is to a company’s financial performance; whether the company intends to act on it and ‘do good’ via its products and services; and whether the company generates societal benefits in addition to financial benefits.
The second factor is the creeping rise of quarterly capitalism over the past 30 years. Under it, listed companies have been incentivised on short-term profits at the expense of long-term viability. Markets have, as a result, morphed from a source of investment capital for growing companies to a vehicle for cash distribution and balance sheet management. Long-term issues like climate change have not been on many chief executives’ radar.
The third factor slowing down progress is the tentative nature of the evidence now available on whether climate change is indeed a risk factor that generates returns. Specifically, the evidence shows that it is a risk factor for sure; except that, so far, it is a compensated factor in Europe but much less so in the US and Asia Pacific. The compensated element has also varied over time during the last decade.
Such evidence sits uncomfortably with those over-discerning investors who argue that for climate change to be treated as a risk factor, it needs a long performance history over multiple cycles in multiple regions. Currently, the available data on the subject fall well short of these criteria.
Still, the majority of participants in our survey took a forward-looking view on climate change, as summed up by the chairman of an Anglo-American asset manager “Just as it is foolhardy to drive a car by looking in the rear-view mirror, so must investors look forward and factor in change. The world does not stand still.”
After the huge collective push from governments, international bodies and investors worldwide, it is hard to believe that climate change will not emerge as a compensated risk factor before long. The role of the US government, however, remains crucial in this respect, as I have argued in my article in today’s FTfm (23rd March 2020). If you are a subscriber to the FT, you can access it here.
Amin Rajan – Research Update 