Investing to influence climate change

When running for Prime Minister in the 2007 election, Kevin Rudd described climate change as “the greatest moral, economic and social challenge of our time”.

Over time we’ve seen policies come and go, including the carbon pricing scheme enacted by the Gillard government in 2011.

Despite the ineffectiveness of public policy to take hold and be a catalyst, the market had slowly created options for consumers and investors to help contribute to change.

In the financial services industry, this led to funds with a sustainable focus for ethically-minded investors to direct their savings to, particularly in the case of compulsory superannuation.

There are also managed funds and exchanged traded funds (ETFs) with an environmental, social and governance (ESG) focus, but collectively these still only make up a fraction of the overall market.

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BlackRock, in what seemed to reflect a visit from the three ghosts of Christmas over the holidays, recently changed their direction announcing they would completely divest from coal this year.

This was a significant move from one of the largest funds globally and they would additionally incorporate other ESG initiatives.

In two open letters – one for the chief executives of the companies they invest in and the other to their own clients – BlackRock chief executive officer (CEO), Larry Fink, said climate change had become a defining factor in companies’ long-term prospects.

“Last September, when millions of people took to the streets to demand action on climate change, many of them emphasised the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect,” Fink said.

“But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”
One of the external factors that had been pressuring BlackRock was activist group Climate Action 100+ (CA100+).

Launched in 2017, CA100+ was an investor initiative that aimed to ensure the world’s biggest greenhouse gas emitters acted on climate change.

One of the other major investment funds that had come under scrutiny by CA100+ was Vanguard, and unlike BlackRock, have resisted the call to sign up to the demands of the activist organisation.

However, a Vanguard spokesperson said the company regularly engages with the CA100+ as they shared similar climate change risk concerns.

“There are a variety of ways in which organisations engage with the issue of climate change,” the spokesperson said.

“Vanguard’s investment stewardship team is taking action to address climate change risk through our company engagements and industry advocacy efforts with organisations and initiatives such as the Sustainability Accounting Standards Board, Task Force on Climate-related Financial Disclosure (TCFD), and UN Principles for Responsible Investment (PRI), among others.”

WHAT FUNDS ARE DOING

There are two directions ESG investment can take: either divest from companies not adhering to those policies or use the stakeholder power in those companies to lead change.

Australian boutique Alphinity Investment Management runs the Sustainable Share fund which specifically focuses on ESG factors as well as adherence to the United Nation’s Sustainable Development Goals (SDG).

Stephane Andre, principal and portfolio manager for Alphinity, said leading a large investment fund offered significant power over the companies they invest in.

“It gives us a voice because having $8 billion [funds under management] gives us access to all the CEOs in Australia, so we would have BHP, Rio or Woodside sitting here in our office and it’s part of the conversation,” Andre said.

The firm’s consideration of climate change was aligned with the TCFD, which aimed to develop voluntary, consistent climate-related financial risk disclosures for companies to use, to provide information to investors, lenders, insurers and other stakeholders.

Andre, said they looked at both transitional and physical factors of climate change.

“We look at impact of market changes, that’s part of the transitional factors – a very clear one would be thermal coal and the move away from it,” Andre said.

“That means you have less demand for thermal coal which has an impact in terms of return for price.

Climate change was Goal 13 of the United Nations Sustainable Development plan and Alphinity looked at companies who were having a positive impact towards those goals.

“We never invest in a company purely because it has a positive impact, we don’t want to compromise investment returns, we want investment returns and we want to support sustainable development goals,” Andre said.

Stuart Palmer, head of ethics research at Australian Ethical Investment, said climate change was the single biggest issue which is going to drive future wellbeing of the planet or lack of wellbeing, depending on how we respond to it.

“It plays into our investment choices across all our portfolios and asset classes, whether it’s equities, fixed income or property, and all sectors, because we think all sectors have a role in limiting warming in accordance with the Paris Agreement,” Palmer said.

Vanguard had been criticised for its lack of action and the company defended what it considered a nuanced approach.

“As an asset manager with a fiduciary duty to act in the best interests of our 30 million clients in 170 countries, Vanguard is concerned about any risk to long-term shareholder value,” a spokesperson said.

“Climate change is one such topic and we understand the importance of addressing this complex issue while adhering to our obligations to deliver long-term value to our fund holders.

“Our most effective role as a manager of equity index funds is to encourage strong governance practices that enable this resilience.

“We convey to companies what we see as best practices, as well as inadequate practices, through engagement, voting, and advocacy.”

However, between 2015-2019, Vanguard had opposed 84% of climate-related shareholder motions.

Vanguard defended that record and believed shareholder proposals related to climate change or sustainability varied widely in degrees of prescriptiveness.

“Vanguard applies particular scrutiny when shareholder proposals are binding resolutions, which is often the case in Australia,” the spokesperson said.

“Our votes against a shareholder proposal may indicate a disagreement with the specific ask that overrides our overall support of the proposal.

“For example, in 2019 we voted against a shareholder proposal filed at three Australian banks that called for annual reporting on strategies and targets to reduce fossil fuel assets, including eliminating exposure to thermal coal in OECD countries by 2030.

“In these cases, we support meaningful disclosure of climate-related strategy and risks, but we believe that specific tactics and timeframes for addressing those issues should be determined by the board and management.”

ENERGETIC

The core issue of climate change comes down to carbon emissions generated by energy supplies, but current renewable capacity wasn’t enough to carry the load.

That means firms must decide between fully investing into the development of renewables and batteries, or compromising and finding other sources that are not perfect, but do not have the worst carbon impact.

Alphinity still invested in conventional gas – but not coal seam gas (fracking) – as they considered it a transition fuel to help technology progress towards greater dependency on renewables and battery storage.

“We see the dirty fuels such as thermal coal, coal seam gas and uranium as not necessary, because you have cleaner offers on the market,” Andre said.

“Gas for us is a transition fuel that is required even if you want to have renewables, because you can’t go 100% renewable today because you don’t have the batteries in place.”

However, Australian Ethical believed that gas was no longer needed as a transitional energy supply.

“The rationale was the transitional role that gas could play as we’re building up the renewable supply,” Palmer said.

“We’ve gotten to the point where the transition fuel argument doesn’t work, we should be building out renewables instead.”
Nuclear energy was not an option for either Alphinity or Australian Ethical, although they had no issue with the energy generation, they had concerns over treatment.

“You would have to look at the waste recycling of the uranium side of it, the issue with uranium is not the generation of it, it’s the waste treatment at the end,” Andre said.

The obvious issues of radioactive waste, site safety, the time it takes sites to come online and be operational, and the risk of diversion of fuel for nuclear weapons had kept it excluded for both funds.

“Anything is on the table and we’re open-minded, but nuclear we have always excluded based on our analysis,” Palmer said.

WHAT CAN POTENTIAL INVESTORS DO?

For investors, Palmer said it’s worth doing the extra research to make sure the fund was being compliant, rather than just using climate change action as a marketing tool.

“You want to see the fund is publishing a list of the companies they’re invested in, so they’re transparent about that and amazingly there’s still a lot of funds that don’t publish that information,” Palmer said.

“They might give you a top 10 holdings, but they won’t tell you across the portfolio where they invest.

“You want to see them talking about climate change and how they’re investing to take into account both the risks and opportunities of climate change and amazingly we’ve seen funds just refuse to comment on climate in the past.”