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Combatting climate change through investing for impact

04/12/2019

Whether it’s the rising number and intensity of hurricanes or floods, forest fires or droughts, it is increasingly untenable to ignore the causes and consequences of climate change.

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Arguably there is no more critical challenge facing global society. 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 two degrees, the impact looks grave.

It is not only the health of our planet at risk from rising carbon emissions, but also our financial wellbeing. Despite the scale of the challenge, I am buoyed by the contribution that investors can make by channelling resources and exerting their influence.

The power of persuasion

Active investors like M&G have long held company management to account on corporate 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 I believe it is the role of responsible investors to persuade and cajole their management to make positive changes. Frank discussion about the risks that climate change poses to a company – for instance, if rising sea levels might inundate its coastal assets – can shape opinions and strategy.

When it comes to lending sufficient weight to the management of climate risks, an important step is disclosure. The Taskforce for Climate-related Financial Disclosures (TCFD) has developed a framework for consistent climate-related financial risk disclosures, upgrading the importance of climate reporting by requiring its integration within financial accounts.

We also want to see ambitious targets and metrics to ensure companies make tangible progress towards mitigating risks. Another vital step is linking executive remuneration to climate-related goals. Rewarding progress and aligning incentives makes them more likely to be achieved.

Shaping a sustainable transition

I believe the transition to a lower carbon economy will be more effective if incumbent companies are coaxed into playing an active part.

Their scale means they are well-placed to deliver a positive impact. For instance, if a global car maker can halve carbon emitted from the 10 million vehicles it makes a year, its environmental benefits could far outweigh those of a manufacturer of 1,000 zero-emission cars a year.

Leading companies which spearhead and mainstream sustainability in their sectors can deliver terrific impact. Take Ørsted, for example. The Danish energy company is at the forefront of society’s transformation towards renewables, having once been a fossil fuel-focused business. Today, Ørsted has built more offshore wind farms than any company worldwide and has committed to being coal-free by 2023, when it will have reduced its carbon emissions by 96% compared to a decade ago.

Where leading companies can evolve and tap into trends like rising demand for green electricity, their shareholders can aspire to achieve sustainable financial returns and contribute to a demonstrably positive impact for the climate.

Keeping up the pressure

While the shift away from a carbon-intensive economy may appear incremental, I am confident that we are on the cusp of companies accelerating their progress, spurred by legislative, normative and economic pressure.

Good intentions are reflected in the number of companies committed to a trajectory that limits the global temperature rise to less than two degrees Celsius above pre-industrial levels – a goal of the international Paris Agreement on climate change.

Investors are right to support companies that take steps towards combatting climate change, but it is also right to expect material progress. If companies fail to act, investors have a responsibility to use all tools at their disposal.

The threat of divestment can be an effective one. It has certainly moved the dial on corporate attitudes, but it is not a panacea. Using ownership and stewardship as instruments – exerting pressure alongside other shareholders on companies to decarbonise – can be more powerful.

Investors with more than US $34 trillion in assets under management have signed up to the Climate Action 100+ initiative to ensure the world’s largest corporate greenhouse gas emitters take action on climate change. After engagement with Shell in 2018, the oil major not only committed to set carbon emissions targets, but linked executives’ long-term incentive plans to meeting them. BP has committed to align its capital expenditure strategy with the Paris Agreement.

The environmental risks of climate inaction are evident. Where companies do not act, they will not only expose themselves – and their investors – to financial losses, but they will miss opportunities for success that lie in tackling this challenge.

The views expressed here should not be taken as a recommendation, advice or forecast. The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.

Find out more about the M&G Positive Impact Fund