Investors to Decarbonize the Global Economy?

Joy Williams, a senior advisor at the climate change service provider Mantle314 who also chaired the Decarbonization Advisory Panel for the New York State Common Retirement Fund (see full report here), shared her thoughts on last week's PRI in Person conference:
Last week, I had the opportunity and privilege to address a theater full of finance professionals at the annual PRI in Person conference. The PRI stands for the Principles of Responsible Investing and is an investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact. Its signatories number over 2250 financial firms representing just under $90 trillion USD AUM. The theme of the conference this year was “Responsible investing in an age of urgent transition” and the sense of urgency was very prevalent in discussions around the conference venue.

This year’s conference hosted over 1700 people in Paris. Topics ranged from broad issues such as policy to very specific issues such as reporting under the TCFD (Task force on Climate-related Financial Disclosures). Here are the key themes I took away from my 4 days there:
  • Responsible investing in real assets has gone global. Here in Canada, where direct investing into infrastructure is more common, I’m used to having these discussions because the long life of these assets fit naturally with ESG topics such as climate change. However, this was the first year at PRI for an entire day on real assets and shows the growth of interest in responsible investing for this asset class. Some key touch points were investing for impact with infrastructure, social license and climate metric challenges.
  • Climate change is both urgent and mainstream. Having the conference in Paris, the city where the historic climate agreement was created, made climate a natural topic. The depth and breadth of this discussion has matured substantially from even three years ago when people still weren’t sure whether the new G7 climate task force would produce anything meaningful. Today, we were debating options on how make useful decisions across portfolios that will have meaningful outcomes. Also, the PRI introduced a new climate tool in the Inevitable Policy Response – a forecast of the necessary policies that governments will need to meet the agreed upon targets. My own panel showcased three examples of investor action happening already.
  • The overall tone was to move past “process” and to outcomes. The theme of focusing on outcomes was a general one across all ESG topics. Some speakers went so far as to propose that the focus on ESG data is not useful and in some cases, a misdirection. Rather, understanding the direction of trends and then managing for desired ESG outcomes was more useful and that data was not necessary to drive action towards those outcomes.
  • Europe is making a significant headway on issues of global importance such as taxonomy, but it may not be fit for purpose in Canada. The EU Action Plan for Financing Sustainable Growth is a hot topic and will drive responsible investing to the next level. However, key actions such as setting an environmentally sustainable taxonomy do not appear to include any transitional fossil fuel activities such as switching to natural gas. Canada’s own expert panel on sustainable finance (ably represented by Barbara Zvan at this conference) has pointed to the need for tools that work for Canada in order to support a move to a green economy.
The PRI has come a long way from the high level discourse in the early years. I found there was value in detailed discussions among front line investment professionals and grains of wisdom from thought leaders pushing the boundaries, but at the end of the day, it will be up to individual organizations. There was an urgent call to practice responsible investing and it’s increasingly clear that responsible investing is becoming table stakes and investors may have to explain when they don’t practice responsible investing rather than when they do.
I thank Joy for sending me this brief synopsis of last week's PRI in Person conference in Paris. She covers the main points and I encourage my readers to contact her at Mantle314 for further information and expert advice.

I will see Joy, Barb Zvan and Kim Thomassin over the next couple of days at the CAIP Quebec & Atlantic conference in Mont-Tremblant where I am looking forward to listening to experts cover many topics, including responsible investing (see full agenda here).

Back in June, I covered Canada's Final Report of the Expert Panel on Sustainable Finance here. Keep in mind this is a work in progress but the authors provide great advice and insights on a complex topic.

In other important responsible investing news, CDPQ put out a press release today, Investors make unprecedented commitment to net zero emissions:
In one of the boldest actions yet by the world’s largest investors to decarbonize the global economy, an alliance of the world’s largest pension funds and insurers – responsible for directing more than US$ 2.4 trillion in investments – has today committed to carbon-neutral investment portfolios by 2050.

This commitment by the newly launched, United Nations-convened Net-Zero Asset Owner Alliance was announced today at the UN Secretary-General’s Climate Action Summit, which brought together governments, companies and civil society to strengthen commitments and accelerate the implementation of the Paris Agreement on Climate Change.

The Net-Zero Asset Owner Alliance is an example of investors stepping up to protect people and planet with the knowledge that companies that transform their businesses to deliver a low carbon economy will benefit most from the opportunities presented by climate change.

Inger Andersen, Executive Director of the UN Environment Programme (UNEP) said,
“There are no short-cuts to decisive climate action. We need to take a long-term view. I applaud the leadership of the investors in this Alliance. Their commitment sends a strong signal that financial markets and investors are listening to science, and moving us to a path of resilience and sustainability.”
Asset owners – so called because they are the principal holders of retirement savings or are insurance companies investing their customers’ premiums – represent some of the largest pools of capital on the planet. Their investment portfolios are highly diversified and exposed to all sectors of the global economy.

Concerned about the disruptive impacts that unabated climate change will have on societies and economies, now and in the future, responsible asset owners are powerful allies in global action to fight climate change and limit the rise in global temperature to no more than 1.5°C warming.

As long-term investors who must look far into the future to fund their liabilities, asset owners are keen to ensure that the global economy prospers, that climate-related risks are addressed, and that opportunities to invest in a cleaner tomorrow are captured.

The Alliance was initiated by Allianz, Caisse des Dépôts, La Caisse de dépôt et placement du Québec (CDPQ), Folksam Group, PensionDanmark and Swiss Re at the beginning of 2019. Since then, Alecta, AMF, CalPERS, Nordea Life and Pension, Storebrand, and Zurich have joined as founding members.

Convened by UNEP’s Finance Initiative and the Principles for Responsible Investment, the Alliance is supported by WWF and is part of the Mission 2020 campaign, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).
Mitigating climate change is the challenge of our lifetime. Politics, business and societies across the globe need to act as one to rapidly reduce climate emissions. We, as asset owners, will live up to our responsibility and, in dialogue with the companies in which we invest, steer towards low-carbon business practices. We’ve already started and, by 2050, our portfolios will be climate neutral,” said Oliver Bäte, Allianz’s CEO.
The members of the Alliance will immediately start to engage with the companies in which they are investing to ensure they decarbonise their business models. Initiatives such as the UN Global Compact “Business Ambition for 1.5°C — Our Only Future” campaign will be a clear partner in mobilising corporations to commit to net zero emissions. The Alliance will also collaborate with other initiatives, such as the Investor Agenda, Science Based Targets initiative, Climate Action 100+, and the newly announced 2050 Ambition Alliance.

The members of the Alliance will hold themselves publicly accountable on their progress by setting and publicly reporting on intermediate targets in line with Article 4.9 of the Paris Agreement. By committing to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050, asset owners are significantly raising the bar for other investors, industry associations and, importantly, the global economy.
“The Net-Zero Alliance is the recognition that institutional investors collectively have an important role to play in fostering the energy transition the world needs. For investors like CDPQ, there are so many opportunities to earn commercial returns by investing in low-carbon solutions and to work with portfolio companies to decarbonize,” said CDPQ CEO, Michael Sabia. “Combined with the necessary changes in public policies, investors’ actions will induce real change in every sector.”
To have maximum impact, existing Alliance members actively encourage additional asset owners to join them in their quest to decarbonise investment portfolios and achieve net zero emissions by 2050.

Notes to Editors

Magnus Billing, CEO, Alecta

“As investors we have a part to play in the climate transition, together with businesses, policy makers and society. Joining the Net-Zero Asset-Owners Alliance underlines Alecta’s commitment to strengthen our portfolio’s alignment with the Paris Agreement. We aim to use our voice as owners and engage with companies to increase climate disclosure and transition, to explore new investment opportunities that align good returns and positive climate impact, and to contribute to the development of tools and methods for integration of climate in Investment analysis.”

Johan Sidenmark, CEO, AMF Pension

“As a pension company, with customer relationships often lasting for decades, a long-term investment horizon is a natural and necessary approach for us. Integrating sustainability in our asset management – in particular risks and opportunities following climate change – is necessary if we want to fulfil our obligations not only today but also in fifty or a hundred years. Following our commitment to the Paris agreement, we want to be part of the transition towards a low-carbon economy and continuously work with alignment of our investment portfolio with the 1.5-degree target. Therefore, the goal of net-zero emission motivates us, and we look forward to being a part of this promising and timely initiative.”

Eric Lombard, CEO, Caisse des Dépôts

“For nearly 20 years, Caisse des Dépôts has been actively involved in the fight against global warming, with concrete and quantifiable results. As an institutional investor, it is proud to commit to a 1.5°C roadmap today. This ambition is strong and must be supported by a rigorous methodology, to which Caisse des Dépôts' teams will actively contribute. By joining this alliance, we want to take a further step in aligning our financings with the Paris Agreement objectives and send a strong signal to the companies in which we took participations, creating therefore a leverage effect on the whole economy.”

Marcie Frost, CEO, CalPERS

“CalPERS recognizes that climate change poses urgent and systemic risk given our responsibility to protect our members financial assets and provide the long term returns that can pay pensions for this and coming generations. The net zero alliance gives us the platform to drive the change needed to achieve the demanding goals of the Paris Agreement. We are committed to the advocacy, engagement and integration of climate risk and opportunity across our portfolio to meet that challenge as fiduciaries to nearly 2 million Californian public servants.”

Michael Kjeller, Executive Vice President and Head of Asset Management and Sustainability, Folksam Group:

“The Folksam Group has worked with responsible investments for nearly 20 years and we were part of the investor group that founded the UN PRI. Our good experience of collaborative engagements and the clear commitment we have signed set high expectations on the outcome of the Alliance. We believe in active ownership and that an asset owner can make a difference in the needed transition towards a 1.5 degree world. I wish that we in 2050, at the latest, can look back and see that companies have made the climate transition we have been part in pushing and encouraging them to do.”

Katja Bergqvist, CEO Nordea Life & Pension:

“Asset owners have an important role in the transition to a low-carbon and climate-resilient economy. We strongly believe that such a transition requires clear commitments, joint industry efforts and full transparency. We have joined the alliance because it represents a strong platform for enabling this.”

Torben Möger Pedersen, CEO, PensionDanmark:

“To achieve net-zero emissions in the real economy by 2050 we will need to enhance the impact we make ourselves as investors in new clean technologies, renewable energy infrastructure and sustainable buildings among others in order to provide realistic and feasible alternatives for the big CO2-emitters to change their businesses. Against this background the Alliance can act together as active owners and ask companies to transform their business models to comply with the Paris agreement and limit the temperature increase to 1.5C.”

Odd Arild Grestad, CEO, Storebrand:

“Our pensions, savings and investments are one of the most powerful tools we have at our disposal to address the massive challenges raised by the IPCC Reports. We can no longer overlook the impact we all can have if we move our resources towards a clean energy future. The Net-Zero Asset Owner Alliance is a great opportunity and a force for change. Sustainable investments are already generating good returns showing that a sound investment strategy is a win-win for people, planet and profit.”

Guido Fürer, Group Chief Investment Officer, Swiss Re:

"As an early mover to integrate ESG across our investment portfolio, committing to a net-zero GHG emissions by 2050 is a great extension to our approach.”

Urban Angehrn, Group Chief Investment Officer, Zurich Insurance Group:

“Our customers across the globe are facing the challenges associated with climate change already today. That is why we strongly believe that asset owners like Zurich must act now to tackle those challenges, in particular – by leveraging capital markets to fund solutions to the pressing environmental issues of our time. After signing earlier this year the UN Global Compact Business Ambition for 1.5°C pledge, we are delighted to join the Asset Owner Alliance, which is an important step in transitioning towards a low-carbon economy.”

Christiana Figueres, Convenor of Mission 2020:

“The urgency of the climate crisis demands decisive leadership, so it is encouraging to see asset owners flex their financial muscle and guide companies they're invested in towards a net-zero emissions world. The science is clear, we need to halve our planet warming emissions by 2030 to get on track. Investors are waking up to the enormous economic transformation that entails and starting to put their money behind it, but we are going to need more money, more scale and more speed if we are to deliver a liveable future for the young people calling for action from the streets.”

Fiona Reynolds, CEO, Principles for Responsible Investment:
“There is a tremendous urgency around addressing climate change. Pension funds and insurers who own large pools of assets are at the top of the investment chain in that they can direct/mandate the companies they invest in to move away from carbon intensive energy sources to more sustainable ones. They have the ability more than any other investors to move this agenda forward by outlining the material risks of climate change to those managing their assets.”

Margaret Kuhlow, Finance Practice Leader, WWF:
“This is welcome leadership from major asset owners. The message from the scientific community is clear, and as we experience the impacts of a warming Earth, it is more evident every day that we need to act more quickly. Limiting global temperature rise to 1.5°C is not about saving the planet as much as it is about saving the lives and livelihoods of our children and our grandchildren. Those who manage financial resources for our future have a vested interest in a more sustainable world and need to be strong advocates for public policy change.”

About United Nations Environment Programme Finance Initiative (UNEP FI)

UNEP FI is a partnership between United Nations Environment Programme and the global financial sector created in the wake of the 1992 Earth Summit with a mission to promote sustainable finance. More than 260 financial institutions, including banks, insurers, and investors, work with UN Environment to understand today’s environmental, social and governance challenges, why they matter to finance, and how to actively participate in addressing them.

More information: 
This is a very big deal and I agree with those who openly state the financial sector can do more to tackle climate change.

I would say Europe is ahead of North America when it comes to sustainable investing. For example, ABP, the Netherlands’ largest pension scheme has declared itself on track to invest €58bn in assets linked to the UN’s Sustainable Development Goals (SDGs) by the end of next year:
The €431bn civil service scheme ABP said in its ESG report for 2018 that SDG-related investments grew by €5.7bn to €55.7bn last year, equating to 14% of its entire assets. Its goal for next year is €58bn.

ABP has already exceeded its CO2 emissions reduction goal of 25% relative to 2014. Last year, it had reduced the carbon footprint of its equity portfolio by 28%.

It achieved this by setting stricter requirements for large carbon emitters in its investment universe, as well as easing the restrictions for sectors with limited emissions.

The scheme assessed 7,700 of 10,000 companies for their sustainable credentials, resulting in a better insight into the opportunities and risks of ABP’s long-term investments.

In addition, it has developed additional criteria for excluding companies from its portfolio and added 150 firms to its exclusion list. Last year, it divested from companies involved in tobacco and nuclear arms – banking a €700m profit in the process – and added South Sudan’s government bonds to its exclusion list.
The movement is taking hold here too. The University of California system, which educates more than 280,000 students and employs 227,000 faculty and staff, recently announced it is divesting from fossil fuels. It’s the single largest action to date in the growing movement of institutions withdrawing their financial stakes in the industry that’s the principal driver of climate change:
“We believe hanging on to fossil fuel assets is a financial risk,” wrote Jagdeep Singh Bachher, the UC’s chief investment officer, and Richard Sherman, chair of the UC Board of Regents’ Investments Committee, in an op-ed in the Los Angeles Times.
Lastly, on another related topic, the Investment Leadership Network (ILN) CEOs recently committed to increase diversity in senior management and investment roles:
Chief Executive Officers of the Investor Leadership Network (ILN) concluded their first meeting of the CEO Council on Diversity recently, hosted by Natixis Investment Managers, and are pleased to announce a commitment to continue to support and increase diversity at their organizations and in the broader financial industry, with an initial emphasis on advancing gender diversity. The meeting coincided with the conclusion of the G7 summit hosted in France, where gender equality was a central theme for discussions.

ILN members will improve representation of women in key roles and continue to take other concrete actions internationally

As institutional investors managing over $6 trillion in assets around the world, ILN CEOs have committed to work together to accelerate progress on gender diversity issues in the spheres where ILN investors can exert a collective influence. 

As part of that commitment, ILN members will aim to:
  • increase the presence of women in key areas of their organizations. Specifically, all ILN organizations have committed to working toward increasing the number of women in investment and senior leadership roles;
  • establish appropriate metrics, for a majority of members through third party certification, to guide, assess, and benchmark progress as well as inform strategic direction, hiring and advancement strategies for women;
  • support the CFA Institute Young Women in Investment Program, which is designed to foster diversity and inclusion within the investment management profession. The partnership will support existing women’s programs in Mumbai and Bangalore, and will seek to expand programs to other regions with a goal of more than 400 program participants by 2021; and
  • advocate for greater diversity and inclusion with public and private portfolio companies, external managers and the broader investment industry.
The collective focus of global investors on attracting and advancing women in the industry offers the potential to drive higher performance, promote fairness and lead to more sustainable decisions in leadership teams.

The participants agreed to convene a second CEO Council on Diversity meeting to coincide with the G7 meetings in 2020. 
While I applaud these efforts, I must say, so far I haven't seen much action except at the Caisse which appointed two women, Nathalie Palladitcheff and Rana Ghorayeb, to head their real estate subsidiaries, Ivanhoé Cambridge and Otéra Capital.

Here too we lag countries like Sweden where major national pension funds like AP2 and AP3 are headed by women (Eva Halvarsson and Kerstin Hessius). CalPERS's CEO, Marcie Frost, is an exception to the rule in North America.

There's a lot of talk on diversity but little concrete action. And it's not just about women and diversity. I'd like to see equal pay for equal work for all employees and more opportunities for the most disadvantaged groups of society, people with disabilities.

Diversity without inclusion is just window dressing and I implore the ILN members to provide concrete measures and back them up with public reports providing statistics on how exactly they are tackling diversity and inclusion at all levels of their organization for all groups, especially disadvantaged groups.

Below, highlghts from PRI in Person 2018, the leading global responsible investment conference, which attracted 1200 delegates to San Franciscolast year.

And Vikram Gandhi, founder and CEO at VSG Capital Advisors, and Peter Boockvar, CIO at Bleakley Advisory Group, join "Squawk Box" to discuss why investing for impact seems to be growing and why investors should approach it with caution (July 2019).

Update: Leo de Bever, AIMCo’s former CEO, shared these insights with me after reading this comment:
Trying to get investors to sign up for a less carbon-intensive world is still an uphill battle. That is only changing slowly. The spirit may be willing but the flesh is weak. Lots of reasons for that.

Decarbonization is still mostly a passion of entrepreneurs in small companies.

Canada has a big shortage of capital to take these companies to scale.

Conservative silos within investment firms and pension plans make them hesitant to take risks on small companies.Big investment entities take comfort in working with well-known companies that can deploy large amounts of capital, i.e. the modern equivalent of not getting fired for buying from IBM.

The notion of ‘moving the needle’ also keeps cropping up, i.e. why bother with small investments that do not affect your immediate return?

The answer is that a well-structured portfolio of investments in small companies will move the needle in the long run, as some become successful and large.

However, the long run is still mostly talked about, instead of applied to investment allocation of risk capital.
It is tough to make investment decisions that are good for your investment entity, but may not pay off during the ~4-6 years you expect to be there.

I have been trying to make innovative lower carbon investments look more like lower-risk infrastructure in terms of reliable contracted cash flows, but you run into the greenfield issue, i.e. the risk of first having to build on time and on budget whatever you are investing in.

Large pools of capital should arbitrage their low cost access to information on the technology of decarbonization (or anything else that is new). The payoff can be very significant, but you will stick out from the crowd.

With hindsight, I wished that as a CIO and CEO I had focused more on attracting real engineering expertise, and evaluation of executive team capacity to carry out their strategy, as opposed to just relying on spreadsheet models.

The ‘tyranny of Excel’ facilitates getting to ‘no’ just because you did not invest in access to the right information.
I thank Leo for sharing his insights and agree with him.