Earth Capital on Achieving a More Just Transition to Net Zero
Earth Capital, like other institutions, believes that investing for positive impact is a necessary strategy to meet our fiduciary duty in the wake of the climate disaster and is critical to the post- pandemic recovery, with impact investing set to play a decisive role in driving the transition to a more sustainable future.
Pension funds and private equity are more aligned than meets the eye, in that they both have a long-term investment horizon. By virtue of this, both should be inherently interested in investing in a positive future and managing the impact of the ongoing climate crisis. At Earth Capital, our interests are aligned with other institutional investors with long term horizons, like pension funds, in addition to our core belief that investing in a positive future not only secures better financial returns but also a better future.
COVID-19 highlighted the vulnerabilities of our linear, “just in time”, unsustainable economies, but also made real how far and fast we must move to mitigate the global environmental crisis. The ecological “Overton” window has shifted drastically and stakeholders at all levels are demanding meaningful and quantifiable action.
We have reached a fork in the road with two distinct transition pathways to the low carbon, circular and sustainable economy that we so desperately need. Either we plan a managed transition or through our inaction we find ourselves undergoing a chaotic shift - not a planned transition, but a defensive patchwork triggered by manmade disasters beyond our control.
The exponential growth of humankind’s economic footprint has drastically impacted the earth’s ecosystems which underpin our global economy; the more we deplete the ecosystem, the less it will sustain us. We need drastic changes to our way of life requiring change to our models of economic systems to mitigate these very real costs, risks, and threats.
A fiduciary duty is a legal responsibility when managing someone else’s money, however this can no longer be a legitimate barrier to ESG incorporation for institutional investors; climate change is now accepted as potentially posing material risks to asset values and therefore falls squarely within fiduciary responsibility.
The Scale of the Problem
The writing is on the wall in terms of the disastrous consequences of climate change and yet investors continue to turn a blind eye – remaining confident that they can adjust their portfolios if or when climate impacts become more tangible, so are not meaningfully acting. Climate change will not only cause jump-to-distress pricing due to changes in policy, technology and physical risks, but traditional risk modelling will fail to account for this threat. Our economic models, which for 70 years have focused on GDP or national output as the prime measure of progress, must adapt. A sustainable revolution will be required to address climate change and the UN SDGs in an inclusive, collective, universal plan. The focus on growth has been used to justify extreme inequality of income and wealth with unprecedented environmental destruction but it is time to accept the limits of growth. A wider consideration of investment strategy is required to take account of climate change, biodiversity and other sustainability issues.
2020 was the year that climate change was recognised as having a potential material impact on the value of the assets of a pension fund. Trustees will need to hold their managers to account for the impact of climate change on asset values as much as to any other risk driver, with the expected impact showing the same magnitude as those that emerged in the Global Financial Crisis. In the face of all this, investors have no choice but to act decisively and proactively, they cannot wait for government interventions to force their hands. Investing for impact is a necessary strategy to meet our fiduciary duty in the wake of the climate disaster not simply a siloed corner of an investment portfolio created for marketing purposes.
As a result of the sadly only recent awakening within the financial sector, there has been a proliferation of products rich in ecological and ethical signifiers, but whether this is greenwashing through rebranding or a meaningful reframing of investment principles to address the climate emergency, remains to be seen. In particular there has been a proliferation of ESG investing and reporting tools. Whilst it is heartening to see meaningful engagement with sustainability, ESG scores are one input to a sustainable investment process, not a complete answer. They consider the relevancy of an issue for a company or its products and how well that issue is managed by the company over the gamut of indicators. Whilst this can be made an efficient and repeatable objective process, unless it allows for subjectivity on the relative importance of the different indicators, the law of averages will result in a grouping of companies with vastly different strengths and weaknesses but comparable aggregated scores.
Demonstrated by Tesla which scores highly on (most) Environmental indicators and badly on supply chain and worker’s rights issues producing an "average" overall rating. A starker example is BAT, which in 2019 was the highest ESG scoring stock in the FTSE100. That its product leads to its automatic exclusion by socially responsible filters shows the impact of applying subjective criteria alongside ESG scoring.
At Earth Capital, we use our multi-award-winning Earth Dividend™ tool to measure the impact of the entire life cycle, including those on planet and society, as part of our due diligence process on our portfolio companies. This process spans the UN SDGs and allows to measure and manage an investment’s sustainable development impact. By quantifying positive or negative sustainability- related developments before, during, and after investment, we can identify any ESG risks at a company and fund-level as well as ESG related opportunities. To ensure our process is robust, we seek external assurance in accordance with international standards to verify our findings. By having a thorough process and a distinguished team of sustainability, cleantech and finance leaders, our investments are provided with the necessary support, expertise, and guidance to drive long-term sustainable value.
We need to develop the capability to envisage something rooted in the challenges of the real world yet capable of creating an imagined shared future that doesn’t yet exist but that will benefit many generations to come. To deliver this, we need sustainability focused investment, which targets its proposed financing by understanding the holistic footprint of its outcomes, not just its short term, profiteering, dollar return on investment.
This shift to a sustainable economy will see many conflicts, as high carbon industries transition or die and low carbon ones emerge, as a just transition is used to address the global inequalities and injustices that exist today. These conflicts must be met, to do so will be a challenging process which will require citizens and agents at all levels of the economy to come together and engage in the long- term innovative thinking and planning which allows futures just and fair for all to be envisioned and then enacted.
Earth Capital examines in detail the implications and challenges of the climate change transition in a four-part series, looking at the importance of managing these conflicts in an equitable and just way and how investors can contribute to a more sustainable future without impacting returns.
I invite my readers to download and read Earth Capital's four-part series here.
Below, a quick recap of the four-part series:
Series 1: Framing the climate change issue for the discerning investor
At Earth Capital, we believe we have reached a fork in the road with two distinct transition pathways at the extremes to a low carbon economy. Either we plan a managed transition, minimising disruption and losses and maximising new opportunities, or through our inaction we find ourselves undergoing a chaotic transition, with the potential for disruption, uncertainty and perhaps even violent geopolitical conflict.
We invite you to read the first of our four-part series, which looks at these two pathways in more detail here.
Series 2: Why impact Investing is a response to climate change and fiduciary duty
At Earth Capital, we believe that investing for positive impact is a necessary strategy to meet our fiduciary duty in the wake of the climate disaster and is critical to the post-pandemic recovery. Instead of being a siloed corner of an investment portfolio created for marketing purposes, impact investing is set to play a powerful role in driving the transition to a more sustainable future.
We invite you to read the second part of our four-part series here.
Series 3: The importance of managing conflicts towards a just transition
For far too long, agents at all levels of the economic system have shied away from admitting the size and scope of the climate crisis. Now, faced with the inconvenient truth that the climate crisis is a real and severe problem, we need to move faster and at a larger scale. However, the path to a low carbon economy is riddled with transition risk. So how can financial institutions and corporations effectively navigate the road to a more sustainable and equitable economy?
We invite you to read the third part of our four-part series here.
Series 4: How investors can create an imagined and just future by removing climate change conflicts
Achieving a just transition will help address issues such as inequality, poverty and hunger, all of which have been acknowledged by the United Nations’ Sustainable Development Goals as being some of the greatest global challenges we face. However, none of these challenges will be achieved by a series of short-term quick fixes. At Earth Capital, we believe that we need to move away from profit-driven short-termism towards building sustainable industries and systems that deliver long term growth and investor profits. To achieve this, we need to rethink our time horizons and relearn the ability to meaningfully make intergenerational plans to achieve what is needed.
We invite you to read the final paper in our four-part series looking at how investors can contribute to a just and equitable future here.
I thank Gordon Power, CEO, and Richard Burrett, Chief Sustainability Officer at Earth Capital for sending me this thought-provoking guest comment above.
I also thank Elise Hockley who is responsible for investor relations and digital marketing for sending me the material and coordinating a conference call with Gordon a couple of weeks ago.
I am trying to tackle an important topic in terms of climate change, risks and opportunities and I asked Gordon and Richard if they can share their thoughts as I consider them real sustainability experts who have pondered difficult topics in detail.
The aim of this guest comment was to inform my readers and share thoughts from experts in the field.
It was the same aim with Hendrik du Toit and Katherine Tweedie of Ninety One who sent me a guest comment on why the inclusive transition to net zero is the only way forward.
I enjoy sharing thoughts from experts with my sophisticated audience.
Having said this, I'm obviously going to take this opportunity to plug Earth Capital which is a very successful UK-based private equity fund focused on sustainable investing:
ECH’s management businesses, including associate companies Berkeley Energy Limited (BEL) and Sustainable Development Capital LLP (SDCL), manage over $1.7bn in Sustainable Private Equity assets from offices in London (UK), Barcelona (Spain), St Martin's (Guernsey), Beijing, Shangdong & Guangdong (China), Hong Kong, Singapore, Gaborone (Botswana), Nairobi (Kenya), New York & Connecticut (USA) and Rio de Janeiro (Brazil).
At EC, our focus has always been sustainable investing, as global private equity investment managers who invest exclusively in sustainable technology across the climate change nexus of energy, food and water with a track record of strong returns. We invest capital globally in various industries including agriculture, clean industry, energy generation, resource and energy efficiency, infrastructure, waste and water.
Mission, Vision & Values
“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” – Brundtland Report 1987
EC seeks to build on the work of the Brundtland Commission by investing exclusively in sustainable technologies and infrastructure.
EC is committed to ensuring that all its activities are delivered responsibly and with integrity.
EC strongly believes in promoting diversity and creating an inclusive culture for all its employees, investors and investee companies. We are committed to becoming an employer of choice by creating an inclusive and supportive working environment where people are treated with dignity and respect and where discrimination and/or exclusion are not tolerated. Our goal is to ensure these commitments, reinforced by our values, are embedded in our day-to-day working practices.
We have made a pledge for gender balance across Financial Services and are committed to supporting the advancement of female entrepreneurship. For more details please refer to our Women in Finance page.
Guernsey Green Fund
EC has been certified by the Guernsey Financial Services Commission as managing a Guernsey Green Fund confirming that it meets the regulatory standards to qualify as a green product. This endorsement enhances investor access to the green investment space by providing a trusted and transparent product that contributes to the internationally agreed objectives of mitigating environment damage and climate change.
I've met Gordon on a few occasions and met Richard Burrett too. I think highly of them because they're not just private equity managers, they believe deeply in ESG investing (all facets) and they share a lot of their work and opinions with the larger investment community in hopes of advancing the field in the right direction.
There's a lot of nonsense in ESG investing and I enjoy meeting people who are able to take a critical look and separate the worthwhile stuff from all the fluff out there.
Make no mistake, this isn't an easy subject matter, it's still evolving, investors are trying to stay well informed and it's very confusing at times.
But one thing we all agree on, or most do, is that there's a pressing need to understand the risks, challenges and opportunities of climate change and how it will impact institutional portfolios.
Last week, I discussed CDPQ's Climate Strategy 2021, focusing on the third pillar and explaining why its CEO Charles Emond considers this the most pressing issue of our time.
I also had a discussion with with Kim Thomassin, Executive Vice-President and Head of Investments in Québec and Stewardship Investing, Bertrand Millot, Vice-President and Chief Stewardship Investing Officer and Philippe Batani, Vice-President Communications and Public Affairs.
In my last comment, I went over a recent in-depth discussion with OPTrust's CIO, James Davis, and why they feel under all three climate change scenarios -- an orderly transition to net zero, a disorderly one and no transition at all -- all their assets will be impacted and returns will be lower over the long run.
Nonetheless, James, Charles, Kim, Bertrand and other people working at Canada's large pensions see tremendous opportunities in this transition to net zero and if handled correctly, it can also bring about a fairer, more just society.
As Gordon and Richard state above:
Achieving a just transition will help address issues such as inequality, poverty, and hunger. We believe that we need to move away from profit-driven short-termism towards building sustainable industries and systems that deliver long term growth and investor profits. To achieve this, we need to rethink our time horizons and relearn the ability to make intergenerational plans to achieve what is required.
And pensions having an even longer investment horizon than private equity can play an integral part in achieving this just transition.
Of course, as Charles Emond reminds us, we need a coordinated response from governments, businesses and investors to address the challenges of climate change.
And as James Davis reminds us, it's consumers taking the lead here, forcing these changes at all levels.
I view ESG investing as something which will quickly morph into investing, tout court.
Those who take it seriously at all levels will be way ahead of the those who ignore it.
Having said this, I am not a believer of divesting out of fossil fuels, they are going to be part of our economy for a very long time and we need to engage these companies.
I also have strong opinions on pensions, think the primary focus must always remain on meeting liabilities over the long run and ESG investing can be part of that but the starting point must be on the solvency of the plan over the long run.
We also desperately need to expand our critical thinking of ESG trends and listen to important criticism on the topic:
A Critique Of Tariq Fancy’s Critique Of ESG Investing: An Interview With Clara Miller: https://t.co/sghY9ZUJx5— Leo Kolivakis (@PensionPulse) October 1, 2021
Now more than ever, we desperately need cognitive diversity to tackle really important challenges.
Once again, I thank Gordon Power and Richard Burrett for their guest comment and sharing important insights with my readers.
Below, Earth Capital (EC) was founded in 2008 and is part of the investment management group headed by parent company Earth Capital Holdings (ECH), co-founded by Stephen Lansdown and Gordon Power.
And Richard Burrett explains how Earth Capital (EC) seeks to build on the work of the Brundtland Commission by investing exclusively in sustainable technologies and infrastructure. By selecting Sustainable Development as their theme for Impact Investing, social and environmental challenges can be addressed while simultaneously targeting enhanced financial returns.
Earth Capital (EC) has fully integrated Environment, Social and Governance (ESG) factors, both positive and negative, into its investment process.