In the past few months, multiple governments – both national and regional – have declared a climate emergency. Canada has done so. The Welsh Government did in April. Even Pope Francis has, saying that a failure to urgently reduce greenhouse gases would be “a brutal act of injustice toward the poor and future generations”. Whether its part of the Greta Thunberg effect – or simply a delayed response to last year’s grim IPCC report – it seems that climate change is finally receiving the urgent political attention it deserves.
So – how can sustainable investing help? According to Morningstar, “Companies managing carbon risk more effectively are reducing the reliance of their products and services on fossil fuels and placing a greater emphasis on developing ‘greener’ products and services.” While Kathryn McDonald, head of sustainable investing, Rosenberg Equities, AXA Investment Managers, writes that major corporations “proactively addressing climate-related challenges can help reduce future costs and gain new customers with the obvious objective of bolstering earnings. Importantly, these organisations are choosing to evolve rather than be backed into a corner by changes in regulations or technology”.
For the individual investor, however, it can be hard to tell apart the companies that really mean it from the corporate greenwashing. A June report by Novethic, the ESG data research firm, found that in the last decade, sustainable finance has led to the creation of about ten specialised certification labels, that have been granted to less than 500 financial products out of over 60,000 funds on the European market. Some labels are managed by financial centres, a few by professional responsible investment associations, and others by specialised environmental labelling organisations. France is the only country in which the government has created and supports two public labels: the SRI label, dedicated to responsible investment, and the Greenfin label for more committed environmental funds. The other main certification standards include FNG-Siegel, LuxFLAG ESG, Umweltzeichenl, Febelfin QS and Nordic Swan Ecolabel. Together these funds now cover about a quarter of all assets under management (€14,000 bn) in Europe.
Three of the ESG labels identified by Novethic use a point system, either to ensure that minimum requirements are met (Nordic Swan & Umweltzeichen), or to distinguish funds whose ESG practices are more holistic (FNG). The FNG standard also rewards “institutional credibility”, entailing that the asset management company takes and upholds company-wide ESG/SRI commitments.
“Environmental labels intend to offer the guarantee of not investing in sectors detrimental to the environment”, write the report authors. “On the negative screening side, this approach consists in the exclusion of fossil fuels, coal in particular, with varied thresholds.” However, each ESG standard takes a different approach. For example, Umweltzeichenl screens out coal investment for extraction, but not coal electricity generation. Other standards like to reward for good behaviour. The Nordic Swan label and the Febelfin standard, for example, allow for exceptions in the case of companies who are undergoing a clean energy transition strategy, but have not yet completed. In the case of Nordic Swan, companies qualify if at least 75% of their energy sector investments (actual or committed and budgeted) are in renewables, or if renewables generate more than 50% of their revenue from power generation.
Meanwhile, even the hardest traditional investors – who care more for the green of the dollar than the green of the rainforest – increasingly need to factor climate change into their investments, too. According to the FT, “Climate change presents a profound challenge to long-term investors worldwide because of the uncertain path of global warming and its effect on investment portfolios.” Detailed forecasts on asset class returns are therefore becoming, “surprisingly hard to find despite the outpouring of scientific data describing the huge environmental costs of climate change.” While the outlook for oil and gas investments is described as “bleak”, renewables are “the clear winner” with additional returns of 6.2 percentage points a year expected by 2030.
Pretty soon, cold, hard investment decisions and ESG decisions will be one and the same.
Interested in reading more about sustainable investing? Here are a few more articles from this series: