Climate Emergency: Fund Managers, Fossil Fuel Companies, And Getting To Zero Emissions by 2050
By JP Dallmann - Fast Forward 2030 Board Member
This post was originally published on Forbes.
Society is awakening to the facts of a climate emergency and the need for urgent climate action.
But are individuals' demands, governmental requests, and major funds and companies aligned?
We saw the Extinction Rebellion protests in London followed immediately by the U.K. Parliament declaring a National Climate Emergency. Almost at the same time, the CEO of the UK Sustainable Investment and Finance Association was on the news sharing the findings on their most recent survey of fund managers’ responses to climate-related risks facing fossil fuel companies.
There is increasing awareness that drastic action needs to happen. It looks like we are moving in the right direction in one way. However, the challenge remains when looking at the numbers, timelines and who are the real executors of such noble intentions.
Extinction Rebellion - The Truth
The movement states: “We are facing an unprecedented Global emergency. Life on Earth is in crisis: scientists agree we have entered a period of abrupt breakdown, and we are in the midst of mass extinction of our own making.”
The United Nations (UN) - The message is clear
The Secretary-General of the UN, António Guterres, made it clear in his remarks on Climate Change towards the end of 2018:
Climate change is the defining issue of our time.
We face a direct existential threat.
The United Kingdom Members of Parliament’ (MPs) call - Carbon neutral by 2050.
As a consequence of this global emergency, MPs are asking for changes to set a new zero-emissions target before 2050, to improve on the current target of 80% reduction from the levels in 1990.
A group of MPs from the opposition, led by Jeremy Corbin stated: “this House declares an environment and climate emergency following the finding of the Intergovernmental Panel on Climate Change that to avoid a more than 1.5°C rise in global warming, global emissions would need to fall by around 45% from 2010 levels by 2030, reaching net zero by around 2050…”
The current situation - Measurement
There is no official definition of climate emergency. The carbon-neutral target is a basis that is enabling all parties to have a common understanding and come together to take action.
The companies - Are targets aligned?
Interestingly , not all major oil businesses have yet to set targets aligned with the requirements of people or governments . Of course, they are one of the biggest contributors to achieving or missing these targets.
The funds - Are they sustainable investors?
The recent “Survey of the Fund Managers’ response to the climate-related risks facing fossil fuel companies” by the UK Sustainable Investment and Finance Association (UKSIF), in partnership with The Climate Change Collaboration, reports that “90% of fund managers expect at least one risk to impact significantly the valuation of International Oil Companies (IOCs) within 2 years,” but “they are not yet setting firm target deadlines for when the companies need to act”
A couple of weeks ago the CEO of UKSIF, Simon Howard, and the Chairman of CDP, Paul Dickinson, were interviewed by Sky News’ reporter Ian King about this subject and findings, please do watch the clip if you have 5 extra minutes to hear the views directly from the experts.
The Survey - Eight Key Findings From Fund Managers' On Climate Risks Facing Fossil Fuel Companies
UKSIF wrote to 69 fund managers operating in the UK and 30 responded. Collectively they represent organisations with over £13 trillion under management.
Below you will find a few other key findings from the survey:
Since last year there is a doubling of investors that see transition risk significantly impacting IOCs in 5 years.
Over half of respondents (54%) said the reputational risks of IOCs are already negatively impacting their valuation. A further 25% (79%) said they will impact in the next 2 years.
62% see peak demand for oil impacting valuations within five years and peak demand for gas impacting valuations within 10 years.
A large majority of fund managers–71%–have not decided if they believe fossil fuel companies are able to make a transition to a zero-carbon economy.
Managers identified two main barriers to creating new fossil fuel free investment products:
The main barrier is the lack of demand, which all respondents listed within the top three issues. Concern about deviating from benchmarks was also identified as an issue, with 58% listing it within the top three issues.
Alongside the current lack of demand, 71% of managers reported an increase in client interest in the last twelve months.
The fascinating part is in relation to what is being asked to the companies in terms of targets:
41% of fund managers reported that they don’t have a strategy for engaging with IOCs to mitigate climate change-related financial risks.
Among those that do, the objectives vary. In response to prompts, 29% reported they are asking companies to “exercise capital discipline, pursue an ex-growth approach and return capital to shareholders,” whereas 38% are asking companies to “transition to a zero-carbon business and pursue capital and income growth.” Neither of these two objectives is being asked for by shareholder resolutions to fossil fuel companies in 2018.
15 of the total 30 managers already offer active funds or bespoke portfolios that have “Divested from (at least) the 200 coal, oil and gas companies with largest reserves.” 13 offer active equity funds, and four others could. Three offer passive equity funds with the same criteria, and three more could. Five managers offer or will soon offer bond funds that are divested from the top 200, six others could.
As you can appreciate, the statistics are not particularly tilted towards the urgency of execution or even planning towards delivering zero-carbon businesses, let alone reducing the investment in the sector any time soon.
There is an obvious and probable mathematical misalignment between people’ wishes, the government’s calls, the companies will, and the funds' intentions and actions.
Where do responsibility and accountability lie? When trying to respond to this major question, there is a need to understand that there is a vicious cycle that starts with the consumption of fossil fuel based products by people and what they do with their investments–being directly or indirectly through their savings and pensions–in companies and funds that invest in these companies.
There is obviously not an easy and simple one solution fits all in this case, but there is a clear need to align what the people and government are demanding to what the investments funds are doing and the targets required from companies. This must, of course, be within a reasonable timeline that helps deliver them and is in line with the need for the products, be it fossil fuels or financial.
What can you do about it?
A potential idea could be to create a vision of what the solution could be to connect and align the various parts, or at least one of the areas such as investors and companies targets. This could then potentially take the shape of a report, an app, or whichever user experience works best for individuals to be able to see the impact and dynamics between the parts and participants in this ecosystem. It could also include a searchable platform or an easy to use mechanism, to understand who is doing what and how it contributes to the target. If there is something like this already out there, please do let the most relevant people know for others to learn about it and use it.
If you are a fund manager, you will want to consider sustainable and impact investing as part of your strategy. You can place this at the core of your decision process. This needs to be on the Board, Chairman, and CEO agenda. You can also engage with relevant organizations that can help you manage and improve your engagement with and stewardship of the companies in your portfolio.
If you work in the sectors mentioned in this article, please share the relevant information with the decision makers so we can speed up the planning, communications, actions, tracking and changes required. All businesses need to re-evaluate their business models to make them sustainable over time. You may want to do this for yourself, your clients, or society at large.
If you are an individual, please become a responsible consumer first, and then continue to engage with your Pension Funds and Independent Financial Advisors to understand if they are investing your hard earned money in the companies that are not taking action on the major issue that is climate change. You can also try to learn about the United Nations Sustainable Development Goals–The Global Goals–to understand which financial services providers and companies are doing something about it.
If you are anyone and everyone, think about who you could share this with to create awareness about the particular initiatives that people are taking, as well as the context of how the different parts interact and the disconnection that we need to address between them.
We need awareness, community, action! We need to align, invest, track, adjust, repeat! We need to do something!
Grape Hyacinth Muscari armeniacum flower. Panoramic rural landscape with mountains. Vast blue sky and white clouds over farmland field in a beautiful sunny day in springtime.
About The Climate Change Collaboration & UKSIF
The Climate Change Collaboration is an initiative of 4 of the Sainsbury Family Charitable Trusts; The Ashden Trust, Mark Leonard Trust, JJ Charitable Trust, and the Tedworth Charitable Trust. This group came together in 2011 to support pilot and research projects to find ways of reducing CO2 emissions quickly.
UKSIF (UK Sustainable Investment and Finance Association) is a membership organization for those in the finance industry committed to growing sustainable and responsible finance in the U.K. Their vision is a fair, inclusive and sustainable financial system that works for the benefit of society and the environment. UKSIF was created in 1991 and has 240+ members and affiliates include financial advisers, institutional and retail fund managers, pension funds, banks, research providers, consultants and NGOs.
Follow JP on Twitter or LinkedIn, or check out his website.