Warnings about climate change are nothing new – in fact, climate scientists, governments and global organizations have been voicing their concerns for many years, yet fossil fuel companies and other carbon emitters have done nothing. Further, it is challenging for all levels of government to incentivize companies to reduce their carbon footprint without support and partnership from the private sector. Strategic investments are required to finance the transition to a low-carbon economy. Fortunately, there has been a growing voice that has been percolating over the recent years that companies will find difficult to ignore – the institutional investors.
The evolution is coming where major institutional investors around the world, including some of the largest pension funds, are reassessing climate risks and other environmental, social and corporate governance (ESG) factors in response to marketplace trends and new government regulations. Their goal is not to change the world but to maximize returns without undue risk of loss for their stakeholders – in other words, they are seeking more profitable investment opportunities and trying to avoid potentially stranded assets in an environment that is being reshaped by an increasingly low-carbon economy.
The exciting part is that large shareholders are now actively engaging companies on climate change, instead of just avoiding them. For example, Kinder Morgan, the U.S. oil & gas company that wanted to build the $7.4 billion Trans Mountain pipeline from Alberta to British Columbia, was given a wake-up call at their recent annual general shareholder meeting when shareholders approved two environmental resolutions, one of which required Kinder Morgan to produce a detailed report by 2019 on the impacts of climate change on the business and how it plans to transition to a low-carbon future. The voices of persuasion are not the “tree hugging” investors but were coming from the Vermont state treasury, the California Public Employees’ Retirement System (largest U.S. pension fund), and the New York State Common Retirement Fund. There is a lot of financial firepower now pushing companies into getting serious about disclosing their potential climate change risk because institutional investors feel that attractive future investment returns will be generated from companies with low-carbon strategies.
Another example of an institutional investor being proactive about climate change is Caisse de dépôt et placement du Québec, one of the world’s top 20 pension funds, with about $300 billion in assets under management. Michael Sabia, the CEO of the Caisse has set two strategic goals: reducing the investment portfolio’s carbon footprint by 25% by 2025 and increasing the value of their portfolio of low- and zero-carbon assets by 50%, the equivalent of $8 billion, by 2020. The Caisse is setting measurable targets to guide its investment decisions for the coming years by reducing exposure to carbon-heavy assets (such as coal) and linking their Portfolio Manager’s compensation to the success of the pension fund’s carbon reduction investment goals.
The “Double Green” Effect
The ESG investment trend seems like it is following a similar path as the socially responsible investing (SRI) trend that gained momentum many decades ago when investors around the world avoided investments in weapons, alcohol and tobacco. A significant moment for ESG investing came when Canada’s own Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board, and Michael Bloomberg launch the Task Force on Climate-Related Financial Disclosures (TCFD). It urged companies to report their climate change risks to both help them make the transition to a low-carbon economy and allow investors to put a price on their investments’ potential liabilities, from flood risk to stranded assets. There are over 250 companies and pension funds, with a combined market value of more than US$6 trillion, that are supporting the TCFD, including Canadian companies such as Barrick Gold, Royal Bank, British Columbia Investment Management, Telus and Suncor (to name a few). While it is encouraging to see institutional investors taking climate change risk seriously, it is not enough to just “go green” because unless it makes economic sense, companies will not adopt alternative energy – you need the “double green” effect (has to be cleaner and have an economic benefit). Technological improvements and innovations are leading to plummeting prices in solar panels (cost of a panel per watt decreased from over $100 in the mid-1970’s to less than $1 in 2015) and wind power (cost of wind power has decreased approximately 60% since 2009). It is inevitable that renewable natural gas and hydrogen will play a major role in the energy game once the price is right. In the meantime, compressed natural gas (CNG) fuel is commercially available now for the transportation sector and it works – the industry just needs to figure out how to make it less complicated and more cost-effective.