BA, Shell, and Arcelor Mittal have set 2050 net zero pledges but neither company is likely to meet them because they have no recourse to the renewable energy sources required. Speaking at Sustainability in Practice at Cambridge University, Julian Allwood, Professor of Engineering and the Environment, University of Cambridge, and director of UK FIRES said that these companies are just some of many corporates where investors need to be wary of the gulf between promises and reality.

Urging investors to test the rhetoric, he said the three most important prerequisites for negative emissions are companies access to biomass, carbon capture and storage and non-emitting electricity. Investors should ask companies how much they need and how much of these green resources they’ve secured. “These three resources are the route of all climate mitigation,” he said. He urged investors to ask companies difficult questions around their security of non-emitting electricity in the future. “Have BA secured access to non-emitting technology to deliver their plans?”

Shortfall

Companies’ ability to access biomass and carbon storage is highly challenging. Installed carbon storage is a fraction of what is needed; increasing global production of biomass won’t be possible given current land restraints which leaves non-emitting electricity our future energy supply – of which there isn’t enough to implement the plans being discussed at COP26.

Allwood stressed the most critical consequence of climate change will manifest around a global food shortage. “If we continue growing emissions, by the end of this century people will die from starvation.” He said starvation will occur because despite increased efficiencies in agricultural production, temperature rises will cause crop yields to plummet. Countries near the equator will run shortest of food, leading to mass migration, starvation, and war.

Red herrings

Making much of the importance of truth in the climate debate where celebrity and the quest to be interesting often divert from the facts, he discounted as red herrings many of the touted solutions. For instance, he said negative emissions technology is a bad use of renewable energy; geo-engineering that interferes with the ecosystem could have unexpected and dangerous consequences; trees will take too long to grow to be an effective offset and direct air capture involves huge amounts of electricity that would be better used in power stations. “We need to act now or face the consequences,” he said.

Electrification is key to reducing emissions and energy use needs to change across the transport sector, in our buildings, industrial processes and our use of land. The transport sector can be decarbonized via battery powered vehicles charged with renewable energy, already proven in the car industry (where he said progress needs to now extend to reducing the weight of cars) and which will soon progress to electrification of trucks.

He said it could also be possible for the shipping industry to decarbonise with battery powered technology but said flying will be impossible without emissions. Nor will it be possible to produce cement without emissions.

Opportunities

Electrification presents a huge opportunity for investors, as does retrofitting houses with insulation to lower energy bills and save emissions. In the UK he expects that gas boilers will soon be phased out, backed by new regulation. “In most northern European climates, we have to retrofit houses but there are no entrants in this market.” Citing the need for an Ikea of the retrofit sector, he said the market opportunity ran to millions of houses every year and predicted that planning restrictions that pose a barrier to retrofitting would soon ease. Allwood cited Tesla’s journey from 18 years of unprofitability to today’s valuation as an example of the power of innovation and entrepreneurship.

ZERPAs

Allwood proposed a new model structured around Zero Emission Resource Procurement Agreements, ZERPAs, whereby suppliers agree to deliver a certain amount of renewable energy to companies over a period of years. The users, who promise a set price over that period, then have a secure supply and a verifiable transition plan that they can show climate-wary investors.

Today’s finance providers cannot assess the climate risks of investments; ZERPAs, or some equivalent mechanism, would allow them to separate credible commitments from promises that undermine the transition to a net zero economy. “You need a financial way of verifying the rhetoric is underwritten.” Under the system, companies can either wait for the spot market or secure future agreements now for supplies in future. “We need a financial way of verifying the rhetoric,” he said.

It is not only companies that are unrealistic about their net zero promises. He described the gap between the UK government’s ambition and commitment to cut emissions as yawning. “I am amazed at how long independent bodies in government have been allowing them to get away with this nonsense,” he said. Allwood concluded that it will be possible for humanity to live well on much less electricity than what we currently use.

 

 

 

 

Private credit will play a vital role in accelerating the transition to a low-carbon economy.

According to Rob Horn, global head of the Blackstone Credit Sustainable Resources Group, this role is set to get a whole lot bigger.

Horn believes that credit will eventually supply as much as 60 per cent of the estimated $100 trillion needed to decarbonise economies around the world providing for a particularly attractive investment opportunity for private credit.

An opportunity to drive attractive risk-adjusted returns, while potentially improving societal outcomes.

In this exclusive fireside chat with Fiona Reynolds, chief executive of Conexus Financial and former head of the UN-supported Principles for Responsible Investment, Horn outlines Blackstone’s view on energy transition as a key investment theme for the firm; its approach to sustainable finance; and what is needed to encourage more institutional investors into this rapidly evolving space.

Investors are coming together to push investee companies to act on biodiversity in the same way that they have collaborated to put pressure on the biggest polluters to reduce their emissions. Nature Action 100, a collective engagement programme on biodiversity aims to replicate the impact Climate Action 100+ had on collaborative climate engagement with companies.

Speaking at Sustainability in Practice at Cambridge University, Peter van der Werf, senior manager, engagement at Netherlands-based asset manager Robeco said Nature Action 100 is putting governance structures in place and selecting partner organisations for coordination and operational support ahead of its launch. Noting that it took over a decade for investors to coalesce around climate issues, he urged investors to sign up for the NA100 platform. Halting the decline in biodiversity requires urgent action now otherwise millions of species are in danger of becoming extinct.

Engagement will be a central theme on the platform, and van der Werf noted an increasingly strong recognition amongst soft commodity companies of the biodiversity challenge. He said attention in biodiversity is growing and the UN Biodiversity Conference (COP15) in China later this year, postponed again, will increase investor focus.  As part of NA100, investors will engage with both companies and policymakers deemed key to achieving the goal of reversing nature loss by 2030. This is a key difference with Climate Action 100+ on which it is modelled.

TNFD

Other initiatives to build investor awareness and action include the Taskforce on Nature-related Financial Disclosures (TNFD), a 35-member steering group mirroring the work of the climate-focused TCFD. TNFD’s objective is to develop a risk management and disclosure framework for organisations to report and act on nature-related risks. Swedish fund AP7, a universal owner where strategy is focused on trying to create biodiversity integration across the whole market, is working to help drive international standards. “TNFD looks at double materiality as well as the dependence of companies on natural resources and the impact on natural resources they can have,” said Emma Henningsson (pictured above) who heads up AP7’s active ownership strategy.

WWF

Elsewhere van der Werf outlined Robeco’s work building a biodiversity investment framework. The asset manager is working with the World Wildlife Fund, using its expert biodiversity knowledge in Brazil and Asia to add local, granular expertise to its research processes. “For biodiversity, local knowledge is really important,” said van der Werf. The partnership aims to develop a biodiversity investment framework and policy for Robeco and co-develop biodiversity investment strategies. The framework will create more awareness of the issue and inspire and activate investors to integrate biodiversity into their policies.

At Robeco, strategy is increasingly focused on integrating biodiversity in every company the manager invests to the extent managers now make nature-positive investment cases. Elsewhere, the asset manager runs an engagement programme particularly focused on commodity related deforestation. van der Werf told delegates that reversing biodiversity loss carries the same urgency as mitigating climate change. “We are seeing such a deep decline it calls for concerted action across all members in the room,” he said.

Biodiversity is an increasingly important element to sustainability at the Church of England Pension Board. The pension fund owns large amounts of UK farmland in its allocation to real assets. “We actively encourage change of use,” said Tom Joy, CIO, Church Commissions for England. In 2020 the fund measured and gathered data on the value of its natural capital held in strategic land and timber portfolios that account for about 15 per cent of the fund. The investment team is developing a net zero strategy for these assets that will leverage and protect natural capital and encourage collaboration with tenant farmers via initiatives including measuring soil quality to drive better long-term value.

 

 

 

The burden of sustainability reporting was a cause of consternation amongst investors gathered at Sustainability in Practice at Cambridge University, but new standards promise to streamline the process.

Set up last year, the International Sustainability Standards Board (ISSB) aims to achieve a single, global standard that sets out the risks and opportunities of investing in a company, said Sue Lloyd, vice chair of the ISSB which was set up by IFRS Foundation Trustees, the body responsible for international accounting standards.

Lloyd said that today’s confusing landscape needs to be replaced with transparent information on sustainable risks and opportunities that doesn’t preclude supporting impactful investment. “Things that a company does to the planet effect its value,” she said. “Corporate actions that effect value is information we are interested in.”

Lloyd stressed the importance of companies combining sustainable reporting in their financial statements because of sustainability’s link to financial outcomes. And she noted how ISSB standards have drawn a great deal on TCFD recommendations but also taken them up a notch, seeking more quantitative detail that explains different outcomes and impacts. Companies need to explain how they will achieve their carbon targets; how they will use offsets and the standards will detail what certification they require, she said.

Harmonisation

Lloyd also stressed the need for regulators to work across jurisdictions to coordinate legislation. The ISSB is working with the EU and the US’s SEC; although different regions are not on the same trajectory, harmonisation around mandatory requirements is important because it reduces the risk of greenwashing. “Markets are not served by having choices and alternatives,” she said. She added that from a cost and efficiency perspective, it is in the interests of investors to have a streamlined process; once standards are in place, the arguments can stop and the focus turn to solving the problem at hand.

PRI

Fellow panellist David Atkin, chief executive of the PRI, noted the reporting burden on PRI signatories did require revision. He told delegates the PRI plans to revise and reduce the workload for asset owners regarding their reporting requirements – releasing its findings on the issue shortly.

Investors face a myriad of challenges understanding new regulations and reporting standards; accessing data, shaping their net-zero commitments and holding corporates and fund managers to account in a bid to wipe out greenwashing. He noted how rules on climate related disclosure from the EU and US will bring down barriers to sustainable investment. “Our investors want the SEC to do more,” he said. Elsewhere, the UK’s Roadmap to Sustainable Investing that requires large pension funds to report in line with climate change regulations, is driving a new regulatory awareness.

Hélène Bussières, deputy head of unit at the European Commission, picked up on the importance of regulatory alignment. One of the main objectives of the sustainable working finance group is interoperability between jurisdictions, although she noted different regions have different priorities.

Cop 27: what to expect

Frances Way, executive director, Climate Champions team supporting the High-Level Champion for COP26, looked ahead to the expectations of COP27 in Egypt. She said the focus will be on the need to finance lower income countries, providing projects that can be scaled. Mobilization will be a key theme, focusing on how policy makers can unlock finance and solutions like, for example, using multilateral banks to catalyse private investment, a policy that has struggled. “If we don’t invest in [emerging economies] we all suffer and return to square one.”

The PRI’s Atkin noted the critical importance of a legal framework. He said that sustainable standards are a noisy and crowded field and that data needs streamlining. “This is something that will continue to be a major focus for the PRI. No one can solve it on their own,” he concluded.

CalSTRS, the $323.6 billion pension fund, is putting in place building bricks to meet its 2050 net zero pledge in a process that underscores the complexity and size of the task in hand. The pension fund won’t announce any firm commitments and targets until it has set up the governance structures; settled on the right incremental steps to net zero and understood how reducing emissions will impact its risk budget.

The pension fund is also looking at where it can invest in climate solutions in a total fund approach. It involves every asset class in a portfolio tasked with achieving a seven per cent annual return . “Getting the governance right really matters; we are spending a lot of time on this,” said Kirsty Jenkinson, director, sustainable investment and stewardship strategies, CalSTRS, speaking at Sustainability in Practice at Cambridge University.

That governance includes a leadership team setting targets, and an implementation team providing structured support with a private market and public market working group. Governance also prioritises next steps to maintain momentum. “With something this large, if you can’t break it down you lose traction and natural progress,” said Jenkinson. She noted a bigger challenge to measure and set base lines in private markets – although the majority of the pension fund’s assets are in public, passive allocations.

She added that CalSTRS net zero strategy also incorporates the influence the giant pension fund wields. This includes with policy makers; managing and shifting the portfolio around via active decisions and setting goals around what it can control. Where it has less active control, it will rely on market actors.

Shedding assets

Portfolio implementation around net zero will lead to investors shedding assets, said Anne Simpson, global head of sustainability at Franklin Templeton. She explained how when one investor sells unsustainable assets another buys them in a process that often leads to assets going into private markets where there is less transparency and oversight. “Investors can have a pat on the back because they are decreasing ownership of emissions, but this is not the same as being on the right path,” she said.

Information remains an enduring barrier for investors aligning their portfolios to net zero targets. Investors rely on estimates without standardized mandatory reporting. Simpson urged investors to support the IFRS Foundation’s new standard-setting board the International Sustainability Standards Board, ISSB. Elsewhere she highlighted the need to end the subsidies still supporting fossil fuels and said that a price on carbon would enable investors to price risk accordingly. She also urged investors to focus on systemically important emitters in line with Climate Action 100+ and stressed the importance of climate competent boards.

Benchmarks

Benchmark providers play an important role supporting investors pathway to net zero. They give investors the ability to differentiate between assets on a high carbon business model and those delivering the low carbon solutions of the future. Tools – known as portfolio alignment metrics – enable investors to distinguish the leaders from the laggards as economies adjust to a net zero future, explained Sylvain Vanston, executive director, climate change investment research, MSCI.

He said it is easier to achieve long term targets if investors structure in short term targets on route. And noted pros and cons around temperature metrics, and reflected the different trajectory of a carbon intensive company with an ambitious target to cut emissions in the same sector as a company with no transition plan. Reflecting on the data challenge, he said the benchmark provider uses proxies based on other models when there is no data. MSCI is developing a new framework supporting accessibility of targets, creating new guidance and stronger models.

Data challenge

Jenkinson attributed CalSTRS ability to measure a large amount of the public market portfolio to MSCI data. In contrast, there is no similar plug and play in private markets like real estate and private equity where some of the most exciting opportunities exist to allocate capital to companies providing solutions. “[Data] is asset class specific and depends on what is available,” she said, noting an additional challenge of aggregating up to a total fund level.

Simpson flagged the ESG Data Convergence Project, an initiative by leading global GPs and LPs to align around a standardized set of ESG metrics and mechanism for comparative reporting in private equity. Private equity, attracting criticism for asset stripping and questions about whether it constitutes genuine value creation, will benefit from the transparency, she said.

Simpson stressed the need to move away from traditional discussions around ESG integration (and its fabled ability to cure all things) and change the narrative to one of sustainability of the financial system. The debate needs to be reframed to talk broadly about the purpose of the financial system – whether providing retirement income or mortgages – to ensure better management of the financial capital on which society relies.

 

 

 

When Kimberley Lewis (pictured above), head of active ownership at asset manager Schroders, used to work at Pfizer in the corporate responsibility department she was struck by how investor engagement with the drug company was often wide of the mark. Investors engaged on topics that weren’t the most material to the company; asking questions that Pfizer’s team knew weren’t particularly relevant to the company or sector.

“Do your research,” she urged investors gathered at Sustainability in Practice at Cambridge University in a panel session exploring the key characteristics of good active engagement. “You really need to think about the relevant issues for that company at that specific time,” she said, advising delegates to start comprehensively planning and researching 2023 engagement priorities now, ensuring cadence and materiality to increase the likelihood of success.

Successful active ownership requires investors to outline their expectations to corporate boards and clearly state their aims, she continued. Having set specific asks, she urged investors to track progress but with humility – neither assuming or projecting: investors should claim their stewardship role but balance that with demonstrating positive outcomes.

Active ownership involves clear intentionality, agreed fellow panellist Catherine Howarth, chief executive of ShareAction, the NGO that coordinates civil society activism.  Investors can’t stumble into meetings ill prepared; they need to know what companies should do better with clarity around their asks. Investors should also have a plan of what they will do if corporate behaviour doesn’t change – preferably in agreement with peers seeking change. “People have different appetites for collaboration so collectively ensure you know what you are doing so the group doesn’t fall apart when you run into the first hurdle,” she said.

Engagement at Railpen, guardian and administrator of the United Kingdom’s £35 billion ($47 billion) Railways Pension Scheme, is managed internally mirroring the asset managers own bias to internal asset management – and growth equity. “This is a ripe hunting ground for stewardship,” said Michael Marshall, head of sustainable ownership. Articulating the benefits of internal stewardship, he said it helps ensure alignment between stewardship aims and pension fund beneficiaries, allowing Railpen to tailor its engagement and escalate on a timeline of its own choice. “We care about the issues companies face,” he said.

External benefits

The Universities Superannuation Scheme, USS,  divides its stewardship of investee companies between internal and external management. External stewardship is delegated to carefully selected and monitored managers, explained Phil Edwards, head of manager selection at the pension fund. USS requires managers take clear ownership of stewardship priorities at a senior level and demands transparent reporting so the pension fund can see managers are doing what they say – along with compulsory PRI membership. Managers are selected according to their approach on stewardship and engagement; voting and transparency and the ability to work with others and lead, he listed.

The pension fund also checks managers voting record is aligned with its own principles and seeks relationships from which its own internal stewardship practices can also grow and evolve. “We assess every manager on these issues and the degree of alignment with our own approach,” he said.

Elsewhere USS investment managers can expect an escalation process. For instance, the pension fund recently voiced its concerns about one manager’s stewardship strategy, leading to the manager appointing a new head of stewardship. “We are encouraged – and now want to see changes,” said Edwards. “Escalation with our managers is a serious conversation that can ultimately lead to taking away some or all of our assets. We haven’t don’t this yet, but we would if we felt a manager was not taking action in a way we would like.”

Skills shortage

Panellists also noted the workload ESG teams face meeting disclosure and internal stewardship requirements. Investors are buying-in and developing internal stewardship skills, but recruitment is hard in the current market as the race for sustainability talent increases. “If you are going to do stewardship internally, prepare to be patient and pay,” warned Marshall.

Make it matter

Pension funds should ground stewardship programmes in the key interests of their own beneficiaries. Outside climate (in everybody’s interest) ShareAction’s Howarth noted health was a priority for many beneficiaries. “When you ask people what matters, health comes above income,” she said. This could lead to pension funds engaging on issues like a sugar tax. She also noted how more investors are engaging on biodiversity where strategies could focus on the agro-chemical industry.

Her point was echoed by Railpen’s Marshall, who noted that stewardship at the pension fund chimes with issues close to its beneficiaries like workplace rights. “Members views are reflected in the themes we adopt,” he said.

Collaboration

Howarth stressed the importance of collaborating with groups, citing ShareAction’s engagement on the living wage with the supermarket Sainsbury’s, working alongside NEST and Fidelity International. Elsewhere, engagement is best focused on sectors because it leads to whole industries moving forward. Panellists concluded with a nod to encouraging signs of investors getting more assertive and intentional about what they want to achieve, as well as a growing number of collaborations between asset owners and managers.