The impact of climate change is already material, said Woodwell Climate Research Center’s Philip Duffy who warns that thawing permafrost could mean the loss of control of ever being able to manage climate change. Elsewhere, he urged investors to use their voice to bring about change.

The impact of climate change is already material said Dr Philip Duffy, president and executive director of Woodwell Climate Research Center.

Speaking at ‘Sustainability Digital: A Planet in Trouble,” he said that increasing wildfires, hurricanes and rising sea levels are all signs of change with profound economic and social consequences.

Last year’s extreme hot and dry weather in California is a continuation of a trend feeding into wildfires, while storms in the north Atlantic and rising tides and flooding are also part of a long-term trend. In Australia, trends in wildfires will evolve, threatening the east of the country, the most populated area with the highest vegetation. In the Mediterranean additional months of drought every year will lead to water scarcity, fire risk and have an impact on human migration. Duffy also warned of the impact of rising temperatures on crop failures.

Unstoppable momentum

Melting permafrost will also have a “major impact on life on earth,” said Duffy, who works with governments – as well as some institutional investors including CalPERS and OTPP – to help inform policy decisions. Permafrost is thawing as the Arctic warms, emitting carbon dioxide and methane in a vicious circle whereby the more the frost thaws, so it speeds up the thaw.

“We risk losing control,” he said, explaining that even after humans stop emitting greenhouse gases the warming will continue.

“We don’t know the probability of this, but it is a risk, and a risk we haven’t got to grips with yet.”

Meanwhile, he said a key consequence of climate change is that parts of the world will become difficult to inhabit with implications for migration.

“The potential for large scale migration and political uncertainty concerns me,” he said.

In a sobering message to delegates comprising over 300 global investors with a combined AUM of $12.7 trillion, Duffy explained that when we stop emitting greenhouse gasses, the impacts of climate change won’t reverse – they will just stop getting worse.

However, he stressed the importance of action now, and observed from his vantage of years working on climate change that “people are finally getting it.”

He said there is “no such thing as it being too late” and said strong action now and into the future will push the negative consequences of climate change into the future, making a “liveable” future more likely.

Duffy outlined the challenges of climate capture technologies that remove carbon, explaining that the technology and energy use is expensive. It is easier to slow emissions via man management or natural methods like restoring carbon to agricultural soils and re-forestation.

“It won’t get all the way, but this is something we can do right now and it’s inexpensive,” he said, adding that there is growing interest in agricultural methods that restores carbon to soils.

Duffy’s work includes advising pension funds like CalPERS and Canada’s OTPP on how to evaluate assets through a lens that takes into account physical climate risk.

“When we started this, it was something quite new; it wasn’t something investors were used to thinking about when assessing where to allocate capital.”

Duffy also explained that some regions and countries could benefit in the short term from climate change. For example, Russia and Canada may find more land suitable for agriculture. However, he stressed that long-term “we all lose” because of the impact of migration and political instability.

He urged rich countries, that have contributed most to climate change, to do more to help poor countries which have contributed the least but stand to suffer most.

“Like with COVID, it is in the interests of rich countries to help poorer countries,” he said.

Emerging economies are potentially significant sources of emissions going forward and if they develop their economies using fossil fuels, it will exacerbate the problem.

“It is in our own interests to help them develop their economies with low carbon and help them cope with climate change.”

He concluded that change hinges on increasing wealth but via lower carbon solutions – rather than asking people “to make do with less” – and espoused investor power.

“The financial industry and business sector has a strong political voice if they decide to use it.”

Sharan Burrow, general secretary of the International Trade Union Confederation, is calling on investors to do more to fix what she calls a broken labour market.

In an impassioned call to delegates at “Sustainability Digital; A Planet in Trouble,” Sharan Burrow, general secretary of the International Trade Union Confederation which represents 200 million workers in 163 countries called on institutional investors to do more to protect workers rights.

She said investors can choose to have an impact and shouldn’t put “making a profit” before “dehumanizing workers.”

She said investors need to ensure they are supporting democracy and that their capital is going to build strong companies that contribute to jobs and security. Moreover investors have a stake in repairing the broken social contract between workers and business because they invest workers capital.

A labour market that offers no security for workers or adequate retirement provision is good for neither business, investors or sustainability, said Burrow.

In what she called a “moment of truth,” she asked if business leaders and investors are prepared to reform the current model. She warned of conflict, already visible, if this didn’t happen, and noted that investors willingness to make change is often dependent on change not “effecting their environment.”

Burrow also highlighted the importance of a Just Transition that creates new jobs for those whose jobs disappear in the new economy. She highlights the auto sector particularly, where the transition to a low carbon economy is already having an impact on jobs and skills.

“Labour’s share of income has slumped and so many workers live day to day,” she said, calling for equality of race and gender to rebuild trust. “All investments must have a rights and sustainability lens; ESG is no longer an option.”

Burrow questioned whether global monopolistic companies were sustainable, suggesting they should be broken up.

She said workers need occupational health and safety, a minimum living way and control over the number of hours they work.

Reflecting how the Biden administration will impact workers rights, she noted the conflict inherent in the US between strong unions on one hand and resistance to human rights and labour laws from business that comes from the top on the other.

However, she said Biden was “a friend” to the union movement and would support freedom of association, but that he also had an eye on the economy and the urgent need to transition.

Burrow said that it is impossible to build a sustainable economy that doesn’t include benefits for labour and people. She also flagged worrying challenges in democracy, concluding that “many young people” no longer believe that democracy is good for them.

Nobel Prize winner Professor William Nordhaus, Sterling Professor of Economics and Professor of Forestry and Environmental Studies at Yale University, explains his theory of ‘No Regrets’ whereby companies can integrate ESG at a level that brings real benefits for society but has limited impact on the corporate.

Companies integrating ESG need to examine how they deal with the harmful externalities that they generate. By reducing the damaging spill overs of corporate activity like pollution, but without huge financial costs or damaging shareholder value lies at the heart of ESG integration, said Professor William Nordhaus, Sterling Professor of Economics and Professor of Forestry and Environmental Studies at Yale University.

Speaking at “Sustainability Digital: A Planet in Trouble” the recipient of the 2018 Nobel Memorial Prize in Economic Sciences outlined the arguments in his book “The Spirit of Green,” explaining that ESG holds so many concepts and ideas it is easy to become muddled. By looking at ESG through the lens of reducing externalities that benefit society without real corporate harm brings clarity.

Nordhaus used the analogy of turning down a thermostat to explain how corporates can introduce a policy of ‘No Regrets.’ The heating is still on, just a notch lower so that “we don’t’ feel the difference” but it has a “substantial difference” on externalities.

“We can make substantial contributions to reducing footprints in a win for society at small cost for firms.”

Nordhaus said that many firms achieve a win-win, where good management and governance brings benefits to both the firm and society. Challenges come for companies that act in the interests of society in a way that impacts the company negatively. However, a small reduction in a firm’s carbon footprint has a substantial impact on others. He said that “modest” ESG integration that reduces externalities increases shareholder value in a way that is also a “win-win” that does not mean a company will lose out. It has a benefit for society and comes at a low cost to the firm – and does not trigger a shareholder revolt.

Nordhaus said that investors should choose portfolio companies that apply this principle, selecting companies that reduce their carbon footprint at a low cost and designing portfolios that have lower impact. He said this approach would allow investors to reduce their portfolio imprint “with minimal loss” and he urged investors to “intervene with managers” to design portfolios for lower impact.

Carbon price?

Nordhaus, who outlined his argument for a carbon tax last year, told delegates that he believes a price on carbon is more likely under the Biden administration. However, he said it wouldn’t happen in the near future.

“It requires legislation and a majority in the House and Senate,” he said. He does believe US federal regulations are likely around auto emissions, however.

“I would be very surprised if this was not introduced,” he said.

He also urged governments to facilitate innovation in low carbon technology. The “radical” and “deep change” needed to reach net zero by the middle of the century requires a new landscape of innovation fuelled by a price structure where innovation pays off.

“Profit orientated firms need to have a price structure that reflects this priority,” he said, urging for a price structure that incentivizes private actors to conduct research. “The battery people know what to do; they just need an incentive,” he said.

In broad concluding comments, he said that corporations are increasingly viewed as members of society with economic and ethical obligations. He said ESG integration involves mostly voluntary actions, and said the idea that profits are the “central goal” for businesses is a “misleading compass” that needs correcting. He said containing the impact of climate change is possible if we go about it efficiently and at a low cost, focusing on corporate externalities. “We don’t’ have to go back to the Stone Age,” he said. “You don’t cure a pandemic by holding up in the house. You do it with a vaccine.”

Two of the world’s most influential institutional investors are hitting a brick wall in their attempts to engage with Amazon’s board on workplace safety. Every time the Netherland’s APG and the office of New York City Comptroller, fiduciary to New York city’s five pension funds, try to engage with the board at the tech giant in which they own a combined $6.5 billion they get push back from management.

The duo began engaging with the company about a year ago, in search of a better understanding of Amazon’s workplace safety during the pandemic. Their priority remains exploring the disconnect between what they have heard from workers and in the press, and the information the company puts out, explained Anna Pot, head of responsible investment, Americas, at APG and Mike Garland, assistant comptroller, NYC Comptroller’s office speaking at “Sustainability Digital; A Planet in Trouble.”

The institutional investors want to know what metrics the board is using to ensure staff are safe as a consequence of the company’s well documented investment in measures like masks and COVID tests.

“We have tried to correspond with the board, but every time we try, we receive a response from management,” said Garland. “We have been told in a letter from management that [board] directors meet with investors, but can’t honour all requests.”

 

APG’s engagement with Amazon has involved reaching out to the company and looking at the measures it is taking to safeguard the workforce. The process has revealed that the company has invested a significant amount in social distancing measures, masks and associated health benefits, said Pot.

“It is great to see these measures, but what are the outcomes?” she questioned. Both investors want to see what methods the company uses to oversee the effectiveness of the measures it has put in place; last December they compiled a shareholder proposal, but it didn’t “get the response” they sought.

Garland told delegates that because “the same person” was speaking for the board and management, it was impossible for the investors to have a window into the board’s oversight.

Describing APG as an engaged investor and its stake in Amazon as “significant” with ensuing responsibility and leverage, Pot said the asset manager would continue to engage.

“We want Amazon workers to be safe,” she said. Adding that APG “won’t stop” here but will continue to engage on improving labour conditions in a commitment to progress. Moreover, Pot said she believed engagement will ultimately yield access to the board for further discussions.

“We started a year ago and the company is responding to our requests,’ she said. “They are opening up a bit.”

Both investors’ engagement activity is also focused on the auto sector. Here dialogue is based around how companies are supporting their workforce in the transition to a green economy. A low carbon economy holds consequences for the future size of the sector’s workforce, and the investors are asking questions around how companies are equipping workers with new digital skills and how workers can become part of fast-changing companies.

Garland concluded that although all companies tout their workers as their most important asset, few disclose information about what this means, and how they actually manage their human capital.

Investors from Brunel, Wespath and Robeco talk about the challenges of shaping their net zero portfolios including data, benchmarks and holding managers to account.

The decarbonisation of UK asset owner Brunel Pension Partnership’s £30 billion portfolio, managed on behalf of 10 local authority pension funds, involves multiple strategies, tools and careful manager selection.

Most recently it has come with ramped up due diligence around which investee companies are on a transition pathway, said Faith Ward, chief responsible investment officer at Brunel.

Speaking at ‘Sustainability Digital; A Planet in Trouble,” she told delegates that one of the challenges was aligning the portfolio’s different asset classes to Brunel’s net zero ambitions, most recently a multi-asset credit portfolio.

She cited the importance of ensuring net zero ambitions don’t limit managers and strong stewardship tools. Advocacy at a policy level and via the fund’s membership of collaborative organisations like Climate Action 100+, an investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change, are other important tools.

“It is not just about protecting the portfolio; it is about shifting the portfolio,” she said. Positive allocations to companies leading on energy efficiency or green transport is just as important.

She said one of the biggest challenges is around the availability of net-zero glide path benchmarks. Even when a manager says they are benchmark agnostic, benchmarks still drive behaviour and Brunel is working on how benchmarks drive manager behaviour and how to ensure that it is towards net zero.

At Wespath, which provides retirement plans, investment solutions and health benefit plans rooted in the principles of the United Methodist Church, achieving net zero in the portfolio is now enshrined in investment beliefs.

Other initiatives include working with BlackRock to reposition the passive portfolio to low carbon investments, said David Zellner, chief investment officer at Wespath Benefits and Investments and Wespath Institutional Investments.

“We are trying to identify and tilt to companies on the transition and ensure our investment managers actively consider ESG in their decision-making process,” he said. “We have guidelines for our asset managers on how they should vote and align with a good climate strategy.”

Data

Technology and data are driving research at Robeco, said Victor Verberk, chief investment officer, fixed income and sustainability. The asset manager finds corporate winners and transition ready companies’ sector by sector, finding those with the technology to stay on decarbonisation pathways and with the ability to adapt.

“It is very hard work, you have to make sure you understand companies on the fundamental side,” he said.

In another development, Robeco has launched the first Paris-aligned bond fund. It complies with EU rules on what constitutes Paris-alignment and has involved working with data scientists and developing forward looking indices and sectoral pathways in what he described as the holy grail in actively managed Paris-aligned funds. One learning has been around investing in carbon allowances.

Access to data has also been a key challenge; buying data from all vendors is expensive but essential for portfolio managers. Storing and making the data easy to access and communicable for the whole team is the other challenge.

Robeco has also developed a framework that links companies to the SDGs.

“It is one of our best-selling products,” said Verberk. “As more regions adopt the SDGs there is more client engagement around SDG products.”

Brunel’s Ward referenced new guidance to investors on how best to reach net zero from the Institutional Investors Group on Climate Change (IIGCC) via its new Net Zero Investment Framework (NZIF).

The framework outlines strategic asset allocation, strategy design and asset class specifics across listed equity, bonds, infrastructure and private equity for net zero. It is a comprehensive framework, covering all bases and equipping investors to take next steps, she told delegates.

The conversation also touched on the importance of holding managers to account. At Wespath this involves manager reviews, questionnaires and holding them to account.

“We identify areas we can improve,” said Zellner, adding that the goal is to ensure investment managers understand Wespath’s beliefs and views.

Ward concluded that Brunel has made a commitment to a Just Transition, ensuring those that are impacted by the economic shift inherent in net zero are not left behind. The fund has joined a coalition that works to finance a Just Transition, allocating capital to support it.

“We have metrics to allow us to evaluate a company’s response to a Just Transition,” she said.

Sustainability bonds issued by sovereign governments in developing and emerging markets offer exciting investor opportunities. The proceeds are used for impact and allow investors to target real change in sectors like health and education.

Sovereign debt investors in emerging economies are increasingly changing strategy to integrate sustainability, said Farah Hussain, senior financial officer at the World Bank Treasury which has issued debt in the capital markets to help developing countries finance their economies for more than 70 years.

Speaking at ‘Sustainability Digital; A Planet in Trouble” she observed a huge investor shift towards sustainability, outlining the bank’s work with both investors and the finance and debt management offices of sovereign governments in emerging economies to help them to understand their financing options.

She said that building an ecosystem that will attract investors involves developing green bond regulations and taxonomies.

“It is really heartening to see how the green bond market has developed and attained a critical mass,” she said. “Add to this social and sustainable-linked bonds, and we expect this market to really blossom.”

However, she noted that the market only accounts for a small share of total emerging market issuance and that state-owned industries in emerging economies particularly need to connect with investors to channel finance to sustainable activities.

Furthermore countries need to do more to connect with investors on sustainability. She urged debt management offices in emerging economies to capture the moment with timely data and information.

“It is very important that public debt management officers and finance ministries engage with investors and ensure they have the most up to date information,” she said.

She highlighted Uruguay’s high positioning in ESG indexes because it proactively and consistently provides good quality ESG information for investors although it has never issued a sustainability bond.

Mary-Therese Barton, head of emerging market debt at Pictet Asset Management, described institutional investment in sustainable emerging market fixed income as the missing part of the ESG jigsaw.

Encouraging signs of change include more detailed reference to ESG in emerging market sovereign bond roadshows. For example, investors recently questions Saudi Arabia on female participation in the work force, she said. Other signs of progress include Chile announcing it will only issue sustainable Eurobonds in the future.

“It is setting the scene for ESG integration in the emerging bond world,” she said.

Panellists said it requires a new level of investor research and dialogue – and sovereign engagement. For example, investors will need insight into school funding programs in South Africa, or health initiatives in Brazil. It’s a new process for investors, many of whom have historically said it is too hard to integrate ESG into sovereign bond allocations where there are no voting rights.

The World Bank’s Hussain noted other encouraging signs of change like local pension funds in markets like Mexico increasingly buying their own sovereign sustainable debt.

The discussion espoused the importance of stewardship, governance and transparency. If governments create strong frameworks to ensure transparency in the use of proceeds, sustainable bond issuance could unleash a wave of finance that bypasses short electoral cycles. The panellists discussed how investors have often struggled to navigate risk in emerging markets, but in a win-win, sustainable bonds could unlock the growth that makes emerging markets less risky. It would override volatile electoral cycles and target funds in social areas like education and climate change that have held back development with a material impact on growth.

Hussain explained that many investors have a lack of knowledge of the asset class. A large part of the World Bank’s role is working with regulators to help build understanding of the investor benefits, particularly around diversification, pricing and impact. She said for smaller emerging economies it is particularly hard to access the right investors. Elsewhere, the World Bank helps investors navigate the currency mismatch and argues the case for these types of bonds to be part of their strategy.

Barton added that sustainable bonds could attract mainstream bond investors. She urged practitioners to tool up and take ESG integration to the next level. She noted that much of the volatility in emerging markets is linked to fast money, but emerging market debt investment is long term and dampens volatility. As for illiquidity concerns, she said sustainable bonds are outperforming counterparties offering investors performance with purpose and attracting more capital.

Hussain concluded that the World Bank is currently working on developing three taxonomies designed to give investors more clarity and comfort about what they are financing.

“We have done a lot of work in this area,” she said, adding that the work involves addressing benchmark concerns and working with small economies. “There will be a number of ground-breaking transactions from emerging market sovereigns this year. We are very hopeful about this asset class,” she said.