Sustainable Investment And The Race to Zero Emissions During The Covid-19 Pandemic -

JP Dallmann

CEO, ILA & Partners

Extinction Rebellion Climate Change Action In London. Coronavirus / Covid-19. Sustainability

The coronavirus disease (COVID-19) threw the world’s health, economic and financial systems into disarray, but the pandemic did little to distract the U.K. from the climate crisis. A recent survey by Ipsos shows two-thirds of Britons consider climate change to be as serious as the pandemic, and the majority support a green economic recovery.

Their voices are not unheard, since leaders at all levels of society are strategizing ways to “build back better” for our planet. The UN’s Race to Zero initiative is the latest push towards net-zero carbon emissions by 2050 and forms an alliance of leading net zero movements representing 21 regions, 441 cities, 992 businesses, 38 investors and 505 universities. These ‘real economy’ actors are united with 120 countries in the world’s largest coalition to reach net zero emissions by 2050 and, together, reflect about 25% of emissions globally and over 50% of global GDP.

The Focus on Climate Crisis Is Still a Priority

During this period, the financial sector saw sustainable funds experiencing a net inflow of £37 billion globally amid the panic of Q1, while investment funds overall had a net withdrawal £302.8 billion over the same quarter according to Morningstar.

The recent acceleration of investment to such funds reflects the increasing growth in sustainable investing as a whole, but more progress is required in terms of divestiture from international oil companies (IOCs), as well as in public-private coordination necessary to achieve net-zero emissions by 2050.

Fossil Fuel Giants Slated for Losses

The oil and gas industry was dealt a major blow in Q1 due to the combined effect of the pandemic and price war. In March, the termination of the alliance between OPEC and Russia resulted in a near-historic drop in oil prices, weighing heavily on oil stock prices. BP Plc (BP) first quarter profit fell 66% due to the economic impact of the coronavirus and is among other oil and gas companies struggling in the face of slashed oil demand due to the global lockdowns.

Currently, the sector is projected to lose $1 trillion in revenue in 2020, a 40% decline from $2.46 trillion last year to $1.47 trillion, according to research firm Rystad Energy. Prior to the pandemic, Rystad predicted total IOC revenues to increase to $2.52 trillion in 2021, a figure now adjusted to $1.79 trillion.

As governments and investors shift away from traditional energy in favour of renewable energy, IOCs increasingly face the problem of ‘stranded assets,’ whereby vast oil, gas and coal reserves lose their economic worth should regulations limit the burning of fossil fuels. Nearly $900 billion — one-third the current value of IOCs globally —would be written off if governments accelerated efforts to restrict the global temperature rise to 1.5 degrees Celsius, according to theFT.

In result, the cost of capital for IOCs has already begun to increase, with share prices of businesses across the sector experiencing lower valuations than five years ago.

The Bigger Picture and Impact Companies

During a conversation with Lord Browne of Madingley, Former CEO of BP, about the role of IOCs and exclusion of these companies as a sustainable investing strategy to help achieve the emissions target, there was a realisation that there is not a one-size-fits-all solution. To begin with, some countries, particularly those less developed, may struggle to transition as fast as others with more resources, innovation and technology.

The Prince Of Wales Presents The Queen Elizbeth Prize For Engineering to Lord Browne of Madingley.

To complement the complexity of a potential solution formula, and as he highlights in his latest book — “Make, Think, Imagine: Engineering the Future of Civilisation” — there is a key role for companies trying to find a solution or alternative to the challenges we are facing and a brighter future. These companies include those that can initially help offset the negative impact generated by the carbon creators, such as carbon capture, but there are a wide range of alternatives that can contribute immensely to the net impact. These can vary from new ways to generate cleaner energy from waste, to the creation of a vegetarian meat that is accepted and consumed by the masses.

Leaders Committing to Action

The coronavirus is set to cause the largest annual fall in CO2 emissions in history, according to analysis performed by Carbon Brief. Although without climate action, emissions will return to previous levels when industry and transportation return to normal, according to experts.

In response to the Trump Administration’s formal announcement to withdraw from the Paris Agreement in 2019, many leaders are taking action. Among them, there is John Kerry, who launched a new bilateral American coalition in an effort to achieve zero emissions by 2050. The initiative, World War Zero, aims to raise awareness around the climate crisis by hosting one million conversations with leaders across the political spectrum in 2020.

Former US Secretary of State John Kerry speaks at the COP25 Climate Conference.

While the global pandemic remains the immediate priority for governments, policy makers and regulators should remain steadfast in their efforts to limit the global temperature rise to 1.5° Celsius as per the Paris Agreement.

Sustainable Funds Setting Records

Sustainable funds are attracting investment at record rates, and U.K. firms are seeing the effects. For instance, WHEB Asset Management — a global listed equities fund focused on the low carbon transition — grew their FP WHEB Sustainability Fund from £226 million to £431 million in Assets Under Management (AUM) over the past twenty-four months.

Seb Beloe, Partner and Head of Research at WHEB, recently spoke on the Impact Leaders podcast, highlighting the significant increase in interest in sustainable investing over the past year from both institutional and retail investors.

Seb Beloe from WHEB Asset Managemen at the Impact Leaders podcast

Regarding the fund’s investment philosophy and returns, Mr. Beloe said: “We don’t own any oil and gas companies or any of the oil field services businesses that work with big extraction companies, and that has been a tremendous benefit to the fund to the tune of four or five percent.”

Overall, sustainable funds were resilient when tested by the Q1 market sell-off. Their success is in part due to the inflow of cash from investors who prefer the defensive quality of Environmental, social, and governance (ESG) stocks in a downturn, combined with the increasing trend towards sustainable investing by both institutional and retail investors.

Investors Deploying Capital with Purpose

A recent Natixis survey of 500 global institutional investors found that 96% of institutional investors claim they are vital in addressing climate change and other ESG issues.

Two-thirds surveyed believe that ESG analysis has a place alongside fundamental analysis, and about half say institutional investors:

• Should influence the policies and actions of portfolio companies (49%)

• Should deploy capital to address global problems such as climate change (48%)

Europe accounted for 72.5% of the £37 billion attracted to the global sustainable universe in Q1, reflecting the many years of favourable sustainable investing regulations within the EU. The U.S. followed, accounting for 23% of global sustainable investing inflows, according to Morningstar.

Asset Owners Embracing the Opportunity

A majority of asset owners worldwide now incorporate ESG factors into their investment processes, according to a new survey by the Morgan Stanley Institute for Sustainable Investing.

The survey polled 110 public and private pensions, endowments, insurance companies and other big asset owners, finding:

• 78% agree that sustainable investing is a risk mitigation strategy

• Adoption of sustainable investing increased from 70% in 2017 to 80% in 2019

• 57% can envision allocating only to investment managers with formal approaches to ESG

More recently, Blackrock BLK +2% announced the County of Swansea Pension Fund and North East Pension Fund are the latest local government pension schemes (LGPS) to invest in the Global Renewable Power III (GRP III). Nearly 20% of the £1.17 billion raised in GRP III are invested by LGPSs, comprising £188 million, according to Institutional Asset Manager.

Danish pension fund MP Pension is the latest big asset owner to join the UN’s Net-Zero Asset Owner Alliance (AOA), divesting entirely from the remaining twenty-four IOCs in its portfolio.

Jens Munch Holst, CEO of MP Pension, said: “as investors, we need to play our part in making sure the economy recovers from the impact of the COVID-19 pandemic in a more sustainable way,” adding: “now is the time for the countries of the world to seriously deliver on the promise to break the curve.”

Wind Farm on Blue-violet splendour on reference fields

Conclusion

There are many potential solutions depending on the area we are looking at, which we need to search for and understand, so the right combination can be created to solve for the overall global challenge of restricting the global temperature rise by 1.5° Celsius.

The fight against climate change is advancing in the wake of the coronavirus pandemic. Clean energy is a top priority for governments looking to rebuild their economies, but there need to be more collaboration with all stakeholders, to create the right regulations and incentives. The result will accelerate the global effort towards circular economies and net-zero carbon emissions by 2050.

The ESG stampede around high profile funds within the past year and particularly during the coronavirus pandemic is just one indicator of the trend towards sustainable investing. However, such funds often hold large positions in companies that hold high ESG ratings, but whose models may still not be focused on sustainability. These companies have a key role to play in improving or transitioning their business models to provide products that help solve some of the challenges we are facing.

In striving towards net-zero emissions asset owners, investors, and fund managers should focus on achieving emissions reductions targets with an active, forward-looking approach, built into their investment decision processes and models.

Call to Action

If you are a consumer, please monitor your consumption habits and take action to reduce your own carbon footprint and inspire those around you to do the same.

If you are an investor, make sure that the portfolios of the funds you are invested in are congruent with your values, investment profiles and sustainability goals.

If you are a fund manager, carefully consider if your investment processes and strategies are truly sustainable and if your portfolio companies directly help to reduce carbon emissions and have future-fit sustainable models.

If you are in a Government or Regulatory Body, continue to proactively engage with the relevant stakeholders to create the right incentives to accelerate the transition to sustainability.

Finally, if you find this article helpful, please share it to create further understanding. We can only control our most immediate actions!