Climate change is facilitated and accelerated by the large corporations responsible for pollution, and the institutions which finance them. Conventional wisdom has supposed that transitioning to a green and sustainable future is too expensive for these companies to countenance; vested interests oppose attempts to wean society off the products and activities which contribute to the crisis.
This picture is slowly changing, however, and there might be cause for optimism. Pressure from investors, as well as an appreciation of the material costs of not responding to climate change is slowly narrowing this ‘money pipeline’.
According to the Rainforest Action Network, Barclays has provided more than £100bn to the fossil fuel industry since the signing of the 2015 Paris agreement. Since 2016 Chase Bank has lent $196bn to the fossil fuel industry, claims Stop The Money Pipeline. Clearly UN commitments and national policies have done little to disincentivise big corporations
But a lack of proper regulatory oversight does not necessarily mean big corporations are free to behave as they wish. Those who provide the capital to the biggest villains of this crisis have a lot of power; they own (some of) these companies.
According to Sir Christopher Hohn, a hedge fund manager, “if governments won’t force disclosure, then investors can force it themselves […] Investors don’t need to wait on regulators who are asleep at the switch and unwilling or unable to regulate emissions properly […] They can use their voting power to force change on companies who refuse to take their environmental emissions seriously. Investors have the power, and they have to use it.”
The growing realisation of the future cost of climate change to those who are currently funding it might also spur investor action. The crisis will devalue some resources, whilst raising the prices of others. The FT estimates that as much as $900bn worth of fossil fuel reserves will be written off if governments take action to keep global warming under 1.5C, whilst McKinsey estimates that in Florida alone increased flood exposure could knock $30bn to $80bn off residential property valuations by 2050. Investors have a capacity, or even a responsibility, to demand recognition of the damage climate change will do to their investments.
Chris Hohn, again, says that “the risk of a coal loan is accounted for by banks and regulators as investment grade, when in fact they are high-risk in nature”. His hedge fund, The Children’s Investment Fund, is taking on the likes of Airbus and Moody’s, threatening legal and board action against those who are not transparent on their climate policy.
A focus on sustainable investing has, contrary to some expectations, yielded strong results. Bloomberg reported last month that ‘Investors who piled into ESG (environmental, social and governance) stock strategies have beat broader indexes this year, fuelling speculation that the strategy of prioritising companies doing social good will continue to gain adherents well after the current [coronavirus] crisis passes.’ A majority of exchange-traded funds focused on companies with above-average marks for ESG practices have outperformed this year, according to research from Bloomberg Intelligence.
This climate consciousnesses is reaching some of the loftiest boardrooms in the City. The largest asset manager in the UK, Legal & General , has sold out of Exxon Mobil in some of its holdings, and also used annual meetings to vote against chairs of businesses deemed to be failing to meet the climate crisis.
11 big investors filed a resolution calling on Barclays to phase out financing companies not aligned with the Paris agreement, which has won the backing of Church of England, and NEST (the UK’s largest pension fund).
BlackRock, the world’s largest asset manager (controlling $7tn) has risen to the fore of the ESG rhetoric. Larry Fink, its CEO, wrote about climate change and its investment risk earlier this year that ‘Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance’.
BlackRock has pledged to integrate environmental, social and governance considerations into all active management decisions in 2020, publish details on the sustainability profile of every mutual fund, begin offering sustainable versions of its model portfolios and set a goal of increasing sustainable assets under management more than tenfold this decade — from $90bn today to more than $1tn.
That said, ‘green finance’ is still its nascency; it has long way to go and still faces several issues. The FT recently reported that directors of the world’s biggest fossil fuel groups were reappointed with 97% support. 6 of the 10 largest ESG mutual funds in America underperformed the S&P 500 in 2019. BlackRock’s pledges only affect its active funds, worth only $1.8tn of its total $7tn pot.
Despite these significant limitations, recent developments in ESG investing have demonstrated that investors have the capacity to be a force for good, and in the absence of clear and effective government intervention, are instrumental to our global struggle against climate change.