“The world is burning now.” The message was blunt from climate change investing champion Michael Salvatico, of S&P Global. But it’s getting harder, not easier, for investors who want to do right by the planet.
Where once fund managers could simply exclude gambling, armaments, oil or tobacco companies andclaim sustainability, these days they’re talking everything from “materiality” to the overlap between climate and nature.
The changes can be mind-boggling. Earlier this year, the UK classified nuclear power as “environmentally sustainable”, which compared to fossil fuels it may be.
Salvatico, whose team is behind many of the sustainable investing indices used by some KiwiSaver and other fund providers in New Zealand, was speaking at the Responsible Investing Association of Australasia [RIAA] conference.
The changing world was clear to see. Up until 2011, climate change wasn’t even considered to be a systemic risk for companies, Matt Whineray, RIAA chair and chief executive of the NZ Super Fund told the audience. Fast-forward to 2021 and the Government introduced legislation to make climate-related financial disclosures mandatory for the biggest publicly listed companies, large insurers, banks and investment managers.
As Whineray said: “There’s not much point in building up this pūtea, this store of wealth, if in doing so we’re creating an unliveable environment for future New Zealanders.”
Climate conferences are full of buzzwords. This year it was scopes, nature risk and materiality to name a few. Scopes relate to climate reporting and are going to become increasingly important in New Zealand. Scope 1 is emissions a company makes directly, such as by running its factories; Scope 2 it makes indirectly, by buying energy and electricity; and Scope 3, the tricky one, is the emissions a company isn’t directly responsible for from its supply chain. An example is Fonterra’s Scope 3 emissions from farms, which make up 90 per cent of the company’s carbon footprint. It’s working on that.
Divesting in polluting companies, which was hot 10 years ago, is being replaced with a growing emphasis on buying shares to engage with companies to improve. After all, a heavy polluter that changes its ways may be more valuable for the environment than investing only in companies that do good.
Climate change measures should be a priority for businesses. Photo / 123RF
Greenwashing, and now green hushing where companies avoid reporting to keep themselves from scrutiny, are a problem. Companies will tell us that they have a net-zero target. But is that target in 2025, 2050, or even 2060 or 2070, asks Salvatico. And is it a science-based target, or just words? Worldwide, 37 per cent of companies have net-zero targets. 6 per cent align to science-based targets.
Another issue is companies offsetting their carbon footprint by buying credits. That has become controversial, James Harwood, senior portfolio manager at Russell Investments, told the conference. A company can buy credits from forestry to get its emissions near to zero. But there are only so many forests that can be planted, a tree may take 20 years to pay back in terms of carbon, and with global warming causing wildfires, some may burn down before they do any good.
Materiality is another concept important to sustainable investing that gets very complex indeed. It’s both financial and non-financial (environment and social) and the latter relates to issues where a company’s business has negative sustainable impacts. Debates on how that should be reported run quite deep, Pathfinder ESG analyst Kate Brownsey pointed out. On a very simple level, electric vehicles are good, but mining for their batteries is bad. Where the materiality line is drawn is what’s up for debate.
Another issue that KiwiSaver and other fund managers consider is planetary boundaries, said Brownsey. That’s a framework that describes limits to the impacts of human activities on the Earth’s system. Beyond these limits, the environment may not be able to self-regulate any more.
To round it all out, one of the newest frontiers and a hot topic in sustainable investing is nature and biodiversity risk. Nature-related risk encompasses ecosystem degradation and environmental risk. This was really only identified in 2021 by the World Economic Forum as an issue that should be reported on by fund managers such as KiwiSaver managers. It’s more difficult to measure than global warming, which can be boiled down to degrees Celsius.
Private individuals can but do their best. If in doubt that you’re being told the truth by the flashy marketing material, check out comparison sites such as Mindfulmoney.nz.
