Swedish climate activist Greta Thunberg addresses plenary of UN climate conference during with a meeting with leading climate scientists at the COP25 summit in Madrid. Photo / AP
Swedish climate activist Greta Thunberg addresses plenary of UN climate conference during with a meeting with leading climate scientists at the COP25 summit in Madrid. Photo / AP
Teenage climate activist may think change is not coming fast enough but bosses are on the case, writes Garry White.
Chief executives of the world's major companies are more concerned with PR stunts that make their companies appear "green" while not really doing anything to benefit the environment. That's accordingto teenage activist Greta Thunberg, who pointed the finger at bosses of the world's major businesses at the COP25 climate summit in Madrid this week. But, on this issue, Thunberg is dead wrong. Many company boards are taking this issue very seriously indeed; their bonus payments could depend on it.
"I still believe the biggest danger is not inaction, the real danger is when politicians and CEOs are making it look like real action is happening when in fact almost nothing is being done apart from clever accounting and creative PR," Thunberg said.
But real changes are being made and they are being driven by investors – and companies that fail to take this issue seriously are likely to see their share prices punished. With many chief executives' remuneration packages tied into share price performance, this is an issue they will not ignore.
Major investors are increasingly using positive screening and actively disinvesting from companies that do not meet the right environmental, social and governance (ESG) criteria. The number of indices and tracker funds that play into the ESG theme is increasingly rapidly. Data providers are now also giving firms ESG scores fund and investment managers can use to assess whether to invest.
This week, the UN-backed Principles for Responsible Investment (PRI), an international network of investors, argued that markets had not adequately priced in the likely near-term policy response to climate change. "This leaves portfolios exposed to significant risk and investors need to act now to protect and enhance value," the PRI said.
Its analysis concluded that up to $2.3 trillion ($3.4 trillion), or 4.5 per cent, could be wiped off the value of companies in MSCI's global index. The energy sector is expected to be hardest hit, then autos, mining and utilities. This matters for UK-based investors as the FTSE 100 has a very high weighting of companies in these sectors.
This week US oil behemoth Chevron said it was writing down as much as US$11 billion of assets after it changed long-term assumptions about energy prices. This is partly down to a glut of gas in the US, but is also a result of policy decisions by governments to encourage the switch to alternative energy sources throughout the world.
Greta Thunberg was named Time's youngest person of the year. Photo / AP
The shipping industry faces new regulations from January 1, when pollution rules take effect. To reduce emissions of toxic sulphur, shipowners will have to either switch to a low-sulphur fuel or install exhaust gas cleaning systems. It has been estimated the industry will have to invest around US$10 billion.
Ethical investing used to be all about excluding businesses that were harmful or went against certain principles: in the 18th century Quakers prohibited investments in anything related to the slave trade, and Methodists refrained from industries that "harm one's neighbour".
However, ESG investing is not about exclusion alone. It moves away from a pure negative-screening approach, to focus on companies that take a positive approach to managing these issues.
This is something the investment industry has been working toward for many years. The term ESG was first heard at the Who Cares Wins conference in 2005. Institutional investors, asset managers, research analysts, global consultants, government bodies and regulators examined how investors and asset managers could have a positive impact on the world. Slowly this has been growing in importance since then.
A recent Morgan Stanley study showed that 75 per cent of the population is interested in sustainable investing, with 86 per cent of millennials expressing an enthusiasm. The latter cohort is significant as the inheritors of wealth. Indeed, high net worth (HNW) individuals are increasingly becoming aware of the risks to family wealth should they not consider ESG.
A report last week by Boston-based consultant Cerulli Associates indicated that 58 per cent of HNW investors in the US actively use such investment strategies and plan to further increase their allocations in the next 12 months: "The concept behind ESG resonates with HNW investors due to their comfort levels in investing in innovative areas that provide impact and because of their deliberate focus on sustaining and protecting their wealth."
Investing using ESG principles is in its early stages. It is also difficult for an individual to outsource their morals to a fund or investment manager as everyone has a different point of view. Nevertheless, the view that firms are not really doing anything to make positive changes is just wrong.
As more investors choose ESG benchmarks over traditional indices, the difference between being an ESG "winner" and "loser" could become much more meaningful. As demand wanes for shares in firms that do not meet these criteria and increases for those that do, there is a real incentive for chief executives to act. Greta Thunberg is therefore wrong to say bosses are paying lip service to this issue. She could argue the pace of change isn't fast enough, but change is definitely afoot.
