No more posturing — impact matters more than dogma in the fight against climate change
“As the number of products that claim to be linked to firms’ sustainability performance increases, we need to be careful to ensure that investors do not end up buying products that are marketed as sustainable when in reality they are not”.
That’s the view of Steven Maijoor, chair of the European Securities and Markets Authority. And he has a point.
As the “ESG” trend — that is, investment focusing on environmental, social, and governance factors rather than profit alone — gathers pace, the question of what actually constitutes a sustainable product and what the criteria should be for assessing sustainability has become ever more pressing.
Like so many other businesses, asset managers have are now ESG players, producing extensive messaging on the “E for Environment” aspect. Greenwashing is widespread, and we are witnessing a no holds barred game of one-upmanship.
In this jungle, it is all too often impossible to understand the concrete objectives of ESG funds, or assess how sustainable a particular product may be.
At this point, it is necessary to restate the obvious: the main remit of asset managers is to grow the savings of their clients. Happily, integrating environmental impact in our analysis of the companies in which we invest has been shown to continue to long-term value creation.
Today, nobody would dare challenge this view. The latest research underscores the reality of climate and greater awareness among civil society should convince any last doubters. That in itself is very good news.
Moreover, on a personal level, how could anyone not be glad that asset management is becoming a key player in the change of business practices towards an economy that is more environment-friendly?
But while the case for sustainable investing is not in doubt, the reality of how to do it in practice is far less clear-cut. And some of the prevailing attitudes could in fact be counterproductive.
Today, the majority of “green investments” are focused on areas like renewable energy technologies, electric vehicles and energy storage. These are an obvious target, but the reality is that they aren’t enough.
At the current rate of progress, achieving the Paris Agreement target of limiting global warming to two degrees celcius by the end of the century seems impossible. To have a chance of meeting that goal, we need to invest in a way that fosters energy transition in other sectors, and fundamentally review our understanding of the role of industrial companies and commodities in the fight against climate change.
There is too much at stake to tolerate undiscerning posturing or doctrinal positions, which are all too often counterproductive. Instead of dismissing whole sectors as unworthy of green investment, impact must be the sole criterion — and this must be quantifiable and objective.
This requires conviction, proprietary analysis, and a dynamic view of environmental outcomes.
For a start, metals and commodities — sectors rarely regarded as ESG investments — are crucial to energy transition. Copper, steel and nickel, to take just a few examples, are essential for manufacturing electric vehicles and wind turbines and, therefore, for reducing the consumption of fossil fuels.
An investment policy that excludes mineral extraction, on the grounds that it is a polluting activity, is a genuine barrier to energy transition.
As asset managers, we should instead select the companies within these sectors that have the best growth prospects because they provide the products and services that enable other businesses to reduce their emissions.
Next, we should recognise that the companies with the greatest potential to reduce carbon emissions are those that are the most carbon intensive, whether it is from their operations or use of their products. Ruling out investing in the economic spheres that rely the most on carbon is an error of judgement.
Asset management must support the companies that, in their operations, make an active commitment to using renewable energies and preserving the ecosystem in which they operate by reducing negative externalities. We must then rigorously assess the progress achieved.
Finally, we must focus our investments on companies capable of offering less carbon-intensive products and services than their competitors since we believe that this is a driver of long-term growth.
Only a bold and pragmatic approach, capable of rejecting false assumptions and popular misconceptions when necessary, can have an impact and meet the immense challenges facing our societies as a result of climate change. For our part, we are ready to take our share of responsibility and play an active role by investing, in line with our remit, in a way that supports energy transition.
We urge others in the industry to put aside dogma, and focus instead on the one thing that truly matters: impact.
Main image credit: Getty