Shell oil sign

Big firms the world over are being targeted by a clutch of recent reports urging them to wake up and change their approaches to tackle the planetary emergency.

The safest way to do this is to invest in renewable energy and energy efficient assets and to adapt infrastructure – natural and artificial – to protect against extreme climate events.

BREAKING NEWS 9 PM 12 March 2019, see the call by the Reserve Bank of Australia for action on climate change. Full speech here

According to the people in the know, businesses need to understand three things: the scale and pace of environmental breakdown, the implications for societies, and the subsequent need for transformative change. This is the headline case from the Institute for Public Policy Research in its recent publication This Is A Crisis: Facing Up To The Age Of Environmental Breakdown. 

Catastrophic changes are “occurring at speeds unprecedented in human history and, in some cases, over billions of years,” the institute says, citing numerous scientific sources.

It argues that we need all hands on deck for a “socioeconomic transformation to achieve a ‘safe and just space’ for human activity, bringing it within environmentally sustainable limits while tackling inequalities and providing a high quality of life to all”.

But what does this mean for investors, particularly in the built environment and infrastructure?

Investment choices

Investors pondering how to address climate change need to be very mindful of their objectives, whether it be minimising risk or achieving impact, according to Climate Impact: What it is and how to achieve it: A guide to realising climate impact across asset classes, from Institutional Shareholder Services, a provider of corporate governance and responsible investment solutions. 

To achieve impact in the real world, they have to choose the type of actions they take very carefully. They can for example choose to invest less in a certain type of bond (divesting from fossil fuel companies), to increase their exposure to green or similar bonds, or to engage with bond issuers or clients to change their behaviour along the value chain.

Divestment is increasing

Divestment is rising – see Norway’s recent decision to sell about $7.5 billion in stocks in oil and gas from its $1 trillion fund. 

Norway’s finance minister Siv Jensen defended her decision to keep the big oil companies like Royal Dutch Shell Plc and ExxonMobil in her portfolio, because of their increased investments in renewable energy, that is, she felt that by remaining an investor Norway could influence their behaviour for the better, to take a charitable view.

Or perhaps more relevant is that Norway’s $1 trillion fund plus large chunks of income from its own offshore oil and gas fields helps pay for its enviable welfare state. 

At some point, this too has to change because it’s just not sustainable. 

Norway – like every other rich country – can’t keep on forever providing a high quality of life to all its citizens and get back to within environmentally sustainable limits without a complete overhaul of the way its economy works.

The impact of the divestment trend is not yet visible in the market. 

“To illustrate the importance of divestment from certain type of issuers if we are to reach the 2° [warming] target, one has to consider the abundant amount of cheap finance to non-compliant issuers today,” says the ISS report. “[But] although the impact of the divestment movement cannot yet be seen in bond prices, the strategy sends strong signals to the markets about the vulnerability of certain investments to climate change.”

No guaranteed protection from risk

Changing behaviour can reduce risk and add value. However, another recent landmark report from Ernst & Young, Climate Change: The Investment Perspective, says that reducing exposure to coal or any other vulnerable sectors, while necessary and desirable, “cannot protect investors from climate risks” on its own. 

It quotes Julian Poulter of the Asset Owners Disclosure Project: “the scale and breadth of these risks mean they simply cannot be avoided or diversified away. They will impact all sectors and asset classes in different ways.” 

source: Institutional Shareholder Services

Construction is particularly vulnerable

The EY report lists the construction sector as one of five sectors that are particularly vulnerable because of their thirst for energy. To identify the correct strategies, “investors need a scientific approach based on detailed emissions data at individual asset level,” says Ben Caldecott, leader of the University of Oxford’s Sustainable Finance Programme.

Certain actions are more likely to create impact as they are more directly linked with potential changes in company behaviour (for example, shareholder voting, and engagement with clients). 

However, a specific action cannot often be linked with absolute certainty to a specific impact. To do so, a baseline needs to have been established of where a corporate is and what would have happened otherwise – not always easy.

Actions can also lead to unintended consequences outside the power of the investor to influence.

And an investor’s action can have impact without necessarily being additional to what would have happened anyway. For example an investor might give a cheap loan for a low-carbon project, but this is only additional if the resulting project would not have been built anyway. 

The EY report adds that financial institutions need to respond to the actions of other players in the investment value chain too, not to mention the shifting agenda of stakeholders including governments, regulators, customers, staff and the media. 

But it does highlight one area of certainty: “renewable energy and energy efficient assets have the potential to generate stable cash flows to fund the costs of debt.

“On one hand, existing real estate assets can be highly vulnerable to the physical effects of climate change. On the other, one third of global greenhouse gas emissions are a result of energy use in construction, presenting large opportunities for climate change mitigation.”

Insurance will be thin on the ground if risks to real estate are not addressed

Another recent report, Climate Risk and Real Estate Investment Decision-Making, from the Urban Land Institute and Heitman, a real estate investment management firm, warns that access to affordable insurance depends on being able to respond to future risks. 

Real estate industry professionals are beginning to evaluate physical risks associated with properties they own, says that report. The most far-seeing are using more environmentally sustainable materials, more renewable energy sources and less fossil fuels, and developing projects with zero carbon footprints and minimal adverse environmental impact. 

They are also factoring in adaptation to extreme climate events that are becoming more and more likely.

The rest of the industry needs to follow. 

The Asset Owners Disclosure Project has just discovered that 87 per cent of leading pension providers haven’t yet factored climate change into their assets, but those who have, have established that it’s possible for all of them to do so. 

The rest of the world must wake up and smell the coffee, fast – before, in fact, there is no more coffee – a highly possible consequence of climate change.

David Thorpe is the author of  Energy Management in Buildings and Sustainable Home Refurbishment.

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