Just a few years ago, sustainable investment was viewed as a cottage industry — a niche focus for some asset owners, but not a serious pursuit for the rest. Today, however, asset owners globally can be seen listing climate change as their number one priority. Scott Bennett, director, equity strategy and research at Russell Investments, explains that much of this is due to legislative developments requiring investors to report publicly on the carbon footprint of their investments. But, he adds, asset owners themselves are making fundamental changes to how they invest.
As a prime example, the Caisse de dépôt et placement du Québec recently committed to a 25% reduction in the carbon footprint of its portfolio by 2025 and plans to increase its investments in renewable energy and other low carbon assets by 50% by 2020.
As more and more asset owners look to have a measurable impact on climate change in the years ahead, Bennett says they must look with a critical eye at traditional measures and seek context about what companies are really doing behind the metrics.
To get there, investors need to shift their thinking a bit: “It’s not just about risks — it’s about opportunities associated with climate change,” Bennett explains. “How can we take advantage of the opportunities in the transition from fossil fuels to renewables?”
Doing that means thinking differently about industries that are traditionally pegged as high carbon producers: utilities, for example. “You might think that reducing your exposure to utilities might reduce your exposure to climate change risk,” Bennett says. However, many utilities are investing in building tomorrow’s solutions — “by divesting in them,you are cutting that opportunity from the portfolio.”
Beyond the footprint
To show this, Bennett gives the example of two utilities — Company A, an oil and natural gas company, and Company B, an operator of energy grids with seemingly no carbon footprint on paper. A divestment approach would have an asset owner cut exposure to Company A, while maintaining its share in Company B. But dig deeper, and you’ll soon realize this would be a mistake. In fact, more than half of the energy produced by Company A comes from renewables such as wind turbines. By contrast, although Company B has a sustainability commitment on its website, less than 10% of the energy it produces comes from renewables, and the company recently purchased 90% of the coal-fired power plants along the U.S. east coast.
In context and outside of traditional sustainability metrics, which one is more committed to sustainability?
Says Bennett: “A divestment-based approach would have looked only at which one has the exposure to fossil fuels and would have cut the company with the highest exposure.”
Ultimately, asset owners need to look beyond a basic carbon footprint and expand their focus to other metrics and areas of sustainable growth, including water intensity and transportation, both of which touch on the overall environmental footprint of a company’s business activities.
Investors should also look at a spectrum of ways to measure the effectiveness of their metrics and decision-making criteria — and make room for inclusion of companies that are doing innovative work for future sustainability.