Sustainable investing, green asset management and their ilk have built a comfortable niche over the past few years. Yet, their strategies -- which place emphasis on addressing climate change by avoiding assets that exacerbate it and prioritizing those that confront it -- have failed repeatedly to garner mainstream appeal. When it comes down to investment returns, environmental impact has traditionally taken the back seat.
That long-held attitude may at last be changing. A raft of powerful asset managers and policymakers have started to pay more than lip-service to green and sustainable investment. Indeed, these powerful financial actors may become the driving force for addressing climate change in the years ahead.
In this research note, we discuss this new and fascinating phenomenon. Let’s see how green investing has moved from the sideline to the heart of the investment universe.
Asset managers go green
According to a recent report published by the Financial Times, a growing set of asset managers have become the “eco-warriors,” driving change in ways traditional activists only imagined.
“Following decades of campaigning by environmentalists and non-government organisations, it is now spreadsheet-analysing money managers — responsible for the nest eggs of millions of people — who are forming a new generation of climate activists. And these activists are backed by trillions of dollars.
“A growing number of individuals at asset managers, pension groups and sovereign wealth funds are using their power to push the biggest corporate polluters to tackle climate change, spearheading campaigns to cut carbon emissions, boost disclosure on climate risk and hold managers accountable.”
Perhaps it is a bit ironic that it is the faceless moneymen and asset management firms (which environmentalists have long decried as major parts of the problem) who are making the biggest strides toward bringing asset allocation strategies to the fore that are both environmentally friendly and sustainability-minded.
A steward of generational capital must think in terms of decades at least, not mere years or quarters. An understanding of, and response to, the impacts of climate shifts is essential to formulating that long-termist outlook.
FInancial sector goes green too
The realities of climate change are also impacting the financial sector. While conventional banks and other similar financial institutions have so far been somewhat insulated from the immediate financial costs of climate events, insurance companies have not been spared. Another FT report offers a sobering view of the situation:
“Lenders are moving slowly because unlike the insurance sector they are less directly exposed to the destructive power of extreme weather. But they are not immune — and should be paying more heed. A report by insurance company Swiss Re found the total economic loss from natural catastrophes and man-made disasters nearly doubled to $337bn in 2017, from $180bn the year before. Lloyd's of London this year posted its first loss in six years, citing the impact of a series of natural disasters. Axa, the large insurer, has warned that more than 4C of warming this century would make the world ‘uninsurable’. The consequences for the whole financial system would then be catastrophic.”
While financial institutions may currently be somewhat insulated, it will not last. Thus, it is unsurprising that policymakers are also getting concerned.
Some central banks have made tentative steps toward incorporating the potential impact of climate change into their assessment of private lenders. After the 2008 financial crisis and subsequent Great Recession, central bankers around the world were empowered to take proactive action in assessing the financial health of financial institutions.
While no central bank has yet taken definitive action, the Bank of England -- central bank of the U.K. -- has signaled it might be willing to lead the charge. Mark Carney, the governor of the Bank of England, has called for the inclusion of climate change factors in banks’ annual stress tests. Whether that amounts to anything tangible remains to be seen. But it is indicative of a profound shift in thinking across financial actors, both public and private.
Verdict
It is very hard to know where the new green wave will lead the financial industry. That said, we do know that it is here to stay. With climate change an increasingly central political issue, it cannot be ignored by anyone. Financiers and asset managers are certainly no exception. Perhaps they are even more susceptible, since their profits and performance are linked so closely with the financial realities playing out in the economy.
Irrespective of their politics, professional asset managers are taking climate change seriously. Independent investors would be wise to follow their lead. 2019 could prove to be a watershed year for green investing.
Disclosure: No positions.
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