Are Investors the New Environmentalists?

by Philippe Dunsky

The following article is a translation of a blog post that first appeared in the publication Les Affaires as part of a regular column by Philippe Dunsky. Philippe’s column looks at big-picture developments in the transition to a low carbon economy and what they mean for both private and public sector players.  English versions of these posts will be available on our website.

I started my career in 1991, the year before the Earth Summit in Rio de Janeiro. There, leaders from around the world came together to declare their will to act, make vague commitments, take pictures, and leave. With a few timid exceptions, the walk, as they say, didn’t follow the talk.

But in the past decade, change finally seems to have arrived. In the energy sector, the transformations are far-reaching. In 10 years, the cost of solar energy has fallen by more than 80%. Ditto for batteries. Building wind or solar farms is now cheaper than building coal or gas power plants in most regions, even taking into account their intermittency. Elon Musk is winning his bet as vehicle manufacturers race toward electricity.

I’ll discuss these changes in future posts. But today, just weeks away from the Glasgow Climate Summit, it’s change in the investment community that I find most compelling.

In the past year alone, a series of new initiatives and commitments have been made by the global financial community towards climate protection. If you weren’t paying attention, you might be forgiven for seeing a reverse takeover of finance by environmentalists.

Let’s start with the banks: United under the aegis of the Net-Zero Banking Alliance, 54 of the planet’s biggest banks – including Citi, Deutsche Bank, Credit Suisse, HSBC, Lloyds and Morgan Stanley – recently embarked on a process to review their investment criteria and practices with a view to “aligning” them with the requirements of the Paris Climate Agreement. Together, $37 trillion (US) in assets, or a quarter of all world’s banking assets, are soon set to “decarbonize”.

A quarter is a lot – enough to have a ripple effect like a tsunami. The Alliance’s members will develop plans to massively reduce their carbon footprint, ie. the greenhouse gases (GHG) emitted by the projects and companies they finance. For Canadian banks – and their oil and gas customers – the challenge will be even greater than elsewhere.
Bankers are not alone. The Net-Zero Asset Owner Alliance (NZAOA) brings together 40 institutional investors with $7 trillion (US) in assets under management. The members of the Alliance, of which the Caisse de dépôt et placement du Québec is one of six founders, recently committed to realigning their investment portfolios so as to be consistent with the achievement of “zero net emissions” by 2050.

Each investor member of the NZAOA will adopt five-year targets and “will assist, encourage and require the companies in its portfolios to embark on decarbonization paths at a scale and a pace compatible with (…) the Paris Agreement “. Like the NZBA, they are committed to publishing their performance reviews annually. Energy, real estate and green infrastructure will be the first to feel the pinch.

And then there’s the private sector. Blackrock – the world’s largest investment firm with nearly $8 trillion (US) under management – recently announced its intent to place climate at the heart of its risk management strategy. BlackRock, which holds a significant stake in 91% of the S&P 500, will henceforth ask its investees for concrete transition plans towards the elimination of net GHG emissions. “When we think companies are not moving forward with sufficient speed and urgency, [we’re] going to hold directors to account by voting against their re-election.” ExxonMobil, the world’s no. 2 oil and gas major, felt the sting this past spring, as three of its board members were replaced with climate-friendly ones.

Taken together, we’re looking at more than $50 T US in global capital that, once governance measures are in place, will be chasing low-carbon solutions. And, equally if not more remarkable, will campaign for rapid and lasting change in those companies that continue to emit too many GHGs. Even if it means withdrawing their confidence… and their capital.

A bit of perspective: $50 T US is more than half of global GDP. Clearly, this is no longer the Little Leagues. Over the past year, this movement of global capital has moved from the outskirts of the global economy to its very core. Ultimately, every business will be touched.

It is still early days, of course. Will all commitments materialize as planned? Surely not. Will some stumble or drag their feet? Undoubtedly. And let’s not kid ourselves: moving from financial commitments to business plans and investments, and then to the required large-scale changes in operations, equipment, infrastructure, and business models, will take time – time that the climate may not have.

But in the three decades since I began my involvement in the energy, climate and finance spaces, this is the first time that I’ve seen the world’s investment community (including some of our clients) coalesce so clearly around the fight against climate change. With consequences that we have not yet measured, but that herald a significant acceleration of the economic transformation underway.

If 2020 will be forever marked by the COVID pandemic, 2021 could be that of an even more striking – and far more hopeful – pivot: the year in which investors around the world, with the strength of their assets under management, chose to side with environmentalists.