Code Red: Climate Change and Investment Portfolios
20th October, 2021
Have you ever entered your workplace accompanied by the police? I have! Extinction Rebellion protesters were targeting a previous employer of mine, which meant I was channelled into my office via the side door surrounded by a line of police officers. The protesters were chaining themselves to the main entrances, chanting, heckling and singing about the urgency of the climate emergency. The company already had strong ESG credentials, so I don’t believe it was the genuine target of those protests. Rather, I believe Extinction Rebellion were creating publicity to highlight how investments can be part of the solution in fighting climate change.
Human activity is estimated to have already increased global temperatures by about 1⁰C above preindustrial levels. At this level we are experiencing regular extreme weather events, loss of biosphere integrity, land-system change and altered biogeochemical cycles. The UN Intergovernmental Panel on Climate Change recently issued a code red for humanity – it’s time for us to be alarmed! There are global attempts to fight back and reduce greenhouse gases in the atmosphere, with the Paris Agreement leading the way in nations working together. This looks to prevent long-term temperature rises above 2⁰C (and preferably 1.5⁰C) with the upcoming, Glasgow hosted, COP 26 aiming to accelerate action towards these goals.
Investment threats and opportunities
Addressing climate change is something that needs to be tackled by society as whole. It’s not just up to governments to deal with this – we must all take responsibility as individuals, members of institutions, in our work and in our leisure time. Asset owners can certainly be part of the solution. Excitingly, opportunity for financial return and the good of the planet can come hand in hand. For example, asset owners can:
- Invest in companies enabling the transition to a lower carbon economy. Companies developing new technologies and encouraging adoption of greener products/services can offer significant investment opportunities.
- Engage with companies, encouraging them to become greener and to see improvement from a holistic ESG perspective. This can be good for the longevity and future prosperity of a given business.
On the other side of the equation, investors should also consider the risks of holding investments in companies facing great difficulties, perhaps even bankruptcy, due to climate change. Companies that don’t adapt will struggle to survive.
At Dalriada, we have recently implemented a new ESG policy, which includes the following climate change related objectives:
- By 2025, cutting the carbon intensity of portfolio investments by 25%.
- By 2030, cutting the carbon intensity of portfolio investments by 60%.
- By 2040, at the latest, net zero investments.
We do not believe a consistent scheme level target is appropriate because pension schemes will already have varying degrees of ESG integration. Instead, we have committed to the above on a portfolio level across our sole trustee appointments. We will also carry the following policy intent into discussions where we are a co-trustee and, whilst we do not in such cases have the right to insist, we will be arguing strongly for the above.
We believe that declaring a strong commitment early provides the best platform for making the transformational change that is necessary. We intend to be a leader in the ESG space within our area of the pensions industry.
Register the risk
My favourite heckle from one Extinction Rebellion protester was “Don’t go in today, your job’s boring anyway!”. It certainly wasn’t boring that day!
On a serious note, I can see how financial services may not appeal to everyone, just like I can see how the increasing focus on climate change and ESG considerations does not appeal to all trustees. However, I believe we have reached a turning point in our industry, where these issues and considerations are only going to increase in importance.
Without doubt, the opportunity and risks of climate change should now be high on the agenda of every trustee meeting.