There is a vast amount of divergence in the level of ambition by asset and fund managers to tackle climate change. In fact, the worst of the pack are actively obstructing positive change by voting against climate transition changes at company AGMs.
But addressing climate change is a key risk and opportunity to both financial and society stability within our lifetimes.
London Climate Action Week, which takes place 25 June – 3 July, brings together world-leading climate professionals and communities across London and beyond to find practical solutions to climate change. So, what practical steps can investors take to accelerate action to tackle climate change.
1. Signal that climate impact matters
The current economic system focuses on shareholder return and incentivises businesses to prioritise this too. Over time, many businesses have been able to claim ownership of the financial value but not the negative impacts of their activities on the planet, contributing to climate change.
Signalling that issues such as climate chance matter creates a knock-on effect on the financial system: if all investors did the same, it would ultimately lead to a ‘pricing in’ of the effects on climate change by capital markets.
At significant scale it would jolt climate laggard companies into action and incentivise them to improve their impact to stay in investors’ favour.
2. Help scale good businesses
Investors can choose to allocate equity capital or invest in the bond issues of businesses creating climate solutions that avoid carbon. This might include renewable energy, batteries, regenerative agriculture and recycling facilities. This investment can help support or increase their share price and provide access to capital for expansion.
Green bonds are one way to finance businesses and governments’ green projects. The proceeds of the bonds can only be spent on pre-identified, low-carbon, environmental causes and need to be reported on. By providing this capital in a green bond issuance, investors’ have an additional impact on making progress on net-zero plans.
There is some evidence that divestment campaigns and withholding investment in bond issuances by negative-impact businesses increases their cost of debt/capital.
For example, divestment campaigns concerning thermal coal have spread to capital lenders (banks, public bond markets) raising the cost for funding new thermal coal projects. This will inevitably reduce the delivery or growth of these and favour the funding of more positive energy alternatives.
3. Using voting and engagement to drive change
The sobering reality is that only a minority of listed companies are on a credible transition path that will allow us to meet our climate targets. As part-owners of these firms, investors need to apply the necessary pressure to bring about change.
Climate-conscious investors in listed markets will naturally take a long-term view, translating into better relationship-building between company management and active shareholders.
There is no perfect company when it comes to aligning with a net-zero world. Therefore, shareholders need to engage to request better disclosure, more ambitious science-based targets and hold them to these.
Shareholders are also able to use voting rights to back or block strategic decisions that concern the company’s climate contribution or transition plans.
Even public bond markets provide opportunity for engagement. Companies regularly come back to capital owners to issue new bonds, or refinance existing debt.
At this point, investors can leverage pressure on the companies and request new conditions for their continued financing – for example an improved climate target.
When a change in company behaviour occurs on the back of an impact investor’s engagement, this can be seen as creating an additional impact.
