Are Investors Ducking The Hard Questions On Climate Change?

Author

Myles Allen
Environmental Change Institute, University of Oxford
Senior Member, Oxford Climate Society

​Is the Church of England, like my own University endowment fund, avoiding the financial headache of divesting from fossil fuels by ducking the main point? This may seem an uncharitable question, in the week that the Archbishop of Canterbury opened the Stock Exchange, and the Synod will be debating a motion welcoming the Transition Pathway Initiative (TPI), tracking the alignment of corporate business plans with the Paris Climate Agreement.

​Of course, everyone should welcome the fact that the Church and, according to the TPI’s latest report, many investors and major companies, are taking the climate issue increasingly seriously. Progress in the financial community is one of the few good news stories since the Paris Agreement was signed in 2015. But there is a risk that this opportunity may be squandered if the right questions don’t get asked at the outset.
 
Arguably the most important number in the Paris Agreement was not “well below 2°C”, or even “1.5°C”, but zero: the acknowledgment in Article 4 that stabilising global temperatures requires “balance”, or net zero emissions of carbon dioxide, sometime in the second half of this century.
 
So the only question that it is really worth asking a company that is investing in assets today that will be operating for many decades to come, is this: what is your plan for net zero? Or to be slightly less cryptic: do you have a strategy to reduce the net carbon dioxide emissions associated with your activities and products to zero, and if so, how soon – bearing in mind that “well below 2°C” could mean not that long after 2050 at the rate we’re going?
 
The TPI asks 17 questions to assess a company’s management quality, ranging from whether they acknowledge the climate change issue at all, to whether they operate an internal carbon price. They track the “carbon intensity” of a company’s planned activities (the carbon dioxide generated per unit of product delivered) out to 2030 or 2035. But, as we find in an Oxford Martin School discussion paper, they don’t mention net zero.
 
An electricity utility could halve the amount of carbon dioxide emitted per kWh generated by 2030, get rated on a “well below 2°C” pathway, and yet still be investing in gas-fired power stations that will be emitting for the next half-century. An company like Shell, producing detailed scenarios, accepting climate change science, and operating an internal carbon price, scores full marks for management quality: but has just spent $14bn on a floating liquefied natural gas facility, the largest ship in the world, that will, in all likelihood, be anchored over a gas field somewhere, venting pure carbon dioxide into the atmosphere, with no possibility of capture, well past 2050.
 
Earlier this year, after a two-year consultation, we published the Oxford Martin Principles for Climate-Conscious Investment, suggesting that investors should ask companies to commit to net zero emissions, provide a vision of how they would remain profitable in a net zero world and measurable benchmarks of progress. The reaction from financial community has been interesting. Thus far, one asset manager is applying these principles to one of its funds, but the vast majority prefer to stick with initiatives like the TPI or sciencebasedtargets.org, under the umbrella of the Task Force on Climate-related Financial Disclosures, none of which ask the net zero question.
 
We’ve heard some sensible arguments why not: net zero is well beyond most investor and company planning horizons, and companies can’t be expected to disclose their long-term strategy anyway. On timescale objection, it depends on the company. A tech company in a fast-moving field can’t be expected to plan for mid-century, but today’s energy companies and banks are investing in and financing plants and infrastructure that will lock in emissions for the next 50 years or more. And as for strategy, while a company cannot give a detailed blueprint of what it will look like in 50 years’ time, if it claims to be committed to net zero but is still investing in long-term carbon-generating assets, it needs to explain what will happen to the carbon dioxide they generate towards the end of their lifetimes.
 
In a couple of unguarded comments, I have heard another reason why investors may not be rushing to adopt the Oxford Martin Principles: “because none of them will be able to comply.” This is the “don’t frighten the horses” argument – give companies and investors achievable goals, and at least get them “engaged”. But there is a danger with this strategy. People are tiring of ticking boxes where the content of the box isn’t clearly related to the long-term goal. Every journey begins with a first step, but a successful journey also has a last step, and if we can’t tell investors what their destination is, they won’t stay the course.
 
The Bishop of Oxford has tabled an amendment to the Synod motion calling for divestment “from any fossil fuel company which is not on an unequivocal path by 2020 to aligning its business investment plan with the Paris Agreement.” Disappointingly, the response has been that the amendment is tantamount to “giving up” on the TPI. Why? Why can’t the TPI just start asking the net zero question? Unless major companies start now to align their investment plans with the possibility of net zero emissions soon after mid-century, the Paris Agreement is very unlikely to succeed: it is asking a lot of future politicians to implement policies that leave asset owners – meaning the pensioners who vote for them – badly out of pocket.
 
And it isn’t a complicated question to ask a company board: if your investments involve dumping large amounts of carbon dioxide into the atmosphere, or selling products that do just that, then please explain what is going to happen to that carbon dioxide, and to your company, in a net zero world. It is a far simpler question than quantifying your emissions intensity out to the 2030s. In the end, this question needs an answer: we may as well start asking it now.

Further resources:
​ www.oxfordmartin.ox.ac.uk/publications/view/2684
 www.oxfordmartin.ox.ac.uk/publications/view/2685