By Tilly Alexander
Hot on the heels of five days of student divestment protests at St John’s College ending in triumph on Sunday, the Oxford Climate Society’s Green Investment panel couldn’t have been more timely . Subtitled ‘What role can finance play?’, Monday’s event saw its panelists engaged in a lively discussion exploring how investors can, should and will help mitigate the effects of climate change.
The evening’s panelists included Dr Elizabeth Harnett, James Hulse, and Rupert Stuart-Smith. Leader of the Future of Engagement programme at the University of Oxford's Smith School of Enterprise and the Environment, Dr Harnett’s work focuses on bridging knowledge gaps between academia and industry. Industry expert James Hulse also provided the discussion with a professional touchstone. He was a proprietary trader for 14 years before moving on to set up the world’s first climate change hedge fund in 2007 and more recently Hindsight Consultancy, for which he is managing director. (Hulse notes of the name that, “in hindsight” all current movements towards green investment and protecting the climate “seem staggeringly obvious”.) Rounding off the panel was ex-OCS president and co-ordinator of the UK Youth Climate Coalition Rupert Stuart-Smith, currently working as a research assistant at the Oxford Martin Program on the Post-Carbon Transition.
The discussion was kicked off with the question: Why aren’t investors incentivised to care about climate change?
As Hulse highlighted, it comes down to timescales, money, and “lads” mentality. Generally everyone within the industry is working to a short timeline (up to around five years only). What’s more, as a fund manager, your job is effectively to not do significantly worse than the global markets, and you get paid around £400,000 to do that. This means there’s little incentive to do anything other than the same as the rest, just slightly better. In fact, the last thing you want to do is something different: if you take a risk and it works you’ll probably still get paid the same, while if it fails you’re likely to get fired. (In other words, it’s not a very good personal investment.) However, the flipside of this sheep mentality is that when everyone starts making changes, you’re incentivized to do the same. With oil and gas the worst performing sector for three consecutive years, there is increasing incentivisation to get out of it.
According to Harnett and Stuart-Smith, additional reasons include: a lack of belief that risks will actually materialize, and a lack of knowledge about the Paris Agreement and climate change, a lack of data to go off. As Harnett pointed out, with over 400 different companies providing sustainability metrics (with no universal standard), investors are “comparing apples to pears”.
Discussions then moved onto:
What is forcing investors to change their behavior?
The three panelists agreed the Paris Agreement was pivotal. Hulse stated that “Paris changed everything for investors. We can argue about the speed but not the direction of travel. Governments around the world have committed to this.” Articles 2 and 4, which detail the need to keep the global average temperature below 2 degrees above pre-industrial levels and provide scientific support for the urgency of reaching Net Zero within three decades respectively, were particularly praised.
Stuart-Smith also highlighted the growing number of lawsuits seeking to hold big oil companies accountable for the environmental damage impacting millions that they have caused but not had to suffer from individually. (See New York City’s case against Shell, Exxonmobile and three others in 2018, for example.) When these companies actually have to pay for the risks they take, they will no longer be able to remain profitable. Indeed, faced with numerous lawsuits following the California wildfires in 2018, PG&E (Pacific Gas & Electric Corp) was forced to declare bankruptcy. The falling cost of renewables is also accelerating this transition and exposing fossil fuel incumbents.
The focus then turned to: What are investors doing currently doing and what should they do to integrate climate change into their decision-making process?
To integrate climate change in the decision making process, its vital to consider the environmental, social and governance criteria (ESG). These 3 factors are used to measure the sustainability and social impact of an investment.
But how does it work in practice? Hulse noted that though you “can start to measure things” such as carbon emissions, yet these measurements don’t say much about the environmental risk side. Stuart-Smith elaborated on this issue with the example of TPI Tool. Academically based at LSE, the tool assesses companies’ compliance with the Paris Agreement. However, this only spans 5 years into the future, which simultaneously tells you nothing and is misleading (companies tend to look good in the short term). Most significant so far is that banks have withdrawn money from new coal plants. But companies need to have far more ambitious plans. Dr Harnett highlighted the importance of investing in nature-based solutions such as carbon sinks, a discussion that was just beginning in 2019. However, given it is harder to measure results here in terms of financial attribution – you can’t say “I saved this acre of rainforest” – she noted that ways will need to be found to incentivise investors.
What about individual investors and “average people”?
Divestment was recommended by all three panelists. Though “underrated”, it is also “clearly having an impact”, as declining coal share prices indicate. Such change has been triggered not by the collapse of the coal market (which is, sadly, still alive and kicking) but by divestment. As Hulse noted, much to the audience’s amusement:
“You’ve got to be an idiot if you think Exxon is one of the best companies out there. You shouldn’t be managing money for other people if you think that.”
All three also highlighted the different ways in which the individual can exert influence: ask your parents where their money’s invested, use your power as a consumer to signal to investors, campaign, vote in way that helps green policies. Students can also talk to colleges, often sitting on huge endowments, with much of their money tied up in fossil fuels.
The panelists were subsequently asked to expand on the problems that financial institutions face when trying to integrate climate change. “Where to start”, Hulse noted, likening it to the birth of the internet and the tech boom: “climate change changes everything for every business”. It’s not just big oil companies like Exxon that will be affected but delivery services like FedEx, airlines, the steel, concrete and automobile industries, even agriculture (often forgotten about alongside other sectors). We will still need steel, concrete, food, so how do we offset it? Yet at the same time companies can’t be allowed to get away with just saying they’ll offset. The potential for disruption is enormous and it doesn’t take much for civil unrest to start, all of which investors are trying to navigate. Dr Harnett also pointed out another huge underlying issue: many investors simply don’t understand the science. Investors and climate scientists effectively speak different languages and the complexities haven’t been sufficiently translated.
Endeavouring to end on a positive note, the panelists were finally asked about positive trends towards green investment.
(This was initially met with silence, to the audience’s amusement.) Noting that investors respond to societal behaviour, the panelists praised millennial efforts including the fly less movement, surges in veganism, demand for fossil fuel free products and huge changes in expectations around plastics. Activists like Extinction Rebellion and Greta Thunberg speaking out have also got companies scared. While there is “a lot of bullshit” aka greenwashing, this still represents a positive shift as it means companies are scrambling to respond to consumers, wanting to be seen as green while they figure out how to actually change. Millennials are also demanding that the businesses they choose to work for represent their values, with fossil fuel companies finding it increasingly difficult to find people to hire. Even countries like Saudi Arabia, Greece, Qatar are making plans to divest their stock in the fossil fuel industry – a huge shift, unimaginable two years ago. The growing body of scientific evidence able to demonstrate that climate change isn’t just bad luck but the impact of a small group of big companies, as well as rising number of climate litigation cases is also positive. The only thing missing is a political mandate that will put an end to the fossil fuel industry.
Now at risk of losing their social license if they fail to think about ESG factors, financial institutions are ultimately on track to change for the better. While 15 years ago no one in finance was aware of climate change, now everyone running serious amounts of money needs to be.
OCS Media and Research Team
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