Climate change views irrelevant to investment - it's already priced in
OPINION : As an investor, it's not relevant whether you believe the science of climate change stacks up. The weight of evidence is compelling, but set that aside. The world has changed, your investments are already starting to price in climate change. Carbon credits are now currency in today's economy and therefore a company's carbon footprint is starting to become as important as its profits, for assessing a share's value. High carbon companies will be forced to reorganise their activities, or they will be sold down by investors. READ MORE: * NZ fund managers waking up to Kiwi desire to invest responsibly: RIAA * How to check if your KiwiSaver is invested in cluster bombs, land mines or nukes Those positioning their investment portfolios to recognise this should win, whether global warming actually happens or not. The catalyst for change is the Paris Accord, where over 150 countries, including New Zealand, have committed to limit global warming this century to less than two degrees Celsius. Countries have signed up to carbon-reduction commitments to make this a reality. It is a long-term goal needing action now. And action is starting. Investors, regulators and large corporations world-wide are taking notice. In a hugely ironic step, the US$1 trillion (NZ$1.35t) Norwegian sovereign wealth fund, which was established from Norway's North Sea oil riches, has begun divesting fossil-fuel based assets because of the investment risk. Norges Bank Investment Management (which manages the fund) contends the move will make Norway, which is still heavily reliant on North Sea Oil, less exposed to a permanent drop in the world's oil price. Closer to home, the New Zealand Super Fund's outgoing head Adrian Orr recently noted, in relation to climate change, "we don't need to rely on the science". The fund believes, from a long-term investment perspective, that reducing carbon exposure in portfolios is effectively a one-way bet. Recently it joined more than 220 of the world's largest institutional investors to form Climate Action 100+, which is seeking to engage with the world's 100 largest greenhouse gas emitters. The group aims to improve climate change governance, curb emissions and strengthen climate-related financial disclosure. The targets range from traditional fossil fuel companies like BP and Shell to more unexpected names like Panasonic and Nestle. And with more than US$26t of funds under management, the group is driving changes in corporate behaviour. But even ahead of the formation of this group, companies were taking notice. Fossil fuel giant Exxon Mobil, for example, was this year forced in a landmark shareholder vote to take account of carbon impacts in long-term planning. Climate change is also attracting the attention of the financial regulators that oversee the world's banks and insurance companies. The Bank of England and the Australian Prudential Regulation Authority (APRA), which is the ultimate regulator of many New Zealand trading banks and insurance companies, both see climate change as a major risk that could challenge the financial system. Rising sea levels could, for example, lead to massive insurance claims. Stock exchanges like the NZX have adopted new disclosure rules covering environmental, social and governance (ESG) matters. From the director level down, these changes are forcing companies to take ESG factors, including their carbon footprints, into account. Meanwhile, international research companies like Amsterdam-headquartered Sustainalytics are starting to rate New Zealand's listed companies on ESG grounds, and this will make it easier for investors to compare companies' carbon footprints. Failure to disclose carbon intensity will, in the minds of investors, increasingly be seen as an unquantified risk. For companies, this means at best a lower share price and at worst an inability to raise equity capital. Governments are pursuing similar agendas to implement the Paris Accord. And when a government wants to encourage change, no matter how unlikely the mix of regulation, tax and subsidies, it can make that change happen. Germany, for example, was determined to reduce its reliance on nuclear power and fossil fuels and introduced extensive renewable energy subsidies. The policy was derided by Juergen Grossmann, the strongly pro-nuclear chief executive officer of German utilities company RWE. Nicknamed "Nuclear Rambo," Grossmann declared in 2012 that investing in solar energy in Germany was "as sensible as growing pineapples in Alaska". Four years later, when RWE's new boss spun off its fledgling renewable energy company, Innogy, it was valued more highly than RWE's legacy nuclear, coal and gas power assets. In many countries, and particularly in emerging markets, change may entail removing heavy fossil fuel subsidies. In December, UN Secretary General Antonio Guterres said the enthusiasm for subsidising fossil fuels was in essence humanity "investing in its own doom". He is encouraging subsidies for fossil fuels to be turned into higher costs and taxes for users. Companies know they need to embed carbon footprints and climate change impacts into their strategic planning, operation and behaviour. Waiting for the sea level to rise before you build climate change and carbon footprints into your investment thinking is no longer an option. John Berry is a co-founder and chief executive of responsible investment specialist Pathfinder Asset Management.