Nov 27, 2020
November 2020 - The following letter has published as an OpEd in Environmental Finance
As we add impetus to the global move to a cleaner, more sustainable energy system, perhaps the greatest obstacle we face is the enormous financing requirement that this step change in our economies will bring. The financing required to clean up our supply-side energy system over the next 30 years is anything between $100 trillion and $150 trillion. If we go with $100 trillion, that amounts to around $3.5 trillion a year. (Climate policy initiative 2018)
Achieving this mission is therefore not about marginal change, waiting, over analysing or seeking out the perfect data set. It is about taking meaningful and significant action now. At previous annual Green Finance Summits, the key players in the climate finance industry have come together to debate the climate issue. There have always been question marks – is it real?
Do we need to take it that seriously? How can we quantify the risk? How can we understand and capture the prospective returns? At last, I believe this debate is largely over. Everything that is going on in the world now has galvanised all parts of society to take action. We must not underestimate our power to make an impact. In addition, the available investment opportunities are profound and it is increasingly clear that we do not have to sacrifice returns to do the right thing.
To this point I would like to share a personal experience that has given me hope in humanity's ability to achieve the de-carbonisation mission. Our firm, Ninety One, has its African hub in Cape Town, which experienced a dramatic water crisis in 2018.
After three consecutive years of drought, with rainfall two standard deviations below the norm, the city faced the approach of Day Zero: the day on which the taps would run dry. But Day Zero never came. Not because the rains came, but largely because the community took action. Water consumption dropped by almost 60% from 1.2 billion litres per day to approximately 500 milllion litres per day.
The community understood the threat and acted. The crisis was mitigated. My messages from this experience are relevant to all of us. The climate crisis is real. It is not distant science; it is not average world temperatures that never affect us; it is not an academic debate about whether divesting is right or wrong. It is here.
This example shows us that action can make an impact and that action starts with each of us asking ourselves what we need to do. If we take positive action, we can face down this challenge. In our view, too much of the decarbonisation debate and consequential implementation has focused on negative action. How do we divest? What should we exclude? How should we screen? But negative action is not enough, positive action is critical to achieving decarbonisation.
As investors, positive action takes the form of the allocation of capital to businesses, assets and projects that deliver a decarbonisation outcome. This is not that difficult to achieve and could be a very significant driver of future returns. The bad news is that progress in this regard has not been sufficient. The United Nations' Principles for Responsible Investment, a leading proponent of investment to combat climate change, has confirmed that of the approximately $100 trillion in global investment assets only $1.3 trillion is allocated to positive action strategies.
The ShareAction and Asset Owners Disclosure Project estimate that the world's 100 largest pension funds are investing only 1% of their assets in low carbon solutions. In 2018, the Climate Policy Initiative estimated a total of $579 billion was invested to finance decarbonisation. This falls well short of the $3.5 trillion per annum we need.
So, there is a lot for us all to do. For all of the asset owners, pension funds, sovereign funds, insurance companies and individuals: consider whether you are doing enough to allocate capital specifically to investments which will support and benefit from decarbonisation. Exclusion is not enough!
For the asset consultants: do you have clear advice frameworks for pension funds who want to allocate more to positive action investment strategies? Have you considered these strategies and the role that they can play in fund portfolios fully?
“In our view, too much of the decarbonisation debate and consequential implementation has focused on negative action.” A leading consultant recently suggested that on return prospects alone, a sample fund should be allocating up to 10% of their assets to positive action investment strategies. Asset consultants are a critical part of this mission, and they need a strong view on how investment positively supports decarbonisation.
For asset managers, the challenge will be to do more, and better. We have to understand and price climate and sustainability risk into all of our investments. We have to engage smartly to drive change constructively and effectively. We have to reject box ticking in favour of substance and develop investment strategies dedicated to positive action.
This is the kind of change that happens once in a generation in our industry. In the 1970s and 1980s, we saw a decline in direct ownership of equities by individual investors in favour of funds. In the 2000s, we saw the rise of diversification evidenced by a decline in home bias, as well as the growth of alternative investment strategies.
In the coming years and decades, the defining issue will be to mobilise finance for the challenge of climate change. Financing decarbonisation is critical to our future as humanity. It is not going away. It will not cease to be relevant until climate change ceases to be relevant. The good news is that, as was our experience as residents of Cape Town, if we all do our part, this is Mission Possible – not Mission Impossible.
At Ninety One, we must continue to ask ourselves the tough questions on how we develop our expertise and how we can do this better. It's about finding ways to help our clients understand and invest sustainably, think about materiality and importantly how to construct portfolios that can benefit from a decarbonising growth model.
We launched our Global Environment strategy at the beginning of 2019 with a clear objective to positively drive capital to companies providing decarbonisation solutions. A key metric of the strategy's impact is to measure the carbon avoided or not released into the atmosphere as a result of the work these companies are doing. Our UK Sustainable Equity strategy looks for companies including backing smaller companies that have great business models and seek to harness the interconnectedness of business, society and our natural environment.
In Africa, we are partnered with the Private Infrastructure Development Group managing the Emerging Africa Infrastructure Fund. The Fund is a public-private partnership lending to businesses creating, improving or expanding infrastructure in sub-Saharan Africa. By expertly lending to projects particularly in fragile states that more conventional lenders shy away from we can generate substantial impact and sustainable returns by improving economies and helping reduce poverty that perhaps otherwise would not have been funded.
There is still so much to do. Perhaps a great quote for us all to reflect on:
"This is not about saving our planet – it's about saving ourselves. It's not all doom and gloom, there is a chance for us to make amends... all we need is the will to do so." – Sir David Attenborough, Broadcaster and Natural Historian
John Green is Chief Commercial Officer at Ninety One.
The editor of Environmental Finance has an investment in Ninety One Global Environment Strategy.
Ninety One is an independent, active global investment manager dedicated to delivering compelling outcomes for its clients, managing more than £118.0 billion in assets (as at 30.06.20).
Established in South Africa in 1991, as Investec Asset Management, the firm started offering domestic investments in an emerging market. In 2020, almost three decades of organic growth later, the firm demerged from Investec Group and became Ninety One. Today the firm offers distinctive active strategies across equities, fixed income, multi-asset and alternatives to institutions, advisors and individual investors around the world.