This year, Earth Day organizers are encouraging businesses, governments, and citizens to think creatively and urgently about how climate change will impact our health and prosperity. Recent world events and newly published research urge broad and coordinated action, especially in deploying financial resources toward climate investments that scale up existing policies and technologies.
Fossil fuel reliance as a geopolitical risk
Russia’s invasion of Ukraine in February 2022 provided a real-world impetus for governments to reconsider their strategic energy policies. It has quickly become politically untenable to have a country’s domestic and foreign policy beholden to the whims of another country because of its fossil fuel resources. European countries are looking urgently for options to wean themselves off Russian-supplied oil and natural gas.
Interestingly, the current crisis may accelerate two seemingly contradictory trends. In the near term, it may increase greenhouse gases as European nations seek to decrease imports of Russian oil and natural gas and replace them with coal and liquified natural gas from overseas. Yet it may provide the political will and government funding to accelerate investments in clean energy so Europe can become less dependent on fossil fuels in the long term.
A mix of alternative energy solutions that include wind, solar, liquified natural gas, hydrogen, and nuclear energies are likely to expand in Europe, China, India, and elsewhere due to a realignment of the political world order currently underway.
Call to scale up policies and technologies
The war in Ukraine coincided with the release of the 6th UN Climate Report, which highlighted how critical the next few years will be in lowering greenhouse gas emissions to limit climate change.
“We are at a crossroads. The decisions we make now can secure a liveable future. We have the tools and know-how required to limit warming,” said IPCC Chair Hoesung Lee. “I am encouraged by climate action being taken in many countries. There are policies, regulations and market instruments that are proving effective. If these are scaled up and applied more widely and equitably, they can support deep emissions reductions and stimulate innovation.”
This report dovetails the work of last November’s 26th UN Climate Change Conference of the Parties (COP 26) where over 200 countries agreed to the Glasgow Climate Pact. In four key areas, the Pact drives action toward limiting the rise in global temperature to 1.5C:
- Mitigation—reducing emissions
- Adaptation—helping those already impacted by climate change
- Finance—enabling countries to deliver on their climate goals
- Collaboration—working together to deliver even greater action.
Both of these global initiatives call for all stakeholders in our global economy to prioritize climate investing to limit greenhouse gas emissions and the impact of climate change.
Governments often lead the way by signaling policies and regulations that help guide long-term investment planning. The hope is that businesses and individuals as capital markets participants will allocate the necessary resources to those policies and technologies that can make a difference.
Capital markets participant behavior is shifting
Indeed, there’s evidence that businesses are increasingly making investment decisions that align with achieving net-zero emissions goals. Over the last few years, businesses have been more proactive about incorporating climate risk in their corporate strategy, prodded by shareholders becoming more vocal about these issues.
The Business Roundtable, a lobbying organization for some of the biggest corporations in the United States, just cited energy security as a key issue in unveiling a new energy policy roadmap, which touts energy flexibility, a mix of solutions, including support for many of the clean energy incentives in the Biden Administration’s stalled Build Back Better legislation.
Shareholders are increasingly influencing corporate strategy through their proxy voting policies, which are changing to reflect areas of concern. For the 2022 proxy season, the benchmark voting guidelines have emphasized greater corporate diversity and climate accountability as new priorities. The Conference Board noted that :
“With climate change front and center on the SEC’s and investors’ agendas, companies in all industries—not just those in carbon-intensive sectors—should expect more specific shareholder proposals on climate.”
Blackrock, one of the largest institutional shareholders in many public companies, captured the current sentiment well in its January 2022 letter “The Power of Capitalism”:
“Most stakeholders—from shareholders, to employees, to customers, to communities, and regulators—now expect companies to play a role in decarbonizing the global economy. Few things will impact capital allocation decisions—and thereby the long-term value of your company—more than how effectively you navigate the global energy transition in the years ahead.”
In addition, the Securities and Exchange Commission recently published a proposed new rule to standardize climate-related corporate disclosures. If approved, the rule would require disclosures in key areas:
- Governance of climate-related risks and risk-management processes
- Material impacts of climate-related risks
- Affect of climate-related risks on strategy, business model, and outlook
- Impact of climate-related events, e.g., severe weather events, on financial statements.
Businesses and regulators are reacting to the scale of assets flowing into sustainable investing, investment strategies that incorporate environmental-social-governance (ESG) principles in their approach.
According to Bloomberg Intelligence, global ESG assets under management may surpass $41 trillion by 2022 and $50 trillion by 2025, up meaningfully from the $35 trillion recorded in 2020.
Sustainable investing criteria can help identify risks and opportunities
Sustainable investing may offer certain investors the ability to merge traditional financial investment goals with their ESG goals.
Since sustainable investing is a broad concept, the UN Principles for Responsible Investing (PRI) establishes a useful set of criteria for investors who choose to use an ESG approach in their investment analysis and decision-making processes.
These six Principles for Responsible Investment aim to close the gap between a good cause and a good investment, and give the investment management industry multiple ways to promote corporate sustainability:
- Incorporate ESG issues into investment analysis and decision-making processes
- Be active owners and incorporate ESG issues into ownership policies and practices
- Seek appropriate disclosure on ESG issues by the entities in which we invest
- Promote acceptance and implementation of Principles within the investment industry
- Work together to enhance effectiveness in implementing the Principles
- Report on corporate activities and progress towards implementing the Principles
At a company level, applying ESG criteria may help identify potential investment risks, like supply-chain disruptions. For example, companies have experienced supply-chain disruptions due to climate risks like more severe fires or flooding, been hamstrung by having suppliers in conflict zones, or lost weeks of production due to suppliers lacking cybersecurity preparedness.
ESG criteria may help identify potential investment opportunities in companies developing compelling climate solutions. While renewable energy and electric vehicles get a lot of press attention as those industries aim to tackle global warming and create a low-carbon economy, climate change investing can be incredibly varied.
For example, through AMG’s private investment strategies, our clients have had the opportunity to invest in companies building the next generation of energy infrastructure, converting waste into usable products, launching net-zero emissions solutions in transportation and personal mobility, and improving sustainable food production, among others.
Here are some examples held in Cupola fund venture portfolios managed by AMG:
- Solugen is a company on a mission to decarbonize the chemicals industry. The company develops and manufactures proprietary enzymes and bioreactors to produce carbon-negative chemicals more cost-effectively than their petroleum-based competitors.
- Mori created an all-natural protective layer to slow down the spoiling process of fruit, veggies, meats, seafood, and other perishables, Mori’s technology aims to reduce the one-third of food produced that gets lost or wasted every year, and reduce the need for single-use plastic, wax, fungicides, and chemical protectants.
Aligning your investments with your values
As we reflect on this year’s Earth Day amid tragic reports of geopolitical tensions and extreme weather events, we also see opportunities in the global economic transition ahead. Companies that care about long-term sustainability and embrace climate investing may be compelling investment opportunities.
How we manage our wealth offers a tool for expressing our values and capitalizing on these broad trends. AMG can help you incorporate your unique ESG goals into your investment portfolio.
Please reach out to your AMG Wealth Advisor or via our Contact Us page to learn more about how we work with clients who choose an ESG investing approach.