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How can institutions invest more sustainably?

What is stopping us from working together to solve a problem now widely acknowledged.

Solar panels with cityscape

by
Bob Campion

in Fiduciary news

28.01.2020

When environmental campaigners took to the streets of the City of London last year a placard I remember well was ‘Stop funding climate change!’. Whether that’s a fair criticism of institutional investors or not, it’s becoming a commonly held concern and a refrain we are waking up to on a daily basis. Climate change was one of the main themes at Davos last week and this week local government pension scheme pool Brunel Pension Partnership put climate policy at the heart of its investment policy, arguing that asset managers must drive change in the financial system.

Exactly how asset managers and institutional investors can or should act is a question unresolved despite decades of debate. The main problem is that while under-pricing climate change risk is an acknowledged problem – the UN’s responsible investor group PRI believes £1.7 trillion could be wiped off the value of major companies by 2025 – its shorter-term impact is difficult to measure. Pension schemes should be long-term investors. But all too often trustees, their advisers and their investment managers are focused on the short-term; mark-to-market valuations, fixing actuarial deficits, monitoring quarterly performance. Yes, regulation and accounting practices are partly to blame, but it’s human nature too. If we trust someone to do a job we give them space and let them get on with it. If we’re not sure how competent they really are we look over their shoulder and scrutinise every move. There’s still a trust issue between asset owners (like pension fund trustees) and investment managers; a hangover from the dark days of the 2008 financial crisis. Perhaps there’s still good reason for that scepticism, but it’s stopping us all from working together on longer-term initiatives.

When it comes to climate change, short-termism drives us towards a box-ticking approach – the scourge that is ‘greenwashing’. A key message from teenage activist Greta Thunberg at a climate change summit last month was that “the biggest danger is not inaction, the real danger is when politicians and CEOs are making it look like real action is happening when in fact almost nothing is being done apart from clever accounting and creative PR.” She wasn’t aiming that at institutional investors – but she could have been. The investment industry can be just as talented as politicians at making it look as if it is taking something seriously - when actually it is doing nothing.

But on climate change, I don’t believe inaction on the part of institutional investors is malevolent, lazy or one of denial. It’s simply that we don’t know what to do about it. We don’t know what works. Do we buy oil company or green tech shares, do we engage, do we avoid? Is it just about publicity? Should governments or associations be leading our way? What difference does my scheme’s investment pot really make anyway?

My children are adamant that recycling our plastic bottles and cardboard boxes is worth doing because if everyone does their bit, our wasteful society will improve. Recycling is a system that has been agreed on and we’re all giving it a go whatever our misgivings. The same is true when it comes to investing; every little counts no matter how small or large the amount of money involved. But we need to agree how to do. We need a consensus, a plan. And we need to stick to it for the long-term.

So that’s my challenge to us all – asset owners and investment managers. Once and for all let’s draw up a blueprint, let’s agree on a process that actually works not one that just feels like it does. Let’s all do that same thing and get it organised across the industry. Only then can we work out how to stop funding climate change.

Charles Stanley Asset Management will be running a series of discussion and posts this year on the theme of sustainable investing.

 

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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