Comment Piece by Rob Meaney, Senior Investment Consultant, Mercer. Published in the Irish Independent, 06 March 2017
Eyebrows may have been raised worldwide by Donald Trump’s selection of oil-drilling advocate Rick Perry as his energy secretary and climate-change sceptic Scott Pruitt as head of the Environmental Protection Agency but, counterintuitively, these and other fossil-fuel-friendly picks may actually lead to investment opportunities in renewable energy and sustainable natural resources.
Any reduction in funding from political sources represents an opportunity for investors to bridge the gap. As a result, Trump’s election and his climate-change-sceptic cabinet could actually increase the role of pension schemes and other institutional investors in this area.
Just last month, Ireland became the first country in the world to introduce legislation banning fossil fuel investment for state-sponsored investments. The Irish Strategic Investment Fund, worth over €8bn and managed by the NTMA, will have to fully divest from fossil fuels by 2020. This is a clear statement of intent and more countries are likely, if not obliged, to follow.
What is sustainable investing and why is it important?
Sustainable investing takes account of environmental, social and corporate governance (ESG) factors in the investment process. Traditionally, such a focus has been seen as taking an “ethical” stance, one reserved mainly for charities and university endowments. However, incorporating ESG factors actually involves a consideration of real risks likely to drive future returns.
Environmental factors, in particular, are becoming more important. 194 governments have signed up to the Paris Agreement, the world’s first comprehensive climate accord, which commits to set a limit on global warming.
The Paris Agreement aims to lower greenhouse gas emissions by reducing reliance on fossil fuels, with a longer-term target of carbon neutrality by 2050. This is likely to result in huge structural changes globally as government action to mitigate climate change could render many proven fossil fuel reserves unusable or “stranded”.
It is also increasingly likely that companies will have to start disclosing the financial risks they face from climate change, allowing investors to value them more accurately and identify the risks and opportunities created by the transition to a lower-carbon and more sustainable economy.
Why should pension scheme trustees invest in a sustainable way?
Irish pension scheme trustees will have no choice but to address sustainable investment in the coming years.
First, regulation is set to increase, with the EU placing responsibility on pension schemes to consider ESG factors as part of their overall risk assessment, particularly those risks relating to climate change and the environment. From 2019, all pension schemes will need to outline their ESG policy in their annual reports to members.
Second, as pension scheme members become more aware of climate change and sustainability issues, they are looking for sustainable fund options.
Third, there are newfound company-led pressures, as pension scheme sponsors increasingly wish to have their sustainability beliefs reflected in their pension schemes’ investment strategies.
Given these pressures, Irish pension scheme trustees should:
- Consider their investment beliefs on climate change and establish a policy on sustainable investing
- Review their current position and gain a better understanding of their exposure to ESG risks, particularly those related to climate change
- Have a plan in place to manage or reduce these risks
What investment options are available?
Investing in a low-carbon index designed to track a specific index (for example, global equities), but with lower carbon footprints, can be an important first step.
However, a better option would be to consider specialist asset managers who are leaders in integrating ESG factors and long-term sustainability. A focus on sustainability should help drive the long-term success of the companies held and, by extension, long-term investment results.
To gain more direct access to companies and assets focused on sustainable investing, investors should consider underlying assets and projects involved in the move to a more sustainable, lower-carbon economy, including:
- targeted private equity;
- renewable energy infrastructure, such as wind turbines and solar panels; and
- sustainable natural resources, such as forestry and agriculture.
Asset managers for pensions schemes are now expected to have a clear policy on sustainable investing. Pension scheme trustees should ensure they are comfortable with their investment managers’ views and policies in this area.
Sustainable investment needs to move up the investment agenda
Sustainable investing is a long-term theme but it is rapidly evolving area. Companies and industries that have performed well in the past may not necessarily perform as well in the future. All investors, including Irish pension scheme trustees, will need to refresh their long-term investment views to adapt to this changing world.
Trump may continue to believe that the concept of global warming was invented by the Chinese to make US manufacturing non-competitive – in the meantime, Irish pension funds should get on with the business of making sustainable investment choices to manage risk and capitalise on available opportunities.
Rob Meaney is a Senior Investment Consultant at Mercer
Irish Independent Article Link