London Climate Action Week takes place from 25th June – 3rd July and brings together world-leading climate professionals and communities across London and beyond to find practical solutions to climate change.
Naturally, many investors are now asking how they can contribute to the transition to net zero. We look at three ways in which investors can make a real impact.
1) Signal that climate impact matters
The current economic system focuses on shareholder return and incentivises businesses to prioritise this too. Over time, many businesses have been able claim ownership of the financial value but not the negative impacts of their activities on the planet, contributing to climate change.
Impact-focused investors such as EQ Investors integrate climate change into our analysis and investment decisions.
Signalling that such issues matter creates a knock-on effect on the financial system: if all investors did the same, it would ultimately lead to a ‘pricing in’ of effects on climate change by capital markets.
At significant scale it would jolt climate laggard companies into action and incentivise them to improve their impact to stay in investors’ favour.
2) Help scale good businesses
Investors can choose to allocate equity capital or invest in the bond issues of businesses creating climate solutions that avoid carbon. This might include renewable energy, batteries, regenerative agriculture, and recycling facilities. This investment can help support or increase their share price and provide access to capital for expansion.
Green bonds are one way to finance businesses and governments’ green projects – the proceeds of the bonds can only be spent on pre-identified low-carbon environmental causes and need to be reported on. By providing this capital in a green bond issuance, investors’ have an additional impact on making progress on “net-zero” plans.
There is some evidence that divestment campaigns and withholding investment in bond issuances by negative-impact businesses increases their cost of debt/capital. For example, divestment campaigns concerning thermal coal have spread to capital lenders (banks, public bond markets) raising the cost for funding new thermal coal projects. This will inevitably reduce the delivery or growth of these and favour the funding of more positive energy alternatives.
3) Using voting and engagement to drive change
The sobering reality is that only a minority of listed companies are on a credible transition path that will allow us to meet our climate targets. As part-owners of these firms, investors need to apply the necessary pressure to bring about change.
Climate conscious investors in listed markets will naturally take a long-term view, translating into better relationship-building between company management and active shareholders. There is no perfect company when it comes to aligning with a net-zero world. Therefore, shareholders need to engage to request better disclosure, more ambitious science-based targets and hold them to these.
Shareholders are also able to use voting rights to back or block strategic decisions that concern the company’s climate contribution or transition plans.
Even public bond markets provide opportunity for engagement. Companies regularly come back to capital owners to issue new bonds, or refinance existing debt. At this point, investors can leverage pressure on the companies and request new conditions for their continued financing – for example an improved climate target.
When a change in company behaviour occurs on the back of an impact investor’s engagement, this can be seen as creating an additional impact.
EQ’s theory of change
There is a vast amount of divergence in the level of ambition by asset and fund managers, across how capital is deployed, and how effective voting & engagements are used to create the real economy emissions reductions we need. In fact, the worst of the pack are actively obstructing positive change by voting against climate transition changes at company AGMs.
Through our focus on sustainable portfolios, we understand the leader and laggard net-zero strategies across the sector. We use this to engage with the fund managers on identified “best practises”, such as the inclusion of science-based targets.
We play an important role in holding asset managers to their “net zero” commitments. Our engagement and pressure will not just translate into more ambitious climate action associated with our own client’s investments but create more systematic impact on the financial sector.