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Sustainability Matters

The ESG Advisor: Investors Are Playing a Crucial Role on Climate as Governments Struggle to Act

Financial intermediaries need more help to advise clients on how to become climate-aware investors.

The COP26 summit in Glasgow underscored two big things for me: One is that the world’s sovereign nations are not yet able to muster a fully coordinated and cooperative response to climate change, despite the scientific consensus on the causes — the burning of fossil fuels--and the facts on the ground that are accumulating for all to see.

The other is that investors are going to have to step up and play a crucial role if we are going to hold global warming under 2 degrees Celsius by mid-century.

Governments, of course, appear to be the institutions fit for purpose to deal with the climate crisis. But a global policy response requires hard-to-achieve levels of cooperation among the world’s sovereign nations that have to overcome national interests, domestic politics, and the short-term thinking of political leaders, few of whom will be on the scene in 2050.

Investors, on the other hand, seem to be ill-suited to take on such a big responsibility as saving the world. Their main focus is to generate investment results that help them reach their financial goals, not on worrying about broader systemic issues like climate change.

But more investors are realizing they cannot afford to wait around and do nothing while the world’s political leaders struggle to get on the same page. They understand that systemic issues like climate change, biodiversity loss, inequality, and social division will have detrimental effects on their investment returns over the long run. If the purpose of having money is to improve one’s quality of life, and if the world fails to address its major sustainability challenges, then even in the best possible scenario, an investor will require higher returns than one previously planned for in order to improve one’s quality of life. In the worst possible scenario, no amount of money will be able to improve it.

The world’s largest asset managers, as well as institutional asset owners like pension funds, are the largest shareholders in virtually every publicly traded company in the world. Through direct engagement, proxy voting, and strategic divestment, they have the tools to influence corporate behavior. These same asset managers are also among the largest holders of corporate and sovereign bonds in the world. That gives them the ability to influence the terms and conditions of bond issues and to influence policymakers directly.

These large investors can use their enormous pull to pressure companies to make science-based net-zero commitments on greenhouse gas emissions. Many companies are coming to realize they are on the same page as investors in the new sustainability era. The alignment of investors with customers and employees means corporate stakeholders are rowing in the same direction, paving the way for companies to make net-zero commitments.

Investors can also influence governments, and not only as holders of sovereign debt. Governments want to create conditions that will allow the smooth functioning of capital markets. An appropriate response to the climate crisis is fast becoming one of those conditions. Investors, of course, are also people who can use their vote in most countries and can deploy their capital to support parties and candidates who will support climate solutions.

For investors to wield more influence on stopping climate change, everyone in the investment value chain can play a role. Indeed, many of the biggest players are stepping up to the plate, including asset managers and pension funds, universities, large endowments and foundations. But investment intermediaries and individual investors could play a bigger role. Many financial advisors and investment consultants lack the knowledge or commitment to advise their clients on how to become climate-aware investors. While many surveys show strong support for sustainable investing among individual investors and smaller institutional investors, they need help in getting invested that way.

Sustainable investors are having a big impact already as they push companies and governments to make commitments that will slow the pace of climate change to a more manageable level by mid-century. Post-COP26 they can help hold the line while governments get their acts together.

Weekend reads:

1. Want more specifics on what to do now, check out this piece by Leslie Norton: Yes, Fancy Climate Summit Means Small Investors Must Be Vigilant, Too; Morningstar.

2. Ten views on the future of ESG: Where Will ESG Investing Be in Five Years?; Wall Street Journal (subscription required).

3. The nation’s influential conservative law group doesn’t mince words: The Federalist Society’s newest enemy: Corporate America; Vox.