Why investors may move the hand of industry on climate action

By Su-Kim Macdonald

In EY’s 2018 Investor Survey, 48% of investors surveyed said they would rule out an investment immediately if it was linked to risk from climate change, and incredible jump from 7% in the prior year’s survey! With climate change and its impacts being recognised as one of the biggest risks to business in the world by the World Economic Forum, investors are increasingly demanding more from the companies they invest in to demonstrate the tangible ways in which resilience is being embedded across their investments.

In 2019, Larry Fink, the CEO and Chairman of the world’s largest asset manager BlackRock Investments said in his 2019 Letter to CEOs: “As wealth shifts and investing preferences changes, environmental, social and governance issues will be increasingly material to corporate valuations. This is one of the reasons why BlackRock devotes considerable resources to improving the data and analytics for measuring these factors, integrates them across our entire investment platform, and engages with the companies in which we invest on behalf of our client to better understand your approach to them”. Similarly, in 2018 AMP Capital published a thinkpiece titled ‘How climate change is creating risks and opportunities for investors’, which noted: “Professional investors are increasingly focusing on both the impact their investment choices have on climate change, and also on how their investments will be impacted by it. This reflects a wider understanding of, and concern for, the impact of climate change, not just on the environment, but also on the sustainability of company earnings.”

Investor action includes proactive engagement with companies, including direct shareholder action. In May 2019, investors filed a climate change shareholder resolution with BP calling for the company to set out a business strategy consistency with the goals of the Paris Agreement. This was passed with 99.14% of support from shareholders, and also had the support of the BP Board. BP’s CEO, Bob Dudley, said just last week “We are certain we’ve got a path, it may not be linear, to being consistent with Paris goals,”. It’s making them re-think investments, and even exit the most carbon-intensive projects (though they’re yet to announce which). In Australia, shareholder actions are being raised by shareholder activist groups such as Market Forces and Australian Centre for Corporate Responsibility (ACCR) around a wide range of climate related issues including climate risk disclosure, advocacy of lobby groups on climate policy, and exposure to fossil fuels in investment portfolios.

Su-Kim McDonald is a Senior Consultant at EY, and a Melbourne Business School Alumna.

In Australia and New Zealand, the Investor Group on Climate Change (IGCC) represents investors that manage over AUD $2 trillion worth of assets and is focused on supporting investors to help address climate change, manage long term risks and drive long term returns from their investors. The IGCC’s August 2019 Accelerating Change: Capital Growth in Climate Solutions surveyed IGCC members identified a number of key factors for investors’ decision making around investments, climate risks and low carbon investment opportunities:

  1. Appetite for climate investment is strong and growing
  2. Mainstreaming of climate into standard investor practice is a trend to watch
  3. Policy uncertainty is causing investors to go offshore for climate investment opportunities, and also increases the level of active engagement with the companies in the portfolio
  4. Increased TCFD disclosure is impacting investment practice

EY’S Australian Climate Risk Disclosure Barometer, published annually, found in 2019 that across all sectors, companies are failing to address all aspects of the TCFD Recommendations in a comprehensive way, with companies on average scoring 60% in terms of coverage of climate-related disclosures against the TCFD Recommendations and 29% in terms of the quality of the disclosures being made. This represents a significant risk of the companies that are failing to engage and respond to the TCFD Recommendations in a comprehensive way, as they may face reputational and valuation risks even before the risks from climate change are realised within the business.

As investors begin to demand more from their investments, industry will be required to meet the growing expectations to keep investors happy, and as such will be forced to adapt and become more proactive and progressive in the climate action space.

Su-Kim Macdonald is a graduate of the Bachelor of Commerce and Master of Commerce (Management). She is currently a Senior Consultant in Climate Change and Sustainability Services at EY.