Welcome to the second issue of the Iona Digest. In the last issue, we covered the big picture driving the climate change and environmental investment agenda. In this issue, we will be looking at developments in the climate change arena and also at the critical leadership role that we believe pension funds are taking on behalf of their members in climate change.
In June, I participated in the most recent Climate Leadership Corps event which is led by former US Vice-President Al Gore. The objective of the Climate Leadership Corps is to train people from around the world to raise understanding of climate change at a grassroots level within communities, town halls and city/state/regional governments in order to create action and change from the bottom up. In the 11 years since the programme started, approximately 12,000 Climate Leaders from over 60 countries have been through the training.
The key messages from the latest event can be summarised in five bullet points:
What does the average person want from their pension investments? A clear priority is to provide the means for a comfortable retirement. However, both consciously and unconsciously, we also each wish to leave some kind of legacy for our spouse, children and grandchildren. That legacy is not defined solely in terms of a financial inheritance, but includes concepts of the kind of future world (incorporating environmental, and societal considerations) in which our children and grandchildren can thrive.
Looking at financial performance first, there is increasing evidence that there is a strong linkage between a company's focus on sustainability and financial performance. In a meta-study of over 200 research reports, over 80% of the studies showed that share price performance of companies was positively influenced by good sustainability practices. We believe that this positive correlation will be increasingly seen across multiple asset classes.
Secondly, a poll earlier this year by ComRes for the Energy and Climate Information Unit (ECIU) revealed that there had been a “discernible shift” in public opinion with 64% agreeing that climate change is happening and is mainly caused by human activity. This was up from 59% when the same question was asked in 2015 and up from 57% in 2014.
The UK is at a point now with its attitude to climate change that is approaching the kind of 2/3rds super-majority that transcends political tribalism. This same shift is also being seen in many countries around the world.
If we look at the opt-in/opt-out debate in organ donation which shows that in countries which have an ‘opt-out’ policy to organ donation (ie people have to choose not to donate), more than 90% of people typically donate; we can learn important lessons about the psychology of pension funds asking their members to ‘opt-in’ to ethical investments vs taking leadership on behalf of their members.
An ‘opt-out’ approach to sustainability investing and an assurance that all investments are made based on Environmental, Social and Governance (ESG) principles would surely deliver results to the super-majority of their members. The power that the pensions industry yields would allow its investors to gain financial returns (which are increasingly correlated to sustainable investments) and leave the ‘non-financial’ legacy that the majority are searching for.
Pension funds are increasingly looking to move beyond the traditional approach to ESG investing to a broader strategic view of the impacts of, inter alia, climate change on their portfolios. We see pension funds incorporating a range of approaches when establishing a strategic view of ESG/climate change investment:
The unique position of the local authority pension funds
In the context of the above, local authority pension funds are perhaps uniquely positioned in that they are very close to the majority of their members by virtue of their geographical catchment areas.
This means that the pension funds can have a very direct impact on their members’ legacies within their regions by weighting their investments to within their regions. As a result, Local Authority Pension Funds could establish fund allocations which are not only cognisant of the global risks and opportunities of climate change, but also help drive positive regional environment and social outcomes as part of their investment strategies.
Energy capacity auctions shows offshore wind taking the lion share of the awards with strike pricing for two major projects (2.3GWh) at £57.5 per megawatt hour outstripping nuclear at £92.5 per megawatt hour in CfD auctions. Biomass with dedicated CHP had limited success with a strike price of £74.75 and a mere 85 megawatt hours. A feature of the market is the reducing depency on tariff incentives to achieve project closes.
Electric Hybrids – UK and France announce sales of petrol and diesel cars are to be banned from 2040, while a bank predicted all new car sales in Europe would be electric five years before that. Uber followed up announcing that all their cars will be electric or plug in hybrid by 2025.
Modern buildings with large expanses of glass or mirrored surfaces are potentially dangerous for bats research suggests as reported by the New Scientist.
Peter Mills currently Managing Director of Panda (UK) will join us in October as Director of Operations responsible for asset performance. Peter has considerable experinece of composting, AD and MBT technologies having previously held relevant positions within the Veoila Group. Peter began his career at the Environment Agency.
WHERE WE WILL BE
30th November: Stuart Gordon Investment Director, will be speaking at the Sustainable Waste Management Conference in Edinburgh on Market Funding Innovations