The Glasgow Climate Pact means over 200 nations agreed to profoundly reduce coal usage and phase down, though not phase out, fossil fuel subsidies. This is in a bid to limit global warming to 1.5 degrees Celsius from pre-industrial levels, in line with the Paris Agreement goals. All developed countries agreed to substantially strengthen their commitments to early reductions in emissions… all except for Australia. What does this mean for those of us who care for our climate future – not least the climate-conscious Australian investor?
Australian investors still have clout
COP26 confirmed that despite governments falling short, there is power in capital allocation, and as financial writer at Pitchbook, James Thorne, notes “at COP26 investors stole the show from diplomats¹.”
“Behind the political stage, a powerful force is taking shape. The financial world has woken up to the climate crisis and appears willing to supply much of the capital that will be needed to transition to a net-zero economy,” Thorne said.
Though willingness is not yet an obligation. While it is positive that post COP26 we are seeing increased inflows into private equity climate funds around the globe, particularly those focused on delivering new technologies – to date about less than six per cent of global assets from asset managers and banks are allocated to these emerging markets. While this change of direction is encouraging, more than inflows into new technology is needed.
It could also be said that investors are proving to somewhat take the capital burden off underperforming governments (including Australia), introducing more alignment between public and private dollars¹. Despite government shortcomings, in the six years since the Paris Agreement was signed, the business world has moved faster than public policy, and according to John Kerry, U.S. special presidential envoy for climate: “Not only are companies ahead of government, but companies understand that their future is tied to having a stable marketplace²,” Kerry said.
Though all of this isn’t enough to keep us within safe Paris Agreement limits.
Investors must be selective – actively managed funds also mean access to strategic active engagement and advocacy initiatives.
The benefit of actively managed ethical funds means that beyond avoiding high carbon emitters in your portfolio and investing in emerging technologies, your fund manager can engage with companies and stakeholders on the issues you care about. Moreover, your impact goes further with pooled investments.
At U Ethical for example, clients invested in our Australian Equities Trust can be assured that we act on their behalf both through stewardship initiatives, which include collaborations with industry partners on climate-related matters.
Typifying this collaboration and advocacy in the climate space, U Ethical recently submitted a joint request to Treasurer Josh Frydenberg calling on the government to support positive steps the Asian Development Bank (ADB) was taking to rule out support for fossil fuels. This initiative was in light of the US, UK, and EU commitments which saw the European Investment Bank halt coal, oil, and gas project funding by the end of 2021. The Asian Development Bank is an important development partner for Australia leveraging significant financial resources and expertise for sustainable development³. The submission urged the Australian government to step up and join this global leadership.
In terms of active ownership in the climate space, U Ethical’s numerous engagement discussions in 2021 centred on credible and robust commitments to climate risk mitigation and related corporate transformations.
Taking portfolio holding the Commonwealth Bank of Australia (CBA) as an example, we supported shareholder proposals relating to the bank’s oil and gas financing, including questioning its lending to support fossil fuel projects. Here we sought progress on shareholder resolutions filed at CBA’s annual general meeting, seeking greater commitments from the bank.
Head of ethics and impact Désirée Lucchese notes, “The CBA lending to support new fossil fuel projects is out of step with both science and the International Energy Agency (IEA)’s projections to keep us within a safe climate. It is therefore highly doubtful how new exploration could be demonstrated to fall within the Paris goals.”
Where to from here?
Overall, out of COP26 every relevant subsector has now committed to taking action on Net Zero in the next 12 months. But these commitments are feeble and it is still unclear how to get all the pledged capital to the right green projects, particularly when no agreement to transfer capital and technology to developing countries was reached⁴. This sets the global community on a path to 2.4 degree warming, what climate scientist Johan Rockstrom, director of the Potsdam Institute for Climate Impact Research, defines a path from ‘disastrous to dangerous’.
“It’s time to double down on our actions, not letting our focus falter […]. Thankfully, despite shortcomings and gaps in government policy or lacking corporate accountability, active managers are voting with their wallets and their impact is proving tangible,” Désirée says.
If you’re interested in learning more about U Ethical’s actively managed investments including how we’re tackling the climate crisis on behalf of our clients, please get in touch today.