ENVIRONMENTAL CONCERNS ARE NO LONGER JUST PRESSING ETHICAL ISSUES, BUT QUESTIONS OF FINANCIAL PRUDENCE. OVER HALF OF BRITISH CONSUMERS FEEL WE ARE EXPERIENCING A CLIMATE CRISIS, AND OVER ONE THIRD SAY THEY WOULD SWITCH OR BOYCOTT A FINANCIAL ORGANISATION IF ITS INVESTMENTS HAVE A DETRIMENTAL ENVIRONMENTAL IMPACT. DESPITE BIG CONCERNS AROUND COVID-19, THE ENVIRONMENT REMAINS A PRIORITY FOR THE PUBLIC, AND BUSINESSES WILL BE EXPECTED TO CONTINUE THE TRANSITION TO A SUSTAINABLE ECONOMY IN THE POST-CRISIS PERIOD.
Whilst it doesn’t roll off the tongue with as much zest, James Carville’s ‘the economy, stupid’ slogan is aptly modified for Larry Fink’s announcement earlier this year that BlackRock would base future investments with environmental sustainability as a central goal… ‘It’s the environment, stupid!’. If anyone could ‘wake up’ the market to the tipping point which has now been reached around the environment, it is the Chief Executive of the world’s largest asset management firm. “Awareness is rapidly changing” wrote Mr Fink in the company’s annual letter, “and I believe we are on the edge of a fundamental reshaping of finance”. This has been compounded more recently, with the announcement that the UK’s biggest pension fund, the government-backed National Employment Savings Trust (Nest), will begin divesting from fossil fuels, and BlackRock “launching a selection of ESG multi-asset ETFs, to provide investors with a cost-efficient, transparent and sustainable way to invest”.
Data from Ipsos’s 2020 Sustainable Business Monitor survey amongst the British public echoes these sentiments. With a majority of the public now feeling we are dealing with a climate crisis, it appears that cash may no longer be king in investments. Only 21% now claim to care more about financial returns on investments than on whether the financial provider is ethical in how it invests money. This is compared to 28% of the public who prioritise ethics over financial returns and 26% who feel they should be given equal footing. Even allowing for the possibility that consumers may not be quite so ethical when faced with this trade-off in reality, it is clear that there has been a change in the drivers of investment decision making.
The growing imperative for investors to prioritise companies with a good sustainability track record is brought into sharper focus when looking more closely at the attitudes of millennials. Findings from the Ipsos Sustainable Business Monitor show that 54% of 18-34 year olds would be concerned about investments in Oil and Gas, compared to 47% for the UK public overall. This isn’t limited to the UK either; sustainable investing interest among US millennial investors jumped from 84% in 2015 to 95% in 2019, according to Morgan Stanley’s Institute for Sustainable Investing.
So, what does this all mean? Unsurprisingly, that Fink is right.
Over one third of those asked said that investment in projects or companies that have a detrimental environmental impact would lead them to ‘switch from’, ‘stop using’, or ‘boycott’ a financial organisation. Indeed, sustainable investing is ranked alongside executive remuneration – an issue that has a long track record of being a strong driver of negative opinion for the finance sector.
This sentiment is further reflected at a global level when looking at Ipsos data from the recent Earth Day 2020 report, highlighting that even when set against the crisis situation that COVID-19 has presented, concerns around the environment remain steadfast. Over 7 in 10 people around the world agree that climate change is as serious as the pandemic, whilst 65% agree that in the economic recovery from COVID-19, it’s important that government actions prioritise climate change.
Recognising the growing commercial opportunity facing the sector, and the long-term risk of investing in environmentally unfriendly industries, Fink notes that “as a fiduciary, our responsibility is to help clients navigate this transition [the reallocation of capital]. Our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors”.
But where does this leave industries which have been traditionally harmful to the environment, such as the oil and gas industry, for a long time the bedrock of investment portfolios and still an essential service despite growing environmental concern?
In light of BlackRock’s position, The Economist wrote: “[t]o cynics, all the climate-friendly noises amount to little in practice, since few people are ready to make carbon-cutting sacrifices that would force oil firms’ hands. But noises are sometimes followed by action. Should they be this time, the 2020s may be do-or-die for the oil industry”.
It isn’t a case of ‘adapt tomorrow or die’ for fossil fuel companies however, and Fink makes this clear, forecasting “the energy transition will still take decades”. Citing fairness and justice, “we cannot leave behind parts of society, or entire countries in developing markets, as we pursue the path to a low-carbon world”. The demand for energy will continue whilst technology works to bring cost-effective replacements to conventional fuel sources, but it is incumbent on the sector to aggressively pursue cleaner energy; not only from an ethical perspective, but also in order to remain an attractive investment. The same is also true for a number of other sectors which have for a long time been harmful to the environment, and must adapt with the new way of sustainable investing.
Companies from within the fossil fuel and investment sectors which are leading the transition to a more sustainable future are on the right path, reinforced by public support. This should not be derailed. Communicators in these sectors therefore have the opportunity to maintain messaging around this transition, but with fairness in mind, should also remain sensitive to the societies whose energy programs are not as developed as some of the leading world economies. The transition to sustainable investing will need a collective effort – innovation from industry, reallocation of risk, government support and sustained societal scrutiny, but in adopting Fink’s position, it should be worthwhile effort for investors, producers, and consumers, from both an environmental and a financial perspective.