We will discover how strong an agreement states can reach on fighting climate change at the conclusion of the Paris COP 21 talks on Friday. But already, the summit has seen the announcement of a host of initiatives from the public and private sectors.
Several are relevant to the capital markets. Three highlighted by the World Resources Institute are the New York Common Retirement Fund’s adoption of a low carbon index designed with Goldman Sachs Asset Management; ABP, the Dutch pension fund, introducing a carbon budget for its asset managers; and State Street launching a fossil fuel-free exchange traded fund. Over 500 institutions have committed to divest from fossil fuels.
But one announcement on Tuesday is of particular interest. The Science Based Targets Initiative is a gathering of companies and NGOs around one goal: to reduce their greenhouse gas (GHG) emissions in line with what scientists believe is necessary to keep global warming below 2°C.
So far, 114 companies have signed up, and 10 have had their targets approved by the organisation: Coca-Cola Enterprises, Dell, Enel, General Mills, Kellogg, NRG Energy, Procter & Gamble, Sony and Thalys.
Enel, for example, has committed to reduce its CO2 emissions by 25% per kWh by 2020, from a 2007 baseline. Some 13GW of fossil fuel power plants in Italy will be decommissioned. The company is aiming for carbon neutrality by 2050.
In the banking sector, Commerzbank, ING and Westpac are the big names among the 114.
That companies feel the need to set such targets for themselves is a sign of the continued failure of governments to take the lead on climate action — despite having acknowledged the problem of climate change since at least the Rio Earth Summit in 1992.
But it is extremely encouraging that companies are taking the lead, undeterred by fears that they might put themselves at a competitive disadvantage.
So invest in them!
The Science Based Targets Initiative has another great virtue: it attempts to be guided by the scale of GHG reductions that scientists say are necessary — not the weaker targets that governments are willing to sign up to. It is clear that, even if a good outcome is reached in Paris, the scale of emissions cuts envisaged by states will still leave the world likely to suffer catastrophic warming of 3°C, 4°C or more.
For capital markets, theScience Based Targets Initiative presents an opportunity. Here is a self-defined group of companies that have committed to improving their environmental performance quite steeply. Of course, there will be arguments about how adequate their pledges are, and whether they live up to them. But by joining the initiative, they are exposing themselves to that scrutiny.
Around the world, many investors are pummelling their brains trying to work out how to do socially responsible investment. They want to reflect the desire to do good among their end investors — and the asset managers themselves feel personally responsible for the welfare of the planet.
The Science Based Targets group, which is bound to grow, offers a bunch of companies to invest in that are at least trying to do something about the problems the world faces.
By buying a bond issued by General Mills, or the shares of Enel, rather than those of rivals, you are supporting that drive. You also know that the company is trying to green its operations right across the firm, not just with specific projects.
Green clarity, green muddle
Is this not a more appealing sustainable investment project than a green bond, which does not even pretend to address the overall behaviour of a company? Ten percent of a company’s operations might be green, and you can pat yourself on the back for buying a bond theoretically tied to them. But by doing so, you are making it easier for the company to find investment from other investors for the 90% of its activities where it may be making weak environmental progress, or none at all.
It is time for investors interested in green bonds to abandon their obsession with ringfencing and micromeasuring individual projects, which does not in itself help the climate, and look at the bigger picture — some companies and organisations out there are part of the solution, and some are part of the problem.