Climate Deeply Embedded in Risk and Opportunity

Climate risk, real estate, and the bottom line (Source: Four twenty seven and Geophy)

• U.S. markets most exposed to sea level rise include New York, San Francisco, Miami, Fort Lauderdale, and Boston. The Top 2 REITs most exposed to sea level rise in the U.S. are Vornado Realty Trust and Equity Residential.
• Globally, REITs concentrated in Hong Kong and Singapore display the highest exposure to rising seas. Sun Hung Kai Properties, worth $56 billion, has over a quarter of its properties exposed to coastal flooding.

Beyond the cycle: which oil and gas companies are ready for the low-carbon transition?

24 of the largest and highest-impact publicly listed oil & gas companies ranked on business readiness for a low carbon transition:

Investment Opportunity

The green transformation will also drive many positive advances as the need for adaptation will spur the adoption of policy solutions aimed at funding clean energy projects, water security, sustainable and energy efficient infrastructure developments and green technological innovations like emissions capture and energy storage breakthroughs. These new climate industries not only provide jobs and economic gains but also generate a positive impact to society and the environment.

A millennial push: A vast sum of intergenerational capital will be shifting throughout the next decade into the hands of a group of investors for whom financial performance as a sole investment goal, is being replaced by positive impact.

The climate crisis is defining a future generation, and as the cohort of millennial and Gen Z investors grows financial performance will no longer be the only investment goal, increasing demand for positive impact investments that align with the broader sustainable objectives of society.

It will pay to go Green

Cleaner, greener companies with heightened moral capital and those taking steps to tackle climate transition risk are poised to gain in 2020 and beyond and will warrant a valuation premium as investors and asset managers become more discriminating and focus on integrating sustainability concerns into their investment mandates.

For more - Saxo’s Climate basket was released early this week by Peter Garnry

Fiduciary Duties to Drive Change

A key driver for expanding ESG mandates (for which climate is #1 consideration) is the redefinition of fiduciary duty and the growing cohort of millennial investors, for whom financial performance as a sole investment goal, wanting change and settling for nothing less!

As the voice of the climate crisis grows louder, it is inevitable that policy makers will mandate a requirement for institutional investors to include ESG as part of their fiduciary duty. If this change occurs this would make climate change, which is the primary issue for ESG asset managers according to US SIF (The Forum for Sustainable and Responsible Investment) a number 1 driver of investment mandates.

Blackrock have recently announced that it will add companies generating more than a quarter of their revenues from thermal coal production to its investment exclusion list in the next 6 months. At this stage, the policy will apply only to BlackRock’s $US1.8trn of active funds. Therefore, the divestment will affect just $US500mn of holdings out of BlackRock’s total $US7trn (0.007% of assets overall.)

Although this initial change may be small, Blackrock are the biggest financial institution in the world and the impact via signal effect is huge. Others competitors like State Street, JPM, Fidelity Vanguard etc. will follow suit (Groups including Columbia Threadneedle, PIMCO, Schroders, Aviva are already ahead of Blackrock in this respect). Passive allocations will be next, it is only a matter of time.

Climate change is the primary issue and takes centre stage for ESG asset managers according to US SIF (The Forum for Sustainable and Responsible Investment). More than one third of assets under management globally are now being invested according to the premise that ESG factors can affect a company’s performance and valuation, that makes climate a top 1 priority for investors. The number of asset managers investing with some form of ESG mandate is only growing and already trillions of dollars exclude companies that do not measure up in terms of sustainability. This will only grow larger as fiduciary duty is redefined.

Some of the world's largest asset managers already invest with a clear ESG mandate including the Government Pension Investment Fund (GPIF) of Japan, Norway’s Government Pension Fund Global (GPFG), and the Dutch pension fund ABP. The Government Pension Investment Fund (GPIF) of Japan, who manage more than US$1.5trn, last year moved $40 billion of its equities portfolio away from a traditional passive index based on market capitalization to one weighted for ESG themes, and primarily decarbonization. L&G, one of the U.K.’s largest asset managers, also attracted attention last year when it divested some holdings in ExxonMobil because of the company's inadequate response to climate change. Change is a foot.

Fiduciary Duty Re-defined

A key hurdle to financial institutions adopting ESG principles is the mistaken belief that fiduciary duty means focusing solely on returns, allowing ESG principles to be sidelined in favour of sacrificing return. However, recent legal opinions and regulatory guidelines state otherwise, instead arguing that it is a breach of fiduciary duty not to consider ESG principles. As the voice of the climate crisis grows louder, it is inevitable that policy makers will mandate a requirement for institutional investors to include ESG as part of their fiduciary duty. The UK, Canada, Sweden, Switzerland and other EU authorities are already ahead of the game in this respect.