Author: Will Goodhart
This article was originally published by Sustainable Investor, 15 February 2023.
CFA UK Chief Executive Will Goodhart considers whether the net-zero transition in the investment industry is being stifled by a lack of regulatory detail and unrealistic targets.
Over the past several weeks, we have seen a succession of reports reinforcing the urgency for transitioning to net zero whilst highlighting the many benefits of doing so.
It was the recent release of Chris Skidmore's Net Zero Review which reinforced net zero as the economic opportunity of the 21st century. And soon thereafter, the Climate Change Committee (CCC) shared just how sizeable the level of subjectivity is when investors are attempting to maximise this opportunity for their clients' individual needs.
In its February report on adaptation financing, the CCC shared analysis of the needs, barriers and potential approaches to be considered using infrastructure and nature-based solutions.
It read: "the lack of detail on national level objectives for climate resilience means that bottom-up estimates of investment need are highly sensitive to assumptions about a desirable resilience target. Investments are also highly context specific."
In other words, it can be hard to estimate the value of the investment - and therefore to structure the financing - and it's hard to build models for adaptation investment that can be used consistently, making it harder and more expensive to do that kind of work.
It was the recent release of Chris Skidmore's Net Zero Review which reinforced net zero as the economic opportunity of the 21st century. And soon thereafter, the Climate Change Committee (CCC) shared just how sizeable the level of subjectivity is when investors are attempting to maximise this opportunity for their clients' individual needs.
In its February report on adaptation financing, the CCC shared analysis of the needs, barriers and potential approaches to be considered using infrastructure and nature-based solutions.
It read: "the lack of detail on national level objectives for climate resilience means that bottom-up estimates of investment need are highly sensitive to assumptions about a desirable resilience target. Investments are also highly context specific."
In other words, it can be hard to estimate the value of the investment - and therefore to structure the financing - and it's hard to build models for adaptation investment that can be used consistently, making it harder and more expensive to do that kind of work.
Clarity and consistency
For investors to bridge this assumption gap, both reports emphasise the need for clear, consistent, supportive government policy over time. This would stand to address such systemic issues and funnel private capital towards what the Aldersgate Group's Nick Molho calls a "major pro-business and pro-investment opportunity".
Molho asserts that it will cost far less to invest in adaptation measures today, than it will to cope with the increasingly extreme effects of climate change if we don't. He lists the most pressing areas of attention to be: "grid infrastructure, full power sector decarbonisation, energy efficiency in homes, resource efficiency, and the business models to support the rollout of carbon capture and storage (CCS), hydrogen and other low carbon solutions urgently needed by heavy industry".
"Investment" and "investors" are mentioned 615 times within the Net Zero Review and there are another 356 instances within the CCC's report. The need is clear and so is the opportunity. And yet, without the correct policy framework, it's not quite that simple for investment professionals.
At a recent event the UK CFA Society held for its advisory council and the graduates of our Ethical Leadership Programme, we discussed fiduciary duty in the context of sustainable investing. While there was quite a high degree of consensus that sustainable investing is consistent with fiduciary duty ("if we have an information asymmetry in terms of our understanding of climate, why would we not want to use that on our clients' behalf?"), there was also concern about being too confident in the interpretation of that duty.
Attendees noted the impact on recent returns of fossil fuel exclusion and accepted that much of the argument in favour of investing in the net zero transition would depend on beneficiaries' time horizon and further unknowns as to how soon climate risk would start to be more comprehensively reflected in asset prices.
In addition, just as there isn't enough standardisation of the approach to climate reporting and disclosures, the perception of fiduciary duty with respect to climate - and how it should be interpreted - differs internationally with much higher levels of challenge in North America and Asia than in Europe.
Molho asserts that it will cost far less to invest in adaptation measures today, than it will to cope with the increasingly extreme effects of climate change if we don't. He lists the most pressing areas of attention to be: "grid infrastructure, full power sector decarbonisation, energy efficiency in homes, resource efficiency, and the business models to support the rollout of carbon capture and storage (CCS), hydrogen and other low carbon solutions urgently needed by heavy industry".
"Investment" and "investors" are mentioned 615 times within the Net Zero Review and there are another 356 instances within the CCC's report. The need is clear and so is the opportunity. And yet, without the correct policy framework, it's not quite that simple for investment professionals.
At a recent event the UK CFA Society held for its advisory council and the graduates of our Ethical Leadership Programme, we discussed fiduciary duty in the context of sustainable investing. While there was quite a high degree of consensus that sustainable investing is consistent with fiduciary duty ("if we have an information asymmetry in terms of our understanding of climate, why would we not want to use that on our clients' behalf?"), there was also concern about being too confident in the interpretation of that duty.
Attendees noted the impact on recent returns of fossil fuel exclusion and accepted that much of the argument in favour of investing in the net zero transition would depend on beneficiaries' time horizon and further unknowns as to how soon climate risk would start to be more comprehensively reflected in asset prices.
In addition, just as there isn't enough standardisation of the approach to climate reporting and disclosures, the perception of fiduciary duty with respect to climate - and how it should be interpreted - differs internationally with much higher levels of challenge in North America and Asia than in Europe.
Is a ‘best in class' approach best?
Responsible asset owners clearly take a view that integrating climate into investment considerations is the right thing to do from an investment perspective as well as being in the beneficiaries' broader interest. Signatures to the Net Zero Asset Managers Initiative - and other GFANZ groups - are taking the same position, but it isn't always comfortable. There was broad agreement that taking a "best in class" approach and stewarding investee organisations towards net zero is easier than exclusion, but is that going to get us where we need to go as fast as we need to get there?
All of this speaks to the need for clear, consistent policy frameworks, providing greater certainty around the outlook for prices of assets which are, or are not, net zero-aligned. It also calls for the profession to make this need clear to policymakers and regulators.
Professional bodies such as CFA UK also have their role to play. Providing individuals and organisations with specific, practical climate investing skills, alongside the competencies to drive organisational and systemic change stands to make all the difference.
We need to make it easier for those investing other people's money to do so with confidence. They need to feel assured in both their approach and ability to achieve satisfactory relative returns alongside positive planetary outcomes.
All of this speaks to the need for clear, consistent policy frameworks, providing greater certainty around the outlook for prices of assets which are, or are not, net zero-aligned. It also calls for the profession to make this need clear to policymakers and regulators.
Professional bodies such as CFA UK also have their role to play. Providing individuals and organisations with specific, practical climate investing skills, alongside the competencies to drive organisational and systemic change stands to make all the difference.
We need to make it easier for those investing other people's money to do so with confidence. They need to feel assured in both their approach and ability to achieve satisfactory relative returns alongside positive planetary outcomes.
Will Goodhart, CEO, CFA UK
