By Sagarika Chatterjee, Director of Climate Change, PRI
To date, the dominant narrative among responsible investors was that ESG issues, and climate change in particular, are financially material. Investors should put in place processes to respond to the materiality of climate change. Investors are ‘climate change takers’.
By recognising climate change as financially material, investors (in theory at least) integrate climate change in their investment processes. Investors allocate capital to companies better placed to out-perform as we transition to a decarbonised economy. Investors engage companies to better manage climate risks and opportunities. And so the cost of ‘doing business’ goes up for companies less able to respond to the transition and goes down for companies more able.
This is of course welcome.
But the pace of change is not quick enough. And even if the pace quickens, the incremental change to date is not nearly enough to meet climate targets. Climate change is just not material enough. At least, not yet.
And so a new narrative is emerging among responsible investors.
The new narrative is that investors are ‘climate action makers’. The activities investors fund materially contribute to climate change. So rather than responding to climate change, or even managing climate change, some investors are asking how they can actively finance climate action.
This emerging narrative is often asset owner-led because, for universal owners, there are no externalities. If you don’t pay now, you will pay later. The more we delay, the more disruptive – and expensive – the action will inevitably be.
And for asset managers, some are considering the ways in which their services encourage their asset owner clients to be ‘climate action makers’. For they are trusted advisers. The views that asset managers hold on climate change have major implications for their clients. In short, what’s the net-zero investment pathway?
But for all the might and power of finance, and for all the reason and evidence of science, we’re too short ‘climate action makers’. It is not responsible investors, but the voice of children that we hear the loudest.
So as we join children in their climate strike, this new narrative must prevail. Investors around the world must become climate action makers – and fast. Because on climate change, however good the ESG integration process, the only measure that matters is atmospheric carbon. As the children say, it’s too high.
And in time, I expect our backward-looking performance models will prove right the ‘makers’; even though their lens was action, not financial materiality, over the long-term they outperformed the ‘takers’.