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Special Report

ESG: The metrics jigsaw

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Connecting climate dots

The Extinction Rebellion climate protests that took place in London and other cities last month happened to coincide with the release of Legal & General Investment Managers’ latest corporate governance report. 

Here LGIM showcases its credentials in using its voting power at boardroom level to change corporate activity on climate change – where it is an industry leader, according to one independent benchmark.

Yet climate change activism and big capital seem as remote from the lives of ordinary citizens as ever. Both are mistrusted.

The continuing debate in boardrooms, investment committees and wider society about climate change and ESG raises as many questions as it provides putative answers to societal problems.

For the UN, climate change is “the defining issue of our time”, while the World Bank sees it as an “acute threat to global development”. 

The transition to a low-carbon economy will necessarily be capital and R&D intensive, and should therefore lead to significant economic opportunity. New Climate Economy estimates economic benefits of €23trn to 2030 and 65m jobs in low-low carbon sectors.

screen shot 2019 04 29 at 13.10.25

This is a significant source of investment opportunity, given the heavy lifting that will be required, both in real assets, listed markets and dedicated green capital.

For GMO, in a recent paper on climate change investing authored by Jeremy Grantham and Lucas White, climate change investing can be framed as a “global equity alpha play” with some diversification benefits. Alongside the current wave of ESG integration, existing ESG funds could find new life as thematic portfolios for exposure to areas like energy transition.

Yet for most investors, climate change is an ESG issue among many. Interest in ESG has arguably sown confusion about implementation, integration and overall purpose. Few have a dedicated climate change allocation.

For many citizens and pension fund members the fight against climate change is an elite project or a second order problem at most.

At a political level, the gilets jeunes movement in France and the success of the populist Finns Party in Finland have highlighted populist discontent with action against climate change. Carbon taxes may be welcomed by the wealthier middle classes but lower income groups feel they bear a disproportionate burden.

The Investing in a Just Transition Initiative is an important means to focus attention on the social benefits of climate action. Pension funds play a role in communicating their long-term vision in the flight against climate change to ensure better understanding of the manifestly shared goals and interests.

Liam Kennedy, Editor
liam.kennedy@ipe.com

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