Scientifically literate investment executives who care about the future of human civilisation and the ecosystem will be painfully aware that Jean-Claude Juncker’s comment about the euro-zone also relates to the climate crisis.
“We all know what to do, but we don’t know how to get re-elected once we have done it.”
Part of the challenge is that many people – voters but also influential market participants – have thought it enough to comment from the cheap seats. Or pretend that incrementalist solutions (trying to find ‘climate alpha’ – which I view as profiting from the climate emergency) have more social benefit than they do. What is needed now is action that is fit for purpose.
Here are two letters that CEOs of pension funds and fund managers could usefully send right now. For those unsure, just ask a couple of well-informed children in your network how they feel about how the ‘grown-ups’ have handled this crisis.
And if you have cynical colleagues, remind them that these letters will empower change agents in your investment supply chain and help them argue for the changes that their own organisations know are appropriate but may be resisting.
Neither I, nor anyone else, can demand that you send a specific text or follow a particular course of action – that must be your decision.
But please reflect on the fact that, just as you are fiduciary agents responsible for the money under your care, we are all – all seven-plus billion of us in the human race – fiduciary agents responsible for the health of the planet, responsible for passing it on to our children in a condition no worse than when it was given to our care.
If IPE readers can persuade their CEOs to use these letters, I shall, of course, be more than delighted. Please don’t obsess about the details: sending a good enough letter in Q4 2021 – which makes good use of the media coverage for COP26 – will be much better than perhaps sending a perfect letter later in 2022 when the media have lost interest.
If you can organise a board meeting to review the Intergovernmental Panel on Climate Change report in the next few weeks to back your letter, that would be great. But the need is for action, not more procrastination. Rather than ask for permission, act now – and ask for forgiveness if it is needed.
Letter to pension fund members
“As investors of your pensions/savings, we can assure you we take the risk of the current climate emergency very seriously.
“Whilst the situation is already serious, we accept the advice of senior scientists that the worst of the crisis can still be averted if we all act together and promptly. Waiting for political leaders to rescue us has not and will not work.
“We are minded to ask all the companies in which we invest your money to tell us whether or not they plan to align their business plans with the Paris Agreement, and if they do intend to align, to describe exactly how they plan to do this, with estimates of costs and timings.
“We will use our influence to ensure such transparency and, if companies refuse to respond or show inadequate ambition, we will make a professional judgment about how to escalate the pressure they face and or reduce our investment to manage the risks.
“We would like to know what you, our members/clients, think. Obviously we cannot keep everyone happy and nor can we abdicate our fiduciary responsibility to make the final decision.
“We are all fiduciary agents responsible for the health of the planet, responsible for passing it on to our children in a condition no worse than when it was given to our care”
“But we do want to know how many of you support us doing this now, whether you would like us to do more, or whether you would like us to delay taking action. And if so, for how long (eg, until we are forced to by governments or at a particular level of warming/GHG emissions).
“We urge all of you to take a few minutes to respond in this prepaid envelope. We especially want the silent majority to speak.”
Letter to fund managers
“As you will know, there is now a strong global consensus that humanity faces a major climate emergency. As long-horizon-oriented and responsible asset owners, we can assure you we take this risk very seriously.
“Hence, we are formally contacting all the fund managers who are responsible for managing our portfolio to update you about what we would like from you.
“We are fully aware that the investment system (including regulation) – with its focus on the short term and its lack of accountability for systemic risks – is not well placed to respond to this crisis. But these factors cannot be an excuse for inaction. Together, clients and their agents and partners must find ways around this. This includes our firm and yours.
“First, we would like you to require all the companies in which you currently or might invest on our behalf to make public their net-zero transition plans and do so within six months on a comply-or-explain basis. The target date for net zero should be 2050 at the very latest but we are also aware of the mainstream scientific opinion that suggests that this is too late.
“Hence it is vital these transition plans feature firm short and medium-term actions that could be scaled up or brought forward if circumstances demand. To ensure there is no free riding from other fund managers, we would like especially those companies that have a major impact on the climate crisis – either because of their carbon or policy footprint – to face a biannual ‘Say on Climate’ AGM resolution.
“We trust your firm will play its full part in making sure this happens across all markets. We consider this warrants a major upgrade in stewardship activities, both in terms of quantity and quality, but also creativity of strategy (eg, how the stewardship responsibilities are shared out).
“Second, we are minded to shift to a net zero-aligned carbon budget for all mandates and asset classes that would leave you, our managers, to generate returns within that constraint. We are looking for your active collaboration in initiatives on how to create such net zero-aligned carbon budgets and how performance metrics and remuneration should be adapted accordingly. Clearly these initiatives need to have plausible system-wide impact to be useful.”
Similar letters should also be sent to all the research providers and advisers – sell side, credit rating, voting advisers, auditors, ESG rating agencies, lawyers – on whom investors depend to step up their focus on the systemic nature of this threat.
Perhaps, most important, I hope you will lobby your elected representatives and others you may know in positions of political authority, to ensure that regulators act to keep warming to as close to 1.5°C as possible.
The market alone cannot handle this and hence we need to push regulators internationally for the sort of mobilisation that happens in wartime but with the complication that what is needed is international collaboration. This governmental lobbying is probably more than most private sector firms can do and hence my request you act in your personal capacity.
Feel free to contact me if you want to discuss what you could say.
Raj Thamotheram is a fellow of the Nordic Institute for Finance, Technology and Sustainability (NIFTYS)