As usual, climate change was front and centre at this year's World Economic Forum in Davos. Sadly, however, the vast majority of the discussion proceeded on two fundamentally flawed assumptions:
1. That the real action was at the inter-governmental level, and that actual outcomes on the ground would be largely determined by the success or failure of the mega-negotiations at the Paris COP 21 in December.
2. That , even if "non-state actors " like institutional investors did have a material role to play, the apotheosis of their contribution would be investing in "clean tech" --- finance and build a few solar and wind farms, and all will be well.
Puhleese, folks: let's get real! The first fallacy essentially ignores the massive potential impact -- for good or for ill -- of redirecting the $150+ trillion in stocks and bonds owned by public and corporate pension funds, insurance companies, endowments and foundations, family offices, and high net worth individuals. The second assumes that, even if there were a substantial role for these investors to play, it could be fulfilled simply through clean tech investing. Hey: I'm as big a fan of clean tech as the next guy, but let's pause a moment and reflect: for even the most climate-savvy, committed institutional investors in the world that I know, clean tech accounts for less than 1 percent of their overall investment portfolio -- what about the other 99 percent of their assets -- equities, bonds, real estate, infrastructure? And remember: these are the leaders we're talking about; don't get me started on the rest! In terms of climate change, those assets are not so much stranded as -- well, inert, and under-utilized.
Which brings us to another massive lost opportunity: the way endowments, foundations, and wealthy individuals currently invest. The "mission" side of the organization and its investment arm are entirely divorced from each other. Examples abound: chief investment officers of foundations giving hundreds of millions away each year to support environmental or social progress willfully refuse to even consider addressing those same issues in their investment activities.Those investments may be massively undermining the excellent work being done by the grants; they may possibly even be reinforcing those objectives, although I doubt it. The point, however, is that the chief investment officers of the foundations -- fiduciaries all -- generally have no idea which it is ! What's worse, they don't even want to know. And here's the real killer: the dogged refusal to even address environmental or social risk and impact systematically in their investment activities is generally justified by citing the very fiduciary responsibilities which they are willfully ignoring -- "oh, listen: in my personal life I ride my bike to work, recycle like crazy, and am even on the local chapter executive of the World Wildlife Fund, but you gotta understand: 9 to 5, I'm a fiduciary, managing money for widows and orphans, and I'm duty-bound to maximize their risk-adjusted financial returns. And everyone in the asset management industry knows that paying attention to non-material issues like environmental and social ones is virtually guaranteed to produce lower returns, and I simply can't do that!"
How can that be? Well, mainstream financial orthodoxy (despite mounting academic and empirical evidence to the contrary) tells us that, even on a good day, such matters are not material to investment results, and on a bad day (apparently, most of them), they are actively injurious to returns if allowed to influence stock selection! I've heard this very argument made publicly in Davos by a Nobel economist... In actual fact, however, should the skeptics choose to look, evidence abounds that taking environmental and social issues into account in the investment process generally improves risk-adjusted financial returns -- with an environmental or social
"dividend" thrown in for good measure! And never mind past investment performance; what about the future, as environmental and social megatrends bite even deeper ?
There is, however, a faint ray of hope. Over the past 18 months or so, large institutional investors, especially in Europe, are awakening to two inter-related realizations:
1. Climate change, if it weren't before, is now morphing into a legitimate investment issue which demands some response.
2. That response probably should involve more than 1 percent of their assets -- i.e., their investments in pure-play clean tech companies.
Given that investors with over $60 trillion in combined assets have already signed up to initiatives such as the Carbon Disclosure Project and the UN Principles for Responsible Investment, the potential for catalyzing significant progress on the climate file is undoubtedly there. Now let's see the signatories put their money where their signatures are!