How investors can help avert climate catastrophe

How investors can help avert climate catastrophe

Editor's note: This article is extracted from the book Sustainable Investing (Dō Sustainability, May 2013) by Cary Krosinsky, Executive Director of the Network for Sustainable Financial Markets. GreenBiz readers can use code GBiz10 at for 10 percent off this book.

In today's marketplace, investors have three prospective response scenarios to consider when it comes to issues of the environment and society. The first "option," business as usual, is where most investors are presently placed, leading to some form or other of catastrophe whether related to storms, biodiversity loss, sea level rise, etc., or some combination thereof, and very likely economic collapse.

A second overarching scenario -- incremental change -- appears to be insufficient. We struggle to find adequate pathways to sustainability through "wedge" theory. The latest estimates across analysis ranging from the International Energy Agency's future studies and similar from the International Finance Corporation (IFC), World Resources Institute (WRI) and UN Environment Programme (UNEP) suggest we are on the brink of big trouble with incremental approaches being anything but close to enough.

If the possible outcomes are either radical transformation or catastrophe, this has enormous implications for investors. A point to stress is that it should be clear that if investors stand pat, they will fail either way. Therefore, the only sensible choice is the third option: for fund managers and asset owners to change their priorities and perspectives and seek to become part of the solution instead of participating in an almost guaranteed economic or environmental failure over time.

The state of global ownership

The present state of global asset owners requires some consideration. Pension funds, endowments and foundations typically have ongoing shortfalls, paying out more on an annual basis than they earn in profit. Such pools of assets feel the need to use a mix of creative expectation to maintain as much of their own status quo as they possibly can.

Pension funds often report profit expectations of 5 to 8 percent per year even in an age where growth is fundamentally challenged. Yet these same asset owners insist on being universal owners, not factoring in ESG in any meaningful way, perhaps guaranteeing that they won't achieve their own goals if growth fails to continue.

Fortunately, many large asset owners are reconsidering this, including CalPERS, Norges Bank and many others, especially those in Scandinavia. Such asset owners represent well over $1T in public equity alone, making a pending shift of this capital towards sustainability focused companies another trend to consider.

Investor and flood photo by Peshkova on Shutterstock.

Another aspect to discuss more thoroughly is the deeply rooted nature of current lifestyles and business. The global footprint in effect consists mostly of individuals and their families, businesses, governments and the business processes, transportation and buildings involved. Entrenched deeply within all aspects of this are use of fossil fuels, cement and chemicals, all of which are the vast majority of the overall greenhouse gas (GHG) footprint of human activity.

Businesses encompass roughly 40 percent of the global footprint, individuals another 40 to 50 percent, and natural causes are the remainder. PwC suggests that we need to lower the aggregate annual footprint by 5 percent per year, in order to keep within a 2°C increase by the year 2050. Clearly, business has a huge role here, in promoting and delivering resource efficiency and innovative products and solutions which can further reduce individual footprints.

Using investment to encourage such activity, by rewarding those companies best positioned to drive solutions of the future, is worth a concerted effort, and to some degree, markets are already moving in that direction. In 2011, for example, while the S&P 500 was flat, two leading lists of the most innovative U.S. companies, one performed by MIT Sloan, the other by strategy + business magazine, both were up 6 percent.

One other thing worth considering is the overall ownership structure of business. The largest categories of owners of stocks are governments, wealthy families and individuals, corporations themselves, pension funds, sovereign wealth funds, insurance companies and middle-class families in aggregate.

Much smaller in aggregate are endowments and foundations, less than 1 percent of public equity in total, so efforts at getting universities to divest from fossil fuels, while perhaps morally feel good in nature, will not tip the balance in any way shape or form. (More interesting are cases such as Yale University's endowment, who already allocated 6.4 percent of their ownership to "positive sustainable investment." However, does this imply that 93.6 percent of their investing is not sustainable? Perhaps not all of it, but it does beg the question. Certainly universities have the opportunity to set an example, but they cannot do it all by themselves.)

Long-term energy transitions are required

So what sort of larger shifts are required to get us to 2050 without climate catastrophe? One thing we could consider starting with is coal. Can we not consider a preservation and buyout effort to retire those assets in the ground, combined with converting coal plants to use other sources? Some form of effort in this regard would seem mandatory.

While the Obama administration is embarking on technical policies making coal plants unaffordable, Europe is slipping back into increased coal use, especially after Fukushima. China, Russia and India in the meantime continue to make plans to create well over a thousand new coal plants. Coal represents a large majority of the problem, and if we found a way to completely convert coal plants to natural gas using best practice to ensure no methane leakage and limit the damage to fresh water in the process by choosing locations wisely, we could have something of a plan to pursue.

Ownership is critical, as assets in the ground have an assumed value. Much like bankruptcy proceedings, owners of equity and fixed income that relate to coal companies could receive some percentage of their investment back, and owners of the land, whether the same companies or not, simply could be bought out, and a regime put in place to ensure that the coal stays where it is, in the ground.

Similar efforts are deployed on aging nuclear weapons and nuclear waste, making sure they don't leak, proliferate, etc. This comes at a cost, but one we have to bear. Investors should get part of their money back, but not all, as there need to be penalties for choices taken that prove in the end to be economically unwise. Why should investors get a free pass? They seek one, but it is not deserved in this case.

Nuclear makes some sense as a viable option -- certainly France has shown how nuclear can be a majority of the energy source for a country. Can France lead a global coalition to deploy best practice nuclear? The challenge of course is that the best technologies are more expensive, and it takes something like 20 years to deploy nuclear, especially in the U.S., while Fukushima has derailed options elsewhere, and the waste challenge remains.

Clearly, we also need to find a way to maximize solar, wind, hydro, geothermal, etc. The good news here is that the technologies improve every day, along something of a Moore's Law/Kurzweilian path. The bad news is that these same advances have caused early investors to lose their shirts and at times give up on environmental investing as a viable option. This is one reason to map out a transition plan that investors can ride with confidence, and not just invest where their hearts are.