Is it time for investors to take Greta Thunberg seriously?

Greta Thunberg accused the chief executives of major companies of being complacent about environmental concerns. On this, she is dead wrong.

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  1. Garry White

Chief executives of the world’s major companies are more concerned with PR stunts that make their companies appear “green” while not really doing anything to benefit the environment. That’s according to teenage activist Greta Thunberg, who pointed the finger at bosses of the world’s major businesses at the COP25 climate summit in Madrid last week. But, on this issue, Ms Thunberg is dead wrong. Many company boards are taking this issue very seriously indeed; their bonus payments could depend on it. 

“I still believe the biggest danger is not inaction, the real danger is when politicians and CEOs are making it look like real action is happening when in fact almost nothing is being done apart from clever accounting and creative PR,” Ms Thunberg said. But real changes are being made and they are being driven by investors – and companies that fail to take this issue seriously are likely to see their share prices punished. With many chief executives’ remuneration packages tied into share-price performance, this is an issue they will not ignore. 

Major investors are increasingly using positive screening and actively disinvesting from companies that do not meet the right environmental, social and governance (ESG) criteria. The number of indices and tracker funds that play into the ESG theme is increasingly rapidly. Data providers are now also giving companies ESG scores that fund and investment managers can use when assessing whether to invest in a business.

Downside risk

Last week, the United Nations-backed Principles for Responsible Investment (PRI), an international network of investors, argued that markets had not adequately priced in the likely near-term policy response to climate change. “This leaves portfolios exposed to significant risk and investors need to act now to protect and enhance value,” the PRI said.

Its analysis concluded that up to $2.3 trillion (£1.7 trillion), or 4.5pc, could be wiped off the value of companies in MSCI’s global index. The energy sector is expected to be the hardest hit, followed by autos, mining and utilities. This matters for UK-based investors because the FTSE 100 has a very high weighting of companies in these sectors, so it will arguably have a significant impact on the UK’s blue-chip index.

For example, this week US oil behemoth Chevron said it was writing down as much as $11bn worth of assets after it changed its long-term assumptions about energy prices. This is partly down to a glut of gas in the US, but is also a result of policy decisions by governments to encourage the switch to alternative energy sources throughout the world.

The shipping industry also faces new regulations from 1 January, when new pollution rules take effect. To reduce emissions of toxic sulphur, shipowners will have to either switch to a low-sulphur fuel or install exhaust gas cleaning systems. It has been estimated that the industry will have to invest around $10bn to meet these new regulations.

Positive screening

Ethical investing used to be all about excluding investments in businesses that were harmful or went against certain principles. For example, in the 18th century Quakers prohibited investments in anything related to the slave trade, and Methodists refrained from investing in industries that “harm one’s neighbour”. However, ESG investing is not about exclusion alone. It moves away from a pure negative-screening approach, and instead focuses on companies that take a positive approach to managing these issues.

This is something the investment industry has been working toward for many years. The term ESG was first heard at the Who Cares Wins conference held in 2005. The conference brought together institutional investors, asset managers, research analysts, global consultants, government bodies and regulators to examine how investors and asset managers could have a positive impact on the world. Slowly this has been growing in importance since then.

A recent Morgan Stanley study showed that 75% of the population is interested in sustainable investing, with 86% of millennials expressing an enthusiasm. The latter cohort is significant as the future inheritors of wealth. Indeed, high net worth (HNW) individuals are increasingly becoming aware of the risks to family wealth in future generations should they not consider ESG.

The rich want to preserve their wealth

A report released last week by Boston-based consultant Cerulli Associates indicated that 58% of HNW investors in the US actively use such investment strategies and plan to further increase their allocations in the next 12 months. 

“The concept behind ESG resonates with HNW investors due to their comfort levels in investing in innovative areas that provide impact and because of their deliberate focus on sustaining and protecting their wealth,” the report concluded.

Of course, investing using ESG principles is in its early stages. It is also difficult for an individual to outsource their own personal morals to a fund or investment manager as everyone has a different point of view. Nevertheless, the view that businesses are not really doing anything to make positive changes is just wrong.

As more investors choose ESG benchmarks over traditional indices, the difference between being an ESG “winner” and “loser” could become much more meaningful. As demand wanes for shares in business that do not meet these criteria and increases for those that do, there is a real incentive for chief executives to act. Greta Thunberg is therefore wrong to say that bosses are paying lip service to this issue. She could argue that the pace of change isn’t fast enough, but change is definitely afoot.

A version of this article appeared in Friday’s Daily Telegraph.

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