By Sven Richter Drakens Capital June 2019.A CARBON NEUTRAL OR BETTER WORLD
The news that the United Kingdom as a country will be carbon neutral by 2050 is part of a global
trend. The United Kingdom is not alone in its ambitions the European Union and the state of
California also have net zero ambitions. As do a number of companies.
In this new carbon neutral world, we have to consider how the asset management industry reacts.
People, and the firms that provide us with the means to live, our food, transportation, shelter and
the energy that makes it all work, as part of what they do generally do, create carbon. Some
industries and activities have a higher carbon footprint then others but all have some sort of carbon
footprint. The asset management industry, when investing client’s money, buy into these firms with
the aim of making money for their clients.
Picture credit – Chris LeBoutillier - Pexels
WHAT IS NET NEGATIVE
While a forest or a solar power plant may have a carbon footprint, it is the net that we focus on. The act of planting and maintaining the forest and the act of building and maintaining the power plant will produce carbon. In a similar manner an investment fund must have a carbon footprint. The carbon footprint of a fund is the sum of all the carbon footprints of its investments plus the carbon generated in the process of managing the fund.
Some funds may have a negative carbon footprint as they are invested in companies and industries which have a negative carbon footprint. But how many opportunities like this are there for investors. We can try and direct all our investment to solar power plants. But while the move to invest in solar and wind power and to dis invest from coal and oil will create a lower cost of capital for the “good” companies and a higher cost of capital for the “bad” companies. As investors we can only go so fa with this, before there is a problem. If all investors made this move the demand for investments in the “good” companies, however, we define “good”, will soon drive the price of these firms far too high and create a bubble.
WE CANNOT DISREGARD INVESTMENT RETURNS
The investment management industry as a custodian of people’s investments, must always be aware of both capital protection and returns. Putting investments into a bubble that will deflate cannot be good for investors. Many pension funds and asset owners are looking for a way to deal with this problem.
A number of banks and funds have responded by purchasing carbon credits, to get to carbon neutral. As these banks and funds want to limit the amount, they spend on carbon credits, the obvious way to deal with this is to also look at their business and reduce the carbon footprint. The goal of this approach is to get to carbon neutral. This is a good goal but there will always be firms out there that are not carbon neutral. How can we then offset these firms’ carbon when they will not do it themselves? Either by choice or because its impossible for them to achieve this.
The answer, is that certain firms in the industry, must be to go beyond carbon neutral, if we want an industry to be carbon neutral. But this is a challenge. Firms and investment managers have a duty to their investors. We have moved beyond profit above all else as a business model and recognise the wider role that firms and investors play in society. But while there is a move to responsible investing the investment manager must still look to generating a return for their clients. As can be seen by the rise in responsible investing, many more investment managers are looking to transform their business or part of their business to follow sound ESG principals.
The E off course stands for Environment. But we still come back to the investor. Generally, studies show that a fund with sound ESG principals will perform as well or better then one without. So, to do good does not mean you will do badly. But how good can you be before it harms your returns.
Business and investment managers must make a return for their investors. So, they will buy carbon credits up to the optimal level to meet their goal of carbon neutral. Should they go beyond that? To go beyond that may be beneficial to society as a whole. But is it fair to ask them to do that when other firms and investors may then be able to have a free ride on their commitment?
Photo credit - Pixabay
SOMEONE WILL HAVE TO GO BEYOND CARBON NEUTRAL
The answer is that yes, some firms may need to go beyond carbon neutral for the good of society. We can argue to fairness of that, but if we want an industry to be net neutral some will have to be better then neutral.
But how do we do that without effecting investors returns. The answer, is in the firm’s shareholders commitment.
If investors can invest in a fund that has a low carbon profile with the same costs and returns profile as a similar fund and the investment management firm has a goal to put aside a certain portion of their profits.
Then over time this entity, its funds, firm and the offset seen as whole will be achieve better then net carbon neutral.
In the investment industry this can be done and it must be done now if we are to achieve our carbon goals.
PEOPLE MUST COMMIT
The last piece of the puzzle is people. Many of us invest, sometimes directly at other times through our pension funds. If it will cost you or your pension fund nothing extra and your returns are as good, then you have a choice to become part of the solution at no cost to yourself.
To find out more about the funds we run and the solutions we provide to clients,