* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
With climate-smart investments outperforming their rivals, now's the time for companies to step up
María Mendiluce is CEO of the We Mean Business coalition.
Investors are increasingly aware that though the current challenges facing companies are numerous and disparate, from the COVID-19 pandemic to social inequality, the thing that connects and exacerbates them all is the climate crisis.
Put simply, investors are looking for a leadership position in the race to net-zero emissions and they are willing to back those with bold ambition and a strong plan for action.
COVID-19 provides a litmus test
For companies, the devastating COVID-19 pandemic has proved a huge test of resilience and also shone a light on the importance of addressing Environmental, Social and Governance (ESG) factors.
Analysis from HSBC Bank found that during the height of the crisis, ESG-focused stocks outperformed others by about 7%, a finding that was mirrored by analysis from S&P Global Market Intelligence, focused on exchange-traded and mutual funds.
Meanwhile, research from JP Morgan found that COVID-19 could have triggered a ‘tipping point’ for investment flows into ESG-related stocks, with the market expected to reach $45 trillion in assets under management in 2020.
And ESG-themed exchange traded funds (ETFs) attracted a record $38 billion in new money for the year as of July 30th, topping $100 billion in total assets for the first time.
The message is clear - companies that take into account risk factors including climate change are better prepared to withstand increased volatility and disruption. And investors are taking notice.
Unprecedented financial flows
In the wake of the COVID-19 pandemic, governments around the world unleashed unprecedented stimulus spending plans, with many governments specifying green measures as a core part of the spending.
In July, the European Union agreed the most ambitious climate plan to date with some $572 billion earmarked for climate-related industries including electric cars, renewable energy and sustainable agriculture. EU ambition has since been bolstered by a proposed toughening of the bloc’s emission reduction targets to at least 55% by 2030.
Banking analysts were quick to point to winners from these spending plans. Goldman Sachs highlighted the companies most likely to benefit in sectors such as transportation, power utilities and buildings and infrastructure.
Meanwhile, the divestment trend is also accelerating in the post-COVID world, with money flows out of high-carbon companies increasing.
Fossil fuel companies have been among the worst performing stocks during 2020 so far, as the sector is hit by the impact of lockdown travel restrictions as well as increasing climate awareness. But the move to decarbonize investment portfolios is not just short term and was firmly established long before COVID-19 took hold.
The number of institutional investors committed to cutting fossil fuel stocks from their portfolios rose to more than 1,100 as of September last year, compared to just 180 in 2014, according to a report from 350.org. This month, a group of global pension funds and investment managers, with over $40 trillion in assets, became the latest to outline plans to cut carbon in their portfolios to net-zero by 2050.
Meanwhile, the Net-Zero Asset Owner Alliance, which now represents nearly $5 trillion in assets under management, is uniting investor action to align portfolios with commitments to to limit global warming to 1.5 degrees Celsius.
And more than 500 investors with over $47 trillion have signed on to Climate Action 100+, calling for the top 100 companies accounting for two-thirds of annual industrial emissions to tackle climate change.
Defining climate leadership
Aside from ESG ratings, one of the key ways for investors, banks and rating agencies to determine a company’s preparedness for climate change is their engagement with the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD).
In the wake of the pandemic, UN special envoy for climate action and finance Mark Carney called for TCFD recommendations to become mandatory for companies. And the New Zealand government became the first country to announce mandatory climate-risk disclosures for the financial sector by 2023.
While climate disclosure is a strong starting point, companies need to respond to the climate crisis with a clear strategy that avoids risks and maximizes opportunities - a strategy that has high ambition, and delivers on that ambition with action, coupled with positive advocacy to secure wider change.
A new report - Climate Leadership NOW - outlines how companies can progress their climate strategy towards a climate leadership position fit for this decisive decade. Now is the time for companies to lead on climate.