As we mentioned yesterday in Part I of this series, Inclusive Capitalism must include environmental considerations, and big business has a huge role to play in bringing the environment back from the precipice. To that end, decarbonization and active ownership are two things companies can do about it. There’s been heated debate about the application of environmental, social and governance (ESG) principles to investing. While the U.S. hasn’t yet caught up with Europe in adopting these measures, the tide is turning, with the percentage of American institutional investors spurning ESG outright having decreased this past year from over half (51 percent) to just over a third (34 percent), according to an annual investing survey. This means—following the ‘E’ in ESG—that more business leaders are ready to run with the notion that investing in decarbonization is not only good for the planet, it’s imperative to remain relevant in the market. To me, this underscores a central tenet of inclusive capitalism: The mandate to prosper implies that investment managers must first keep track of their own behaviors in the marketplace, as well as those of their investee companies. And what could be more inclusive than pulling back climate change from reaching an uninhabitable level?
Environmental mayhem is affecting virtually everyone on our planet. With the U.S. Administration shifting course on climate change and withdrawing from the Paris Agreement two years ago, corporate social responsibility has been pushed into the limelight, suddenly rendering U.S. companies’ stance on global warming critically important to their bottom line, in addition to the well-being of everyone in the world. Indeed, American withdrawal from the Paris Agreement has had the fortuitous unintended consequence of accelerating the global desire to decarbonize. To expand that thought, something we have been working on in the U.K. and the EU for some years is the idea that ignoring climate change is actually a financial risk. Global warming will have a negative impact on the long-term performance of a company’s portfolio, never mind disrupting the planet.
My firm has been trying to hold companies accountable to a real, measurable standard of response to climate impact. Each year we publish a report on how companies are doing with accelerating their transition to a low-carbon economy, and we have seen improvements across entire sectors. Among this year’s Active Ownership initiatives, we describe how we launched 14 new funds with ESG-related objectives; assessed 11,000 companies according to our own ESG benchmarks; and took an active role in more key U.S. climate-change related resolutions than the 10 largest asset managers.
While we take this watchdog role of holding companies accountable to ESG standards very seriously, here I want to discuss in more depth some of the measures that companies have taken, and can take, to actually lower CO2 output. Economic imperatives alone will not do the job—while science and technology are moving things in the right direction, the commercial response is lagging, probably due to a lack of vision in most big companies. Bill Gates was right when he said, “Most people overestimate what they can do in one year and underestimate what they can do in ten years.”
Consider that over the last decade, the cost of solar panels has fallen 90 percent. Green investing should carry a lower capital charge, particularly in housing, where energy efficient and carbon-lowering measures have really begun to take hold in much new design. And while transportation has been the biggest source of U.S. greenhouse gas emissions, since 2010, electric vehicle sales in the U.S. have gone from zero to 1 million in the first half of 2018; in the U.K., there are projected sales of 20 million electric cars by 2030. They will become ubiquitous, as massive improvements in battery technology move their unsubsidized cost below that of internal combustion engine cars.
While decarbonizing road vehicles may seem relatively straightforward, we are still doing damage by exporting internal combustion cars to poorer developing nations. Also, making the switch to electric transport is of limited use if the electricity is still generated from fossil fuels. And far more difficult still to decarbonize is air travel—for while millennials may not like to buy cars, they do like to travel by air. Perhaps governments or the airline industry should impose a carbon tax on all air travel and reinvest this capital in alternative modes of generating electricity and fuels. Again, science and technology have stepped in here by developing and growing alternatives, and their increasing efficiency and usability resulting from storage will revolutionize energy generation. The same is true for carbon-neutral, energy efficient housing, which we will also see coming on stream. However, more simple measures can be taken to tally and reduce carbon usage, for example a system that equates miles driven with the amount of energy expended on food, heating, and other modes of transportation and travel.
Returning to the concept of active ownership and holding companies accountable, all of this progress sadly remains something of a minority interest for financial markets. Even as China prepares to make all 1 million of its buses electric by 2024, we struggle to name the world’s leading solar companies. Also, as business leaders, we need to gain a much better understanding of the complex dynamics of global energy. At present there is a huge divergence of views, many with conscious or unconscious biases, which can only narrow over time as data availability and use gets better.
We need to infuse our markets with a sense of urgency about climate change. These next 10 years will define everyone’s future—and if we don’t get on top of our carbon emissions in this decade, the window to slow global warming will be closed for everyone. While the cost of inaction is huge, leaders in the ESG space—the watchdogs—although becoming better understood, have yet to be seen as mainstream. In truth, their criteria should be considered the new normal.