31 Jul 2019
Environmental mayhem is affecting virtually everyone on our planet.
This blog is based upon the second of two articles which appeared in Forbes.com on 27 and 28 July 2019.
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, decarbonisation 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. Decarbonisation is not only good for the planet, it’s imperative to remain relevant in the market. This is a central tenet of inclusive capitalism as what could be more inclusive than pulling back climate change from reaching an uninhabitable level?
Environmental mayhem is affecting virtually everyone on our planet. American withdrawal from the Paris Agreement has had the fortuitous unintended consequence of accelerating the global desire to decarbonise. Ignoring climate change is actually a financial risk and global warming will have a negative impact on the long-term performance of a company’s portfolio, never mind disrupting the planet.
We at Legal & General have 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. In this year's report we describe how we launched 14 new funds with ESG-related objectives, how we assessed 11,000 companies according to our own ESG benchmarks and how we took an active role in more key U.S. climate-change related resolutions than the 10 largest asset managers.
However many companies have taken important measures to actually lower CO2 output. Over the last decade, the cost of solar panels has fallen 90%. 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. In the US sales of electric vehicles have gone from zero to 1 million in the first half of 2018. In the UK, there are projected sales of 20 million electric cars by 2030. They will become ubiquitous, as massive improvements in battery technology move their unsubsidised cost below that of internal combustion engine cars.
While decarbonising 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 decarbonise 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.
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.