Investment advisors’ recognition of their fiduciary responsibility to clients in the age of climate change and carbon bubbles is driving “mainstream adoption” of low-carbon indices, writes Bloomberg News, in a report picked up by the Institute for Energy Economics and Financial Analysis (IEEFA).
Europe’s largest asset manager, Amundi, “has been offering low-carbon indexes since 2014,”and “the strategy has grown popular with institutional investors” like Japan’s Government Pension Investment Fund, the U.S. news agency notes. Interest is growing in North America, as well, with the New York State Common Retirement Fund saying just last month that “it would double its commitment to low-carbon strategies, to US$4 billion.”
“We’re not talking about saving the planet,” said Fred Samama, Amundi’s deputy global head of institutional clients. “We’re just assessing risk over the long run.” That assessment shows that a low-carbon index can cut a portfolio’s carbon exposure by half.
Samama came down on the side of a low-carbon investment strategy versus outright divestment, contending that a ban on “the entire fossil fuel industry” would remove any incentive to change. If “you exclude three out of 10 companies in a sector from the index, and if you let them know that if they accelerate their transition to a low-carbon economy that they will be added back, then you are creating an incentive,” he said.
Full divestment, by contrast, “looks good in theory, but it’s really not so simple,” he told Bloomberg. Even after shedding Big Oil shares, for example, “you still might have a lot of polluting companies like airlines, or banks financing polluting activities.” Furthermore, “some fossil fuel companies are investing in renewables.”
And ultimately, “fossil fuel companies represent a significant part of major indexes.” So “if you were to divest from all the airline companies, automakers, banks, insurance companies, and fossil fuel companies, then what do you have left in your portfolio, exactly, if you’re managing $100 billion?”
By choosing low-carbon indices over divestment, he said investors can still signal corporates more or less strongly about desired behaviours. Like Europe and Japan, “you use transparent rules about who can be included in the index and who cannot.” That’s an effective strategy, because “companies pay attention to whether they’re in or out.”