Investment may depend on climate responsibility

The Climate Change Coalition of businesses has launched a new pledge. Meridian Energy has produced what it says is New Zealand’s first corporate report that lists exposure to climate risk. It is a time when public demands for climate-change action among business is red hot, most recently sparked by the Interim Climate Change Committee’s report.

But big investment funds are also demanding more “responsible investment” options. This, in fact, is a great opportunity for Kiwi businesses to attract some of this capital.

Demand for responsible options

Responsible investing has emerged as a fundamental practice for New Zealand’s fund managers, and now accounts for more than 70 per cent of total assets under management, according to the latest benchmark report issued by the Responsible Investment Association of Australasia (RIA). The report shows the sector grew 3 per cent to reach $188 billion in 2018.

But rather than the “negative screening” model of simply avoiding certain stocks, there is a growing shift towards a more positive approach to responsible

James Araci is the environmental future insights lead at Callaghan Innovation.

investing. Unfortunately, the current supply of investment opportunities offering impact, scale, and financial return often falls short of demand.

As a result, there’s rising frustration in finding deals that fit this investment mandate. In a survey by KBI Global Investors, the Dublin investment manager, 70 per cent of institutional investors and consultants said this was the biggest challenge when scoping for private companies.

The last year has seen the emergence of New Zealand funds focused on responsible investments for business, including the $9 million Impact Enterprise Fund and the Purpose Capital Impact Fund, seeking to raise $20 to $30 million. While these funds are modest in comparison with billion-dollar coalitions, they also face the common global challenge — the lack of unlisted companies that can demonstrate a minimised impact on the environment.

The global investment industry is highly concentrated, strengthening demand for responsible investments. The top five global asset managers hold 22.7 per cent of externally managed assets. Large investment firms that have trillions of dollars under management have no hedge against the global economy; in short, they have become too big to let the planet fail.

Equally, many pension funds take a long-term intergenerational view — a point made by the Chief Investment Officer of Japan’s US$1.4 trillion Government Pension Investment Fund at an investment conference this year. We’re seeing this trend develop in New Zealand with the launch of Mindful Monday in June, which offers customers the ability to check what’s in their current KiwiSaver investments.

Climate-change investment drivers

Businesses tend to see climate change as a long-term risk around rising temperatures and sea levels. But more immediate, and rapidly accelerating, are short-term shifts in market sentiment as investors become more concerned about future climate risks.

Early this year The FAIRR Initiative, representing US$6.5 trillion of funds, challenged fast-food chain owners to put robust targets in place for their meat and dairy suppliers. They voiced concern that the industry is neglecting climate change and has failed to set emissions targets.

Twelve major Australian companies are being targeted over greenhouse emissions by Climate Action 100+ (CA100+), a coalition of global investors who speak for $US32 trillion. The CA100+ programme pressures major companies into dealing with climate risk through investor engagement. Woolworths, Australia’s largest supermarket chain, met with CA100+ last year over issues relating to emissions in its supply chain including food growing, processing and delivery.

Appealing to responsible investors

There is no single, standardised method to screen investment opportunities based on exposure to climate change risk. But there are some sources of inspiration out there with the likes of Acclimatise, allowing users to screen their investments for climate risk.

Tools to support positive screening are also emerging such as the Impact Management Project (IMP), a forum building global consensus on how to measure, report, compare and improve impact performance.

Both investors and investment seekers will need to do their own research and consider how best to report on, and prepare for, climate responsibility demands.