It’s seven years since Chris Welsford’s keynote speech to the annual Investment Week Sustainable Investment conference and fund management awards, challenging fund managers who badged their funds as ethical and socially responsible when they were nothing of the sort.
Almost a decade on, we have found that many funds marketed as sustainable solutions to the impending disaster of global heating, are failing to live up to the claims made in their fund literature relating to carbon emissions and temperature reductions.
Our research shows that many sustainable and impact driven fund managers are investing in the shares of companies that are not reducing their emissions sufficiently to limit global temperature rise to 1.5ºc. Many are projected to contribute to significant rises in temperature.
This research is backed up by a report to be published by the French EDHEC Business School. The recently released report from the United Nations IPCC (International Panel on Climate Change) adds massively to concerns that too little is being done, with a rise from the current 1.2ºc to the maximum tolerable 1.5ºc by 2050, now a minimum scientific certainly.
Climate change is the most pressing issue of our age.
You would have had to be living under a rock to think otherwise. Flooding has become a common occurrence in Europe, most recently in Belgium, Germany, and London. China, too, has seen devastating floods this year.
Of course, the global south has long suffered through the worst effects of climate change, most notably in Bangladesh and Indonesia. In Africa, lives, farms and homes have been lost as a direct consequence of global warming. The Amazon rainforest now emits more carbon dioxide than its trees can sequester.
It has been argued that pandemics, such as the one we are currently trudging through, are to become a common occurrence as a result of climate change.
The Harvard School of Public Health surmised that ‘climate change hits hard on several fronts that matter to when and where pathogens appear’ and that, in order to limit the risk of Lyme disease, malaria and dengue fever, efforts should be made ‘to vastly reduce greenhouse gas emissions and limit global warming to 1.5 degrees’.
The illusion of ‘consumer choice’
So, who’s to blame? Is this the fault of individuals? Should you be racked with guilt for driving a petrol vehicle? It’s natural to personally feel the weight of the problem, but there is evidence to suggest that the blame lies squarely at the feet of the corporate world and the failure of governments to provide strong regulation aimed at reducing emissions.
A report published in 2017 claimed that 100 companies have been the source of over 70% of the world’s greenhouse gas emissions since the late 1980s. This figure has not changed.
It is unsurprising that ‘ExxonMobil, Shell, BP and Chevron are identified as among the highest emitting investor-owned companies since 1988’ but most people would be shocked to learn that even companies held in sustainable funds are contributing considerably to the pollution of Earth’s atmosphere.
Financial greenwashing is rife
In July, France’s EDHEC Business School announced a portfolio greenwashing study which ‘shows that the reality of traditional climate investing strategies does not live up to the promises and the communication from their promoters’. The EDHEC found that just 12% of companies held in funds marketed as ‘climate investment’ are on track to limit the rapid warming of global ecosystems.
The EDHEC’s study backs up our own research. Using Arabesque’s free S-Ray Temperature scoring system, Ayres Punchard researchers have identified that only 13.4% of companies held in the Key To The Future model investment portfolio are on track to keep global emissions below the 1.5ºC limit set by the UN Intergovernmental Panel on Climate Change (IPCC) back in 2018.
The IPCC’s latest report signals that 1.5ºC of global heating is unavoidable, and will be reached by 2030 no matter what we do. Radical action must be taken now by governments and corporations worldwide and that includes fund management companies. The IPCC report shows that not enough is being done to reverse the upward temperature movement and it will not be long before we do irreversible damage to our environment making it uninhabitable for humanity.
30% of companies to exceed 2ºC emissions output by 2100
Ayres Punchard’s Key to the Future model portfolio is comprised of funds which market themselves as not only sustainable but as the innovative leaders of the sustainable investment world. For us it is simply unacceptable that 30.7% of companies held in the Key to the Future portfolio are on track to exceed 2ºC (some even more than 2.7ºC) of global warming by 2100.
It is disappointing that when we discuss these temperature related issues with fund managers there is is tendency to disbelieve the company specific temperature data and the conclusions about future temperature rises, preferring instead to believe companies’ own claims about their efforts to reduce their carbon emissions, much of which we think is greenwash.
We see it as a key engagement duty for fund managers to challenge investee companies and work with them by supporting changes that will enable them to truly achieve a net zero target. This includes driving down CEO pay, which in many cases is disproportionate and not reflective of the company’s temperature trajectory.
We want to be able to select funds for our portfolio that are focused on investing in companies that have a practical and honest approach to temperature reduction. What possible justification can there be for a sustainable fund manager to invest in any other sort of company but sadly, right now, that is simply not the case and despite the funds we select being the best out there, even they are falling far short of the target.
Does this mean there are limited opportunities to invest and that there is no choice for managers but to select unsustainable companies for inclusion in their sustainable funds?
No more excuses
Walt Disney is a good example of this, with selection for investment by sustainable funds being based on other factors but absolutely not on any hope that Walt Disney offers any possibility of achieving temperature reductions to 1.5ºc let alone ‘net zero’. Our research, backed up by work carried out by Ethical Consumer, suggests that Disney is simply too big to budge.
Walt Disney is found in a number of well known sustainable funds, because of its apparent educational benefits and contribution to other non-climate related SDGs (Sustainable Investment Goals). But when challenged on why they hold Disney, managers struggle to justify the investment. It’s worth considering that Walt Disney make a contribution to global warming that indicates a level of 3ºc by 2050 and 2100, a completely disastrous prospect. As meaningful engagement with the company is apparently impossible, we believe it renders Walt Disney un-investable.
This is just one example of many we have found in the Key To The Future portfolio. The irony is that we have seen climate change and global heating as an area that most funds claim to do well at investing in, to the extent that we have focused on human rights and labour rights in our engagement with fund managers, because we could see that many of the underlying companies appear to be achieving the climate related goals at the expense of these also important factors.
Ultimately all fund managers have a responsibility to invest and engage with companies to reverse the unsustainable and disastrous upward trend in global heating. Sustainable and impactful funds cannot with one hand, claim to be the key to a better and more sustainable future, and with the other, invest in the very companies that are making no effort to reach net zero. We’re out of time for any further excuses on this.
