A less carbon-intensive global economy will come through both a carrot and stick, if the past month is anything to go by. The work of funds such as Legal & General Investment Management and Sarasin & Partners partly involve beating the climate change drum loudly but much of the work is done through quiet conversations with companies such as BP (BP.) and Royal Dutch Shell (RDSB).
Their sticks are limited, in any case, with current mandates. This week, Sarasin sold off 20 per cent of its stake in Shell because it failed to explicitly commit to aligning its strategy with the Paris goals of well below two degrees warming, but still holds £120m in the supermajor. Last month, Legal & General Investment Management put other resources companies on a naughty list and sold them from its ethical funds. But it still has a non-environmental, social and governance (ESG) mandate for the vast majority of its £1 trillion in assets under management, and the current divestment plan only looks at companies’ reporting of emissions and recognition of climate risks, as opposed to actual polluting behaviour.
These two funds represent the finance-led effort to encourage the world’s biggest emitters to join the effort to slow climate change, providing carrots such as inclusion in sustainable funds. On the other side, there is the regulatory-led push for change: the stick. Last week the UK Treasury said it was exploring how to get all listed companies and large asset managers reporting climate risks by 2022. Days later, however, the Treasury was also boasting of setting up an export finance office in Saudi Arabia and Aramco’s decision to bring its $12bn (£9.6bn) bond listing to London in April.
Liberal Democrat leadership hopeful Sir Ed Davey said the City’s global financing power meant a net zero carbon target by 2050 within the UK, as made law last month, was useless. The former climate change and energy minister told us 2045 (16 years away) had to be the goal and it had to include UK-funded projects overseas. “There is no point the UK sorting out its own account unless it's leading in the world, in financial markets,” he said. “I'd like us to be the green capital of the world, and show you can decarbonise capitalism, which is the phrase I use, through sensible regulations.” Mr Davey said his plan could “secure capitalism” from a carbon bubble bursting. He said capital being slowly withdrawn from non-green projects and companies rather than a shock event would protect market stability and investor holdings. Mr Davey and the Treasury share the goal of making the City a green finance hub, although the next prime minister could take this off the to-do list.
If the government was to take Mr Davey's advice, the immediate consequences of banning ‘brown’ investments from listing in the UK are clear. This policy would see major UK dividend payers such as Shell, BP and Russian steel producer Evraz (EVR) move offshore or shift focus. For global players like those with strong ties elsewhere (BP in the US, Shell in the US or Netherlands, for example) they could just head offshore. Losing some companies and their dividends was inevitable, Mr Davey said, but “carbon-intensive assets... are going to be worthless in the next 20-30 years”.
Investors in the many London-listed companies working in the North Sea received little detail on how their holdings might fare under the government’s recently announced 2050 net zero carbon plan, which came from Committee for Climate change research. The North Sea is only mentioned as a possible hub for offshore wind turbines in the committee’s technical report, despite fossil fuel production and refining making up 8.3 per cent of the UK’s total greenhouse gas emissions in 2017 (42m tonnes CO2 equivalent), according to the committee's numbers. Major industrial projects such as Sirius Minerals’ (SXX) polyhalite mine in Yorkshire would be likely to face tight controls on energy usage at its crushing and milling facilities, but again the strategy lacked detail. Picking long-term government policy is a tough task Sirius shares with investors.