The overhaul of the global energy system may represent the single biggest investment opportunity in history. But, as more money looks to benefit from the transition away from fossil fuels, picking when and where to invest responsibly is becoming ever more complicated.
So far, much of what is considered responsible investing has focused on designing environmental, social and governance (ESG) standards and assessing a company’s performance against those metrics. The result has been a significant shift in investment towards companies with better ESG scores.
However, as the energy transition becomes more urgent, responsible investors need to think less about these ratings and more about outcomes, says Ben Caldecott, director of the UK Centre for Greening Finance and Investment.
“What do ESG scores tell us about anything?” he asks. “They are mainly measuring processes and policies — if a company has a policy in place against deforestation it will get a good score, even if it is deforesting.”
Financial institutions that want to have an impact on the energy transition need to “think about what they want to change in the world and come up with a strategy to realise that change,” he adds. “We’re scratching the surface of the ability of responsible investors to make a difference.”
The question of how to invest responsibly in the energy transition has become more complicated since Russia invaded Ukraine, catapulting energy security to the top of the policy agenda.
A growing international boycott of Russian fossil fuels has pushed up energy costs for billions of consumers, sparking some calls to boost the production of oil and gas elsewhere — just as much of the world hoped to be leaving hydrocarbons behind.
At the same time, BlackRock — a key backer of climate-related proposals in the past — has said it will support fewer shareholder resolutions on climate change this year as they were becoming too extreme or prescriptive. The world’s largest fund manager, with nearly $10tn in assets, said the disruption of global commodity flows due to Russia’s invasion of Ukraine had increased the need, in the short and medium-term, for companies that invest in “both traditional and renewable sources of energy”.
BlackRock insists that its support for businesses committed to achieving net zero emissions by 2050 has not changed. In February, it identified three different types of investors or investment strategies for the energy transition, which it says still stand: those that seek to navigate it by managing risk and capturing opportunity; those that seek to drive it by accelerating change through their investments; and those that want to invent it by funding the next generation of technologies.
Despite the rising profits and valuations of the world’s biggest oil and gas producers, what the world needs is more renewable energy, not more oil, says Nick Stansbury, head of climate solutions at Legal & General Investment Management.
“The way out of the situation we currently find ourselves in is not to abandon the energy transition but to double down,” he says. “We need to get the lowest cost energy with the lowest possible carbon intensity.”
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Coming on May 31: The Moral Money Forum digs deeper into the arguments for divestment, engagement or new approaches that combine elements of both strategies
Legal & General, the UK’s largest fund manager, must take instructions from its clients on where to invest. But it increasingly tries to push those clients towards companies with the strategies that it thinks will best help the world reach net zero carbon emissions by 2050.
“This is not just about delivering on some moral or societal obligation as an investor,” Stansbury says. “This is actually about understanding that there is a real financial opportunity out there for those companies that do swing behind this and really seek to understand what their competitive advantage is going to be in the energy transition.”
In the past 12 months, though, “green stocks” have suffered as the deluge of money into climate-friendly companies has eased. For example, shares in the Danish power company Orsted — a leading player in the offshore wind market and one of a few large energy companies that clear the bar for the most climate-conscious investors — rose 80 per cent in 2020, but fell 33 per cent in 2021. The share price has dropped a further 17 per cent so far this year.
But Stansbury is not concerned. He says: “We often see this sort of a hype cycle in new big changes — a period where the market runs ahead of itself and prices in too much change, usually too quickly, with too much optimism, and then there is a period of adaptation and adjustment, and then things rebuild again.”
Nevertheless, he cautions against assumptions that only those companies directly involved in cleaner energy solutions have a role to play. “Every company has to change the way they operate.”
Caldecott agrees, arguing that to “achieve net zero, to achieve these environmental and social objectives, you need large companies to change and to change quickly”.
“If we don’t try and change existing polluting companies then we’re not going to solve this problem and I think people are becoming more aware of that.”
