2018-12-21
In October the Intergovernmental Panel on Climate Change (IPCC) – a body made up of the world’s top climate scientists – issued an urgent warning that there is only 12 years left for action to keep global warming at a maximum of 1.5°C above pre-industrial levels. Half a degree beyond that we will see a world where coral reefs mostly disappear, and Arctic ice – 10 times more likely – to melt over summer. It will also be a world where tens of millions more people will be exposed to extreme droughts, floods, extreme heat and poverty. Investors around the world are increasingly becoming a vocal voice in the fight against climate change. Just this month during COP24 (UN Climate Change Conference), 415 investors from across the world managing USD $32 trillion in assets have called on governments to accelerate their climate action. Since the Trump administration’s announcement in 2017 of walking out on Paris Agreement, it was encouraging that countries emerged from COP24 reaffirming their collective commitment to submit national climate action plan by 2020, and agreeing on the basic rules to do so. But we still have a long way to go in order to meet the 12-year timeline set down in IPCC. So what does it all mean for investors? What can investors in Hong Kong do to tackle climate change? What tools, analytics and guidance are there to enable investors to take climate action with their capital? Joining us in this Salon to share their thoughts on this topic is Ronie Mak, Managing Director of RS Group, Saker Nusseibeh and Christine Chow from Hermes Investment Management, and Nick Robins, Co-Director at UNEP’s Inquiry into the Design of a Sustainable Financial System. Ronie Mak: Climate change has always been close to our hearts at RS Group (RSG). We have applied the climate change lens across our portfolio since 2013, and climate change will remain a core focus of our strategy going ahead. We care about climate change because the choices we make today impact the world we leave for our children to live in. There’s no more room for denial after the IPCC report – we have only 12 years to keep global warming to a 1.5-degree scenario. Just a few weeks before the IPCC report we experienced the strongest typhoon in Hong Kong on record. – My parents’ flat by the waterfront was so damaged that electricity and water supply got cut out and they were locked in for two days. We are increasingly seeing such extreme typhoons in Hong Kong. Climate change is happening right now; it is “literally on our doorsteps”. RS Group, being based in HK, a global financial hub, we see the power of finance to help address growing climate and environmental pressures. If you look at the United Nation’s Mission 2020, initiated by Christiana Figueres, finance is one of the 6 key milestones necessary for us to reach before 2020, in order to meet the SGD goals by 2030, and a net zero emission by 2050. This milestone requires us to collectively commit at least US$1 trillion investment in climate action, and for all financial institutions to have a disclosed transition strategy. For private investors there is a spectrum of investment strategies one can adopt, from divestment to more active ownership, which includes everything from investing in fossil fuel-free funds and ESG funds, to investing in climate change related solutions through public and private market funds and direct investments. At RS Group we adopt a “total portfolio” approach, and we embed climate change considerations in all our activities and across asset class. We have a three-prong strategy: “Support, Avoid, and Engage”. “Support” means investing in climate change mitigation solutions; “Avoid” means divesting from fossil fuel-intense industries; and “Engage” means investing in funds active in engaging with companies on climate-related issues and encouraging them to do more, and share experiences with the broader community. You can read more about our climate change strategy here. We also consider the need for philanthropic grants to support system-building initiatives, riskier but deeper impact projects, and the need for thought leadership and research. For example, while there is much research on the global impact and remedies of climate change, there has been less systemic examination of Hong Kong’s performance on mitigating and preparing for climate change. It is with this in mind that RSG decided to support Carbon Care Asia to produce “Paris Watch”, a report which examines Hong Kong’s current state and future targets in relation to the main aspects of the Paris Climate Agreement, and compare its performance against five other Asian cities. Furthermore, RSG is also one of several foundations supporting World Resource Institute and Civic Exchange in developing a new initiative, tentatively named “Hong Kong 2050 is Now”, which aims to mobilise collective and cross-sectoral action to transition Hong Kong towards long term carbon neutrality. On the regulatory front we are encouraged by developments this year in Hong Kong in relation to green finance: for example, the setting up of the Hong Kong Green Finance Association (HKGFA), and the recent climate strategy rolled out by the Securities and Futures Commission (SFC) to bring Hong Kong in line with the Task Force on Climate-related Financial Disclosures (TCFD) requirements. Meanwhile, we hope that the Hong Kong Exchange (HKEx) will continue to tighten its requirements on ESG disclosure, especially when China will make ESG disclosure mandatory for all listed companies and bond issuers by 2020 currently ESG disclosure for listed companies is only semi-mandatory in Hong Kong. A recent Financial Services Development Council report highlighting the urgency of building a more robust ESG ecosystem in Hong Kong will also hopefully lead to more changes in the coming year. Hermes Investment Management: Saker Nusseibeh (SN) and Christine Chow (CC) CC: The IPCC report states that we must be more ambitious in our targets to avoid a catastrophic climate change scenario. The report does not change our view dramatically as companies are still coming around to the idea of meeting a 2 degree scenario, but it does give us a stronger mandate to intensify engagement with companies given the explicit urgency of the issue. SN: Climate change is one of the most pressing risks for our clients and they are becoming increasingly aware of it. Many of them are universal owners, so they are broadly exposed to physical risks such as rising sea levels and drought, as well as transition risks such as stricter emissions regulations. Do investors fully take on board the effects of climate change? No. But are they starting to understand that climate change has pretty profound financial impacts? Yes. Investors also need to be taking account of the risk to the financial system of stranded assets. CC: In the last few years, we have engaged with many global financial institutions to ensure the development of strong climate strategies and policies, in line with the goals of the 2015 Paris Agreement. Recently, we engaged with HSBC on its sustainable-finance agenda, focusing on its efforts to support the transition to a low-carbon economy, and on its climate-related disclosures. An example of a case study conducted by Hermes can be found here. SN: To bring about change, real, positive change, investors need to engage with the companies they own – and that engagement has to be precise and constructive about how firms can improve. In some instances, investors need to work together in their engagement efforts, through initiatives such as Climate Action 100+ and the Investors Agenda”. SN: ESG – or investing in the right things for the right reasons and reaping the financial rewards – has become an important part of investing for governments around the world. CC: In Asia, many governments are taking a leading role in putting ESG at the heart of how they invest. For example, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund has very publicly made ESG investing a key pillar of its investment approach, and has recently noted that companies in which it invests are increasingly adopting ESG considerations, which is immensely gratifying to see. SN: But this is not just about ESG. It is about the momentum that is changing society’s consumer habits. It has already started and it is going to be big. We are going to see a profound shift in what people buy and how – this shift is coming soon, and at pace. This type of popularist movement is bigger than anything we have seen before, and has the power to unite – rather than divide – society. It is up to us as investors to see it coming – and keep one step ahead. Nick Robins: My first message to the Hong Kong investment community from the IPCC is: this needs to be rapid, it’s much quicker than you thought. This is the message of the IPCC’s special report on holding global warming to 1.5 degrees Celsius. We need to reallocate capital at speed and at scale. [For more on Nick’s thoughts on how investors can respond to IPCC: Financing the climate change triple jump: how to align capital with a 1.5°C world] Second, this needs to be done in a way consistent with and supports the broader goals of economic and social development, and that is now known as just transition. On the first day of COP the Polish Presidency released the Silesia Declaration on the Just Transition with more than 50 countries in support. Successful climate action needs to be fast and fair, and respond to the needs of workers and communities affected by the shift. Investors have also recognised that they have a role to play in delivering the Just Transition and at COP a new Investor Guide was launched backed by an investor statement with over 100 institutions in support with USD $5.5 trillion in AuM. [For more on Just Transition please follow Nick’s blog The just transition comes of age and the newly released (Dec 8) Climate change and the just transition: a guide for investor action, a partnership between LSE, Initiative for Responsible Investment at Harvard, PRI and International Trade Union Confederation] Third, for those who have much, much is expected. We really do expect high-net-worths to be leading the way and deploying their capital in this area. We would like to see them play a leadership role to drive this process both in their philanthropy, and also in terms of their investment practice, which means aligning their portfolios on the opportunity side, low-carbon opportunities and so on; de-risking their portfolios on the down side, divesting from high carbon assets, such as coal; and also engaging in a very strategic program of engagement, particularly aligning themselves with Climate Action 100 process, which recently scored a major victory with a negotiated statement with Shell. If we look at the investment needs for the low carbon economy, we look at the assets of some of the wealthiest people in the world. We have no lack of money. And now we know there are many options to invest in. Finally there is something now that can be done in the Hong Kong community. What’s so interesting about Hong Kong is it highlights the whole phase we are in. The take up of green finance by the government, and by the financial community, like the recent launch of Hong Kong Green Finance Association (HKGFA). It is not moving in a linear form; it’s actually moving in a very disruptive way: very rapid pick up of this by the authorities in Hong Kong, the commitment to a sovereign green bond, and also the broader commitment on green finance through HKGFA, and linking that to the broader green finance ambitions of China as a whole. There is something that can be done by the financial center that is Hong Kong, which obviously plays a very important role in the region. But again, while climate change may be classified as environmental issue, transition is not an environmental issue. Transition is a process of structural economic and social change. So in a sense, it would be a risk if investors see climate change as purely an environmental issue, and human rights and labor standards as purely a social issue without recognising the profound social issues in the climate transition. I think there’s a particular and very powerful agenda in the just transition for impact investors. For example to think about those parts of Asia which are very high carbon. How can investors, both through grant and return capital, invest in those places so there are new sources of income and entrepreneurship? So green finance is absolutely important, and ESG is a broader piece. But in a sense we are all now thinking about how investors could help finance the SDGs, and again it’s not about seeing the environmental and social issues as siloed, but as integrated. The whole point of sustainable finance is we look at these things as a whole.