Green Investment - The Future of Investing?
What is in store?
From the streets of cities and towns, large and small, to the board rooms of major business and investment firms, the call to face global warming and climate change head-on has permeated all aspects of society.
Huw van Steenis, chair of the sustainable finance committee at UBS says: “2020 may be the year when climate-risk analysis of portfolios moves out of a niche into the mainstream. With CEO of heavyweight investment management firm Blackrock threatening to ‘to vote against management and board directors when companies are not making enough progress on sustainability-related disclosures and […] plans underlying them, this is a big possibility.
In his yearly letter addressed to chief executives, Blackrock CEO Larry Fink, petitioned them to “disclose in line with industry-specific” guidelines set out by the SASB and for businesses to report under the TCFD. As a market leader, the pressure exerted by Fink could have rippling repercussions. Many public companies will now come under pressure from one of their biggest shareholders to disclose in line with those standards. At the same time, rival asset managers are likely to follow in BlackRock’s footsteps and adopt the two frameworks as part of their own investment process.
The sentiment continued at the World Economic Forum this past week in Davos as climate change was one of the main topics of discussion. The Big Four accounting groups alongside many of the world’s largest companies, have signed up to the most comprehensive effort yet to hold businesses accountable for their social and environmental impact. The new framework will allow businesses to report their corporate metrics in line with the UN’s sustainable development goals. This comes as large firms are beginning to feel investor’s growing scrutiny of environment, social and governance (ESG) issues and peer pressure.
However, not everyone sees eye-to-eye. An informal poll found that only 33% of WEF attendees were confident that the metrics, created by the WEF’s International Business Council, would be fully in place within the next five years; a bleak outlook considering the target to implement said metrics in corporate accounts from 2021 onwards. Additionally, Mike Corbat, chief executive of Citibank, said it was not the job of banks to ensure that companies were adopting environmentally friendly business models by unilaterally cutting off finances from polluting businesses. This was backed by CEO of Goldman Sachs, who worked on the IPO of oil company Saudi Aramco, who said his bank would not refuse to advise clients that are major polluters.
Although, superficially, there may seem to be limited reasons for companies to pursue greener objectives, research produced by Blackrock may suggest that climate change can cause negative financial impacts. BlackRock's own research suggests climate change poses a growing threat to valuations and the creditworthiness of many state and local governments, real estate companies and the electric utility sector. As economies transition to cleaner energy sources, fossil fuel companies are dragging down investment returns—one group attributed $90 billion of losses to BlackRock investors from select holdings in fossil fuel companies.
As law firms try to stay ahead of change, we may see a decrease in legal assistance needed in economic activities concerning oil and other forms of fossil fuel. Furthermore, this international call for change may see the implementation of legal frameworks for international trade, which firms may have to stay on top of, to ensure their clients remain informed of the latest shifts in regulations.
By Marcus Cheung