World needs $2 trillion a year in investments to meet climate challenge

Fund managers estimate 15% of global earnings could be at risk in transition to low-carbon economy

SAN FRANCISCO (Callaway Climate Insights) — Investors have been underestimating the potential needs for capital to meet the 2°C. warming cap set in the Paris Accord, according to comments at the Morningstar Investment Conference this week. 

Simon Webber, a fund manager at Schroders, said his company’s models suggest that as much as 15% of global earnings are at risk in the transition to a low-carbon economy. Much of that risk will be in fossil fuel-related industries. “When we look at the models that the street has for many of these industries, in no way do they capture that scale of inflection,” Webber said during an online panel discussion at Morningstar’s virtual investment conference. 

But as dire as things are for legacy industries, the opportunity for new processes and technologies is enormous. Webber said his company’s models indicate “there will need to be $2 trillion a year of additional investment going into these newer technologies creating a low-carbon economy,” if the world wants to meet the Paris Accord goal to limit the increase in average global temperatures to less than 2°C. above pre-industrial levels.  

Lucas White, a fund manager at GMO, said his funds began selling out of oil companies in 2013. “We’ve sold out because of stranded asset risk in the fossil fuel companies,” he said. “There’s clearly more risk with them than there is with Google.”

The new and developing investment opportunities are widespread, according to White.

They include “clean energy companies, batteries and storage, electric grid companies, energy efficiency,” as well as the technologies and materials that will go into all of those efforts. 

In a separate presentation at the conference, Michael Jantzi, founder of Sustainalytics, said he sees sustainability investing at an inflection point.

That’s because more investors are seeking sustainability as part of their portfolios and because companies are seeing benefits from using ESG screens as part of their business processes. 

“Strong sustainability rating and performance leads to favorable rates,” for companies seeking to borrow, Jantzi said.

In addition, the Covid-19 pandemic has led to a greater understanding of the risks of truly global problems. The spectacular market selloff from late February to late March “has made risks real for people,” Jantzi said. 

And as a mark of the growing importance of ESG investing to the fund industry, he pointed to the recent controversial rule making proposal from the Dept. of Labor to limit ESG investment options in retirement plans, including 401(k) plans.

The rule was the outgrowth of a broad-based executive order by President Trump last year seeking to boost the energy industry.  As part of the order, Trump ordered Secretary of Labor Eugene Scalia to review retirement plans the department regulates. Specifically, it ordered the review to “identify whether there are discernible trends with respect to such plans’ investments in the energy sector,” and to make recommendations about whether its guidance on fiduciary duties should be “rescinded, replaced, or modified.”

A Morningstar analysis of the 8,737 public comments on the new guidelines found that 95% opposed the proposal. “Something is going on in the markets, Jantzi said. “People want to have impact in regards to investing choices.”

If the contorted efforts of the Trump administration to protect the fossil fuel industry from the evils of ESG are anything to go by, it would appear that people are indeed having an impact.

Read from Tony Davidow: After drubbing by funds, what's next for Labor Dept.'s ESG rule proposal?

Photo: makelessnoise/flickr.