Week 47: How much did investors know about climate change?

Dear all, 

I hope everyone is well and safe – and ready for a new edition of ‘ESG on a Sunday’!

See no evil, hear no evil, speak no evil ?? ?? ??

This week we start with a growing trend of litigation against the financial industry in relation to climate change.

This is actually more than a trend. It’s a slow rolling reality, equipped with all legal tools, marching on towards the finance fortress in order put an end to what many regard as a “three wise monkeys” industry.

In other words: An industry taking the convenient stand that it hasn’t seen, heard and certainly hasn’t said anything about the climate change risks related to the investments made. That’s nonsense, of course.

In reality, the question is: What is the climate responsibility of a this global sector (one of few truly global-to-the-bone industries), populated by brightest and finest minds (engineers and lawyers, mostly) who are constantly looking for more?

It is obvious that the industry could easily foresee the agony and enormous losses of the oil and gas sector, given the zillion analysts, specialists and subject matter experts employed in the investment houses around the world.

Perhaps they even knew as much as some of the oil giants, but did not dare to act?

Or was it more down to the structural (and tragic) issue of an industry caught in a very short investment horizon?

A paramount idea in the financial sector is to “manage risk & return expectations”. Maybe it’s about the incentive models that are structured with no tomorrow in mind?

Or is it about a sheep mentality in a wolf’s world?

No matter what it is – inaction, ignorance, denial, carelessness, lack of data or knowledge – the global financial industry is increasingly facing litigation on inaction on the climate change risks that are more obvious than ever before.

This could be very painful. But for whom? Investors or broader societies? Well, investors are people too…

The pressure is mounting

In July 2020, Ms. O’Donnell filed a court case against the Australian government for failing to disclose climate change risks to investors.

In 2018, Mark McVeigh, another young Australian, sued his pension fund, the Retail Employees Superannuation Trust (Rest), for allegedly failing to adequately manage the risks that climate change poses to its investments. 

The fact that Mr. McVeigh and Ms. O’Donnell are both Australian may reflect their government’s laggard approach to climate change. But their court cases are also part of a growing willingness among green investors to see legal action as an alternative to divestment.

In this article you can read more about increasing focus on litigation in finance and climate. 

And to all of those thinking, “well, fiduciary duty is to provide returns only to clients”, I suggest this piece. It also gives us an idea that more litigations are coming.

And if you think it is not really that big, I suggest this essay. It gives you a comprehensive analysis of the different types of costs that can arise from climate change litigation.

The stories we tell

So how much do people in the industry really know?

They should know enough. In this article in FT, the costs were spelled out in numbers. $900 billion to be precise. It indicates that investors do/must know that stranded assets in oil and gas sector may cause havoc in valuations of the companies that millions of people have their pensions savings invested in.

Or is this just one of those pieces that people in the industry has labelled as an “ESG analysis, tree hugging, save-the-world thing with no real anchor in reality”?

We need to remember that our perception of facts is dominated by the framework of narratives we are served in order to explain and “help us understand” what is really going in.

In this very telling piece from Brookings related to the financial crisis in 2008, you can sense the depth of the narratives, told years after that crisis, and the impact that they have on millions.

Today, global finance dominates all the economic narrative frameworks, it’s the narrative “stick” of our economic future. The question is how and to what extent sustainability is part of that narrative.

This paper performs a narrative analysis of eight different conceptual frameworks of sustainability to identify the strength and weaknesses of these frameworks, with the aim of exploring a coherent alternative to current practice and conventional ways of thinking.

All of this also points to the distinction between between sustainable and impact investing.

Overall, investors are better equipped to grasp the distinctions between ESG and impact investing, but they remain rather perplexed about the differences between sustainable and impact investing, often mixing one with the other. From a distance, sustainable and impact investing appear quite similar. A closer look, however, reveals meaningful differences.

There are differences and it is good to understand them. Some of this is related to data. In this piece you can learn more about the complexity of it. The paper outlines the four things no one will tell you about ESG data.

To sum it up, there are different versions on what sustainability really is, and it’s clear that the different narratives are shaped by our world view – and will shape our future. In this piece you can see how dangerous that is.

ESG falls down the investment agenda

While we talk about all these things, ESG have fallen down the agenda of big investors this year as they grapple with the repercussion of the pandemic and subsequent economic downturn.

It is not a surprise given the times we are in where millions of people around the world will or have already lost their jobs and security. But it’s still worrying to read that more than eight in 10 investors globally said their company has demoted ESG as an investment criteria because of COVID-19’s economic hit.

At the same time, it’s yet another example of how our world is shaped by short-sightedness and the narratives we are served.

That’s all for now. I wish you a great week! 

Best regards, Sasja