Why climate change mitigation is not the end of the world for global investors
Discussions at COP21 highlight the crucial position of economic investors in helping to work towards a better planet. Although the attitude of investors towards issues surrounding climate change is becoming more positive, a good number of them are still battling with whether or not to prioritise the good of the planet over how it will most likely affect their investment returns. Fossil fuels [dirty fuels] are a major asset to numerous investment companies, especially for those that have built their portfolio around the sector. Advocating for clean energy and carbon emissions regulation puts them at a risk of losing this. However, to achieve a significant reduction in carbon emissions and improved management in global warming, big investors around the world will be required to decarbonise their assets, ultimately.
Greg Murray, Co-Founder and Managing Director of CleanStar Ventures, talks to Ventures Africa about investing around climate change and how investments in Africa – and globally – can still thrive, especially if investors do the right thing to save the planet.
Ventures Africa (VA): What would you say is the biggest worry that investors have when it comes to climate change as it affects investment returns in Africa
Greg Murray (GM): I suppose it would be agriculture. That’s the most affected sector, followed closely by the energy sector. Aside from the political issues surrounding foreign ownership of land, the major concern that foreign investors have is around primary agriculture risks and that translates to climatic risks. The seasons are all over the place and there’s not a lot of predictability in many countries around rainfall patterns and droughts.
You end up with people who play more of an agro-processing and source-trading role, rather than a primary production one, offloading the climate risks onto small farmers. It sounds great from a political economy, land ownership and community involvement point of view when taken at face value. However, it can be problematic, because small farmers are obviously the least prepared to handle the climatic variability associated with climate change.
(VA): Do you think that understanding the risks of climate change on financial stability will push investors to make smarter choices to improve their business environments?
(GM): There are favourable situations created by the increase in awareness around the need to act on climate change, as well as a huge growth in renewable energy opportunities, whether it’s in energy generation or in the huge market that exists for cooking fuel. The current deforestation and climate changes are all linked to the charcoal market, for example, and it creates a significant opportunity to replace that fuel with a more sustainable alternative and that’s something that wasn’t really possible five years ago.
Thus, whilst climate change presents risks, it is also an opportunity to do things in a more sensible way. In terms of how people are assessing risk, I do not know if there’s a sufficient integration of climate risks into investment decisions, such as with renewables investors or climate-related investors, which is our primary function. Perhaps agriculturists are thinking about dams and hydro-plants and would be aware of the risks associated with drought periods and the impacts on their business, but that is as far it goes for investment decisions.
For example, the oil and gas/coal industry is promoting awareness for the donation of stranded assets within huge reserves found all over the place. If a global agreement is reached to have emissions not rise above 2 degrees Celsius then it’s quite likely that a majority of the existing reserves are not going to be utilised.
Some people [investors] are taking this very seriously, while others are not and they are trying to divert attention away from this fact. I really doubt that the notion of unburnable reserves is factored into the decisions of the guys doing coal-mining on the continent or going after oil and gas. Particularly given as the African countries are not likely to be at the forefront of enabling regulation of emissions, I’m not sure that it is being concluded in investment decisions in the same way.
(VA): How prepared would you say investors are to undergo a structural change under which fossil fuels as a source of energy for economies is no longer viable?
(GM): Investors want to make money. So once the alternatives are cheaper and we have factory technologies that enable us really compete, the money will flow. I think that it’s a matter of taking a moral decision. In terms of focus, existing energy assets are to be protected and we can expect them to behave, to fight tooth and nail to protect those assets and fight regulation on emission and so on.
We’ve seen this behaviour before and I don’t think many people will suddenly change their. On the continent too, the mentality, at least from developed countries, is to use any means necessary – including energy – to grow as fast as humanly possible. Looking back historically, this is not necessarily good.
Frankly, I don’t see any regulation with ‘teeth’ coming up soon, at least not in the East African countries that we operate in, acting to limit emissions. There might be governments that will position themselves for the climate finance, for example, to track some of that.
(VA): What financial strategy do you think investors should adopt as the global energy sector evolves?
(GM): I think that they should hunt down renewable energy and climate-friendly technologies, because they are going to be the future with the amount of capital being poured into them. Going after coal and fossil fuel-mining or generation would be against them as it takes time for the regulation on emissions to trickle down. We’re already seeing it in the destruction of value of coal stocks globally.
(VA): Institutional investors tend to play a powerful role in determining how some of the biggest companies around the world decide on economic issues. What are your thoughts on how they can influence the necessary response to the 2 degrees Celsius scenario being discussed presently in Paris?
(GM): Recently, the investment community is leading the charge in terms of taking an active role in pushing for the adoption of certain standards. I don’t see the institutional investors being the intransigents here, it’s more of the companies themselves that have sunk capital into a particular strategy.
Institutional investors can trade out of companies easily, it’s much harder for the companies themselves to divest fossil fuel assets because they won’t find a buyer to sponsor the financial trade, particularly in the public market. Institutional investors can take a stand or a strategy decision on climate risks and decide that they want to go underway on dirty fuel or energy assets. It’s easy to implement, but less so to undertake the structural challenge required.
For example, E.ON, in Germany, has basically separated itself into the ‘good bank’ and ‘bad bank’ where all the dirty energy assets are in the bad utility and the new distributed energy assets are situated in the good utility. As a result of this, they have to try to delink the forward-looking from the residual, dirty energy asset portfolio that has to be protected and I think we’re going to see more of that.
It’s harder to do than the institutional investors simply summing down a particular stock because they decide that the climate risk premium has increased. I actually see institutional investors as being part of the solution. We’ve seen it with various declarations and with institutions signing on to the need for greater disclosure on climate risk and carbon risk.
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