Institutional investors should not hesitate: after President Trump’s ill-advised decision to pull the US out of 2015’s historic Paris agreement, they should not follow him down the rabbit hole of fully embracing fossil fuels.
The question is not whether investors can turn a quick buck helping Trump Make Coal Great Again – they certainly can, with the right projects and under the right circumstances. But the long-term damage of increasing investors’ exposure to stranded assets and the negative impact those assets will have on the rest of their portfolios should stop them in their tracks.
It seems incredible to be revisiting this topic after 147 out of the 197 countries that have signed up to the Paris agreement have already ratified it, but when the world’s economic powerhouse and second-largest polluter goes back on its commitment, it’s worth making clear just what’s at stake.
For the planet, Trump’s decision to quit Paris will almost certainly accelerate an already catastrophic-looking scenario. As Michael Oppenheimer, professor of geosciences and international affairs at Princeton University, put it to Bloomberg: “Four years of the Trump administration may have only modest consequences, but eight years of bad policy would probably wreck the world’s chances of keeping [global] warming below the international target of 2 degrees Celsius.”
And for investors? As 282 of them, representing over $17 trillion of capital (that’s 17x the amount needed to fund President Trump’s proposed infrastructure plan), made clear in a recent letter to the G7 and G20 nations: “As long-term institutional investors, we believe that the mitigation of climate change is essential for the safeguarding of our investments.”
That’s the key bit that the Trump administration seems to be missing as it decided, in the face of overwhelming international opprobrium, to turn back the clock – that many of the investors needed to fund the US’s energy plans are simply not interested anymore in funding assets that pose a material risk to their portfolios.
Take the insurance industry, for example. Late last year, ClimateWise, a group of 29 of the world’s insurers, found that the gap between the cost of natural disasters and the amount insured has quadrupled to $100 billion a year since the 1980s. As a result, they concluded they had to use more of their $30 trillion war chest to help mitigate – not exacerbate – the effects of climate change.
Equally importantly, investors are paying close attention to what’s already in their portfolios. As James McIntire, Washington State Treasurer from 2009 to 2017, wrote in The Hill in late May, “public fiduciaries […] must intervene with companies and investment managers in response to ESG issues [like climate change] and demand standardised sustainability information”.
He points to a recently approved climate disclosure proposal put forward by CalPERS and the Connecticut Retirement Plans and Trust Funds demanding multinational Occidental Petroleum evaluate how its portfolio would withstand a 2-degree increase in global temperature as an example of the kind of scrutiny portfolio assets are under.
McIntire’s conclusion is unequivocal: “Climate change presents significant risks that will affect the long-term financial viability of the capital markets. In the absence of federal action, it’s the fiduciary responsibility of public pensions to press forward.”
And that, in the end, is the clincher. Politicians may have the luxury of tunnel vision, of making decisions based on short electoral cycles and narrow constituencies; institutional investors, particularly pensions and insurers, do not.
President Trump has made the wrong decision – it is short-termist, flies in the face of scientific consensus and, importantly, endangers the fiduciary duties of many institutional investors. The latter need to keep those duties front and centre now, to avoid making a bad situation worse.
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