COP26: how to finance the shift to a more sustainable future

COP26: how to finance the shift to a more sustainable future

Engagement is vital in helping the world’s largest carbon emitters transition to net zero.

 
 

The quick read

  • COP26 has emphasised the need for companies to do their part in helping to halt climate change.
  • Rather than simply removing the companies with the highest carbon intensity from its portfolios, St. James’s Place believes that engagement is the best way to ensure these firms improve climate-change governance and cut emissions.
  • St. James’s Place is a member of initiatives including the Glasgow Financial Alliance for Net Zero and Climate Action 100+, which both seek to support companies in their transition to a low-carbon future.
 
 

The COP26 UN Climate Change Conference in Glasgow has generated some historic announcements since it began, including several that aim to help restore the vital balance between human activity and nature, which I talked about in my last article.

In the past few days, the UK’s five biggest supermarkets made a strong commitment to halve the environmental impact of a weekly food shop by 20301. Also, the UK is one of 45 governments moving towards more sustainable farming.

Sadly, over the past 200 years of coal mining, we have not valued our land or natural resources properly. But with the help of these commitments, they will re-emerge as valuable assets over the next ten years.

We know that to halt climate change, we must reduce our CO2 emissions as much as possible. We have the tools to do it – two-thirds of the necessary technology exists already.

The Glasgow Financial Alliance for Net Zero (GFANZ), of which St. James’s Place is a member, now manages a collective $130 trillion in assets2. So we know the money is available to back these transitional measures, including those promised by the supermarkets and the 45 countries.

Engagement of these investors with the companies involved will be a powerful accelerant.

 

Why engagement matters

 

When Sir David Attenborough spoke at COP26, he said we can distil the climate change problem down to a single number – the concentration of carbon in our atmosphere. I agree that we need to shut down hydrocarbon use dramatically. But we also need a more nuanced view.

We cannot just turn off carbon emissions tomorrow. Large swathes of the world’s population rely on fossil fuel energy, including those in many developing nations, who are less responsible for climate change than we are in the West.

Switching off carbon without helping them finance the transition would be unfair. Instead, we need to achieve a just transition, which aims to ensure that the move to an environmentally sustainable economy does not leave anyone behind.

To achieve real change, we need engagement. St. James’s Place could reduce CO2 emissions in our portfolios much further by simply selling the biggest carbon emitters and buying stocks with a lower carbon intensity.

That would make our portfolios look good. But it would be less effective in financing the transition to net zero, because selling the biggest-emitting companies just passes ownership of those stocks to somebody who cares less about it than we do.

Instead, we invest in companies that acknowledge the need to change, such as BP and Shell, as we want to support that.

The oil price has risen and they are currently making good money from oil production. But if we continue to finance them, it enables them to recycle that money towards net-zero-carbon activities. We urge them to do that now rather than return it to shareholders as dividends.

 

Cleaning our backyard

 

We liken screening companies out of portfolios to throwing the rubbish over our neighbour’s fence rather than tidying our own garden. We engage with companies directly, with the help of engagement specialist Robeco, as well as through our fund managers.

We are also a member of Climate Action 100+, which aims to engage with the largest-emitting companies to reduce carbon output. Those 100+ firms are responsible for 80% of all corporate industrial greenhouse-gas emissions globally3. We need them to be at the forefront of the transition.

St. James’s Place is the UK’s largest wealth manager, with £148 billion under management. Our shareholdings give us a significant influence over the companies we own.

Through GFANZ, Climate Action 100+ and other initiatives, we can pool our influence with other investors to create an even greater impact on the way those businesses think.

 

Energy and steel

 

All the companies we engage with are capable of transition. In the energy sector, we hold Xcel Energy and WEC Energy Group, which both still produce lots of CO2. But, since 2005, they have reduced their carbon intensity by more than 50%, and have ambitious goals to reduce it further by 20304.

We also hold NextEra Energy, which mainly produced electricity from oil and gas until a few years ago, when it transitioned to become a leading US renewable-energy provider. Last year, its market cap exceeded that of traditional oil producer ExxonMobil5.

The same approach applies to other areas such as steel, historically a carbon-intensive activity, but fundamental to construction. COP26 has highlighted the need for net-zero steel production. As part of the finance community, St. James’s Place’s job is to fund that transition.

 

Long-term, holistic thinking

 

Attenborough said at the conference that humans are the greatest problem solvers, but we are bad at thinking long term and holistically.

St. James’s Place is responsible for the long-term financial wellbeing of our clients. We measure success over decades, not days. That long-term mindset enables us to help companies move away from their short-term profit focus towards long-term sustainability.

I’m optimistic that we can move towards a carbon-free world, but there is no time to waste. If we act together, we can make the difference.

 

Find out how you can invest in a better future. Talk to a St. James’s Place Partner today.

 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

1 WWF, Leading supermarkets join WWF in pledge to make UK weekly food shop “greener” and help tackle climate change, November 2021
2 The Glasgow Financial Alliance for Net Zero, 2021
3 Companies, Climate Action 100+, 2021
4 Xcel Energy sets another single-year record in carbon reduction, press release, Xcel Energy, 22 February 2021; Pathway to a cleaner energy future: 2021 Climate Report, WEC Energy Group
5 How NextEra overtook ExxonMobil as the largest US energy company, Forbes, 3 October 2020

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.