The challenge of matching institutional investment objectives with the urgent need to tackle global warming has been highlighted by the launch last week of 'Just Climate', an asset management venture from Al Gore and David Blood’s Generation Investment Management.

Gore, the former US vice-president who brought the issue of climate change to a global audience in 2006 with his film An Inconvenient Truth, and former Goldman Sachs fund manager Blood, have teamed up with founder investors including Ireland’s Strategic Investment Fund (ISIF) and Harvard university’s endowment fund.

David Blood, Just Climate

Just Climate will make long term (typically 10 to 15 years) private markets investments in clean energy and infrastructure, as well as “impactful companies and projects seeking to catalyse timely decarbonisation and carbon removal at scale".

As reported, those at the coalface of climate capital allocation believe that ESG investment strategies are falling short. Harriet Lamb, CEO of the climate not-for-profit firm Ashden, said: “We need to find ways of connecting capital with these projects.”

Blood sees “an impact gap” when it comes to institutions’ ESG strategies.

“When we look at the opportunities that will decarbonise the economy most quickly, capital is not flowing to them."

Just Climate aims to mobilise future waves of asset-owner capital, but it will only do so if it can align with their objectives. Although Just Climate seeks to deliver appropriate long-term, risk-adjusted financial returns, its website says: “This is an aspiration and there is no guarantee this goal will be achieved.”

That is where it diverges from asset owners such as pension funds and sovereign investors. For example, in Australia, Unisuper CIO John Pearce told AsianInvestor this approach was not something his fund could consider.

“Our fiduciary duties are very clear – climate change considerations must be considered in the context of member’s best financial interests. We cannot explicitly subordinate financial interests to any other consideration.”

Jang Dong-Hun, CIO of the Korean Public Officials Benefit Association (Poba) told AsianInvestor he was largely supportive of the Just Climate initiative. “However global asset owners need to approach the issue from the governance point of view first. Shareholders and boards of directors need to have clear understanding of their objectives.”

Jang said Poba is moving forward with its strategy of adopting ESG and climate-related allocations, as long as they meet a minimum required return threshold. He added that “After the Covid-19 pandemic, I feel that asset owners are now more conscious of COP26, facilitating more active investment in ESG.”

EXCLUSION IS NOT ENOUGH

Matt Whineray, NZ Super

In a statement last week, Matt Whineray, chief executive of the Guardians of NZ Superannuation said: “It’s not possible to get to net zero simply by excluding carbon-intensive companies from investment. Companies from all sectors will need to make net zero commitments and develop plans to get there by 2050, or sooner.”

Singapore’s GIC is in accord with this, believing that it is more constructive to actively engage and support companies in their transition towards long-term sustainability, rather than to mechanically divest from certain industry sectors.

In collaboration with the Monetary Authority of Singapore, GIC developed a set of climate scenarios which it has applied to stress-test its portfolio. The scenarios cover the 1.5°C to 4°C range of global warming outcomes by 2100. In a paper published in June this year, Rachel Teo, GIC’s head of futures unit, economics and investment strategy elaborated on GIC’s thinking about climate risk and its return expectations.

“Based on a hypothetical global 60% equities, 40% bonds portfolio, projected returns may still be positive in the long run with climate change, but they are meaningfully lower in our three reference risk scenarios, versus a baseline that assumes no further climate related impacts beyond what has already occurred.

“Long-term investors may be surprised by the underperformance of the portfolio relative to their expectations, and should be prepared to navigate the potential increase in market volatility as a result of climate-related shocks.”

FULLY COMMITTED

Though NZ Super hasn’t been involved with Just Climate, their head of responsible investment, Anne-Maree O’Connor told AsianInvestor: “The Generation team have a very good pedigree and have been focused on sustainable finance from day nought, so it’s great to see them still leading.”

Last week, four of New Zealand’s largest institutions, NZ Super, ACC, Government Super Fund and National Provident Fund signed up to the Crown Responsible Investment Framework, announced by NZ Minister of Finance Grant Robertson.

The institutions have committed to transitioning their investment portfolios, which collectively total more than NZ$100 billion, to be aligned with a net zero emissions economy by 2050 or sooner.

Whineray said NZ Super’s long-term commitment to decarbonising represents a significant maturing of its existing climate strategy.

“To date, the NZ Super Fund’s climate change strategy has been based on an investment view that the impact of climate change has been under-priced by global markets. As a result of this, we have already significantly reduced the fund’s emissions footprint, and no longer have any material, long-term holdings of fossil fuel reserves.”