Arisaig attended the CFA Society UK’s “Investing in the net zero transition” conference last week. A healthy 300 attendees across the investment community gave a positive message that despite a range of global issues in play over the last 18 months – including war, supply chain challenges and inflation levels in developed markets not seen for 30 years – that climate change is an issue that remains front and centre.
The overarching message on what asset owners are looking for in their managers and direct investments is that expectations are growing in terms of disclosure and action. There is an increasingly high bar as to what is considered competence in the climate investing space. There is also a growing impatience, to our minds understandably, with managers who have made substantial improvements in terms of climate change analysis and disclosure without any associated change in allocation decisions. In other words, having done the easy work on reporting, managers are often coming up short in terms of the much harder task of actually aligning their portfolios with net zero.
Ultimately asset owners want their managers doing more than just filling in questionnaires, and so the short list of what we need to communicate is: (i) do we have an investment and engagement plan that is based on research; and (ii) can we effectively communicate progress, with bias towards quality not quantity when it comes to engagements.
At the conference, we found investors in climate change solutions to be striking an increasingly confident tone. There is clear evidence pointing to the cost competitiveness of renewables, particularly solar and onshore wind, which are now the cheapest form of new power in most major global markets. This has empowered those financing the energy transition to make the argument that climate is almost irrelevant – the tide has begun to turn on the global energy mix, and so an investment approach aligned with net zero can be deemed to be a purely ‘future-proofing’ financial decision. Further bolstering their case is the fact that even the most optimistic renewables forecasters have tended to dramatically underestimate the pace of progress in this sector, a pattern which has a good chance of reoccurring if ‘learning curves’ fully materialise among the most important renewables technologies.
There was an increasing focus on the role that emerging markets will need to play in a green energy transition, which was good to hear. It may seem like common sense that two thirds of the world’s population need capital to finance their own net zero transition, but too often the developing world is ignored when it comes to promoting climate change solutions. We suspect that relative valuations may be playing their part in shining new light on emerging market opportunities. As we have argued before, investing in EM climate solutions represents a compelling way of combining structurally higher developing market growth with the tailwinds of climate change transition.
