ESG is not the same as global warming, or climate change. There are overlaps, but the differences are more important. In essence, ESG is on the same level as a political conviction.
It is no coincidence that there are “green” parties in several countries. Climate change is neither political nor a conviction. There is near consensus (around 97%) among scientists that climate change is a scientific fact.
Moreover, climate change is not a problem of governance, it is a problem of human survival, such as AIDS or Ebola. An even more important difference is that the time to prevent irreversible climate change is limited.
Investment professionals know that it is virtually impossible to predict the future, but they also know that ongoing trends can take less or more time than predicted. The time we think we have may actually be shorter in reality.
Think of the possibility of Australia-like wildfires on the vast Russian steppes. Two dates stand out in the discussion. The Paris agreement is focused on 2030. Irreversible global warming is thought to be setting in around 2050.
If humanity fails to prevent irreversible global warming, the consequences are not yet fully modelled, but they already look terrifying to unacceptable. To a large extent, the consequences are threefold: freak weather events and events linked to weather changes, a rise of the ocean water level and threats to food security.
They will cause huge numbers of deaths, from babies and the retired dying from heat, to the victims of country-wide wildfires, storms and flooding.
To see what this means to you, in 2050, your children or your grandchildren may find themselves living in an area where the temperature rises to over 50°C for weeks or even months, a life-threatening level.
The value of your house may have dropped to zero as the area has become unliveable. Your beach house was swept into the sea. If, in desperation, your children decide to re-locate, they may end up in a stream of climate fugitives welcome nowhere. No responsible parent can accept this scenario.
Solutions are available even today. They range from drastically diminishing carbon emissions to purifying air and stocking the resulting carbon. These solutions face hurdles, such as insufficient demand, resulting in a high price – a problem that can easily be solved by legislation.
Perhaps the largest problem is opposition from what may be called the carbon lobby. It is no coincidence that the countries that deny global warming the strongest, the US, Russia, Brazil and Australia, all have a powerful coal mining lobby.
Behind the carbon lobby are companies. About 100 companies are responsible for 71% of global carbon emissions. The list of these companies is well known. Behind these companies are individuals, decision makers, people who are likely to make the front page of business magazines.
Whatever they say their motive is, no responsible person, parent or not, can accept that profits and bonusses are more important than preventing global warming.
The problem lies with companies. Some are making efforts, but unless they target 0% carbon emissions by a date before 2050, they are not doing enough.
The problem is not in individual behaviour, as the carbon lobby likes to imply. First, it affects only a small part of carbon emissions. Second, plenty of individuals are already making changes, like driving a hybrid car, flying less, eating less red meat and more vegetable-based meat replacers.
The problem lies with companies. Some are making efforts, but unless they target 0% carbon emissions by a date before 2050, they are not doing enough.
There are two ways to make companies fall in line with the interest of all of humanity. The first is through voting, resulting in more stringent regulation. That road is long and obstructed by the carbon lobby, but it is effective.
The second road is through financing. This is where pension funds come in. Their fiduciary duty is to act in accordance with the interests of their beneficiaries. It is impossible to deny that preventing irreversible climate change is in their interest.
It is, therefore, a duty of pension funds that are subject to regulation on fiduciary duty to promote climate change prevention forcefully. Here is a short shopping list:
- Get rid of the deniers, the opportunists, the short-sighted and the uninformed. Pension funds need to get personal. Those blocking a solution must be voted out urgently. A happy by-product will be that the carbon lobby will lose company support.
- Get serious on stranded assets. Pension funds should insist on writing off on stranded assets and not creating unsustainable new assets. A new oil or gas field requires around 10 years before it comes on stream. Oil exploration is, therefore, a stranded asset today. New coal mining will never be able to pay its development cost. New models of petrol cars are a very doubtful proposition. New oil refining capacity is a dodo, even today. As a bonus, this line of action should in time starve the carbon lobby of financing.
- Demand hard carbon emission targets in line with the Paris agreement from companies. This is not a wild-eyed proposition, but a condition for company survival without a panicky and overdue transition.
- Lobby international organisations to develop benchmarks for carbon emission and apply those benchmarks when judging or pricing companies for investment. Lobby governments to turn those benchmarks into hard law for speed of implementation.
If you are a rational and responsible person working in a pension fund, you cannot afford to do less.
Peter Kraneveld is international pensions adviser at PRIME bv
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