Following the 2015 Paris Climate Change agreement, investor concern over stranded assets is more widespread than many think.
In the lead up to the Paris Climate Conference in December last year there was a significant number of posts from all around the world on Twitter discussing a range of issues including divestment, carbon pricing, major project financing and citizens imploring their Governments to act on climate change. Following the historic agreement reached on 12 December 2015, similar themes continue to be discussed with increasing urgency, especially in terms of actioning the terms of this agreement.
In brief, the five main terms are:
- Limiting global warming to 2°C
- Five year reviews of emissions reduction commitments and opportunities to make more ambitious pledges
- Developed countries will provide $100 Billion per year to developing countries by 2020
- Global peaking of greenhouse gas (GHG) emissions as soon as possible
- Countries must create a process to address losses and damage from unavoidable climate change impacts
While it is indeed true that Governments need to show courage and face the reality that is climate change, companies and individual investors also have important roles to play. Reflecting on the nature of the role of investors can and do play, a very interesting 2015 Ernst and Young survey of more than 200 institutional investors worldwide regarding non-financial reporting by publicly traded companies has clearly shown investor concern regarding stranded assets may be more widespread than many people think.
The first question in the survey asked whether the investor’s fund decreased its holdings of a company’s shares due to the risk of stranded assets. The second question asked whether companies adequately disclosed their environmental, social and governance risks that could affect their current business models.
A report based on this survey entitled ‘Tomorrow’s Investment Rules 2.0’ has reported three principle findings:
- The majority of investors factor environmental, social and governance (ESG) analysis into their decision making
- Few investors use a structured approach to evaluating ESG
- A significant number of investors question whether companies provide sufficient information for investors to decide whether ESG is crucial in their decision
The survey report also highlighted the following key factors pertaining to the future of global investment:
- Approximately 62% of investors are concerned about stranded assets
- 33% of investors reduced their company holdings in the last year due to stranded assets
- 25% of investors plan to closely monitor the risk of stranded assets in future
- 37% use a structured approach to analysing non-financial information related to environmental and social risks when making investment decisions
- the quality and quantity of non-financial information available is a serious issue for investors
- approximately 66% of investors report that publicly traded companies do not adequately disclose ESG risks
- approximately 71% of investors see integrated reporting (that includes ESG) as either important or essential
- nearly 62% of investors consider non-financial data relevant for all industrial sectors
- the main reason companies provide ESG information is for their customers and regulatory requirements
- the deficit in useful non-financial information available to investors has created a unique first mover opportunity for companies to provide ESG information that investors find most useful
It is interesting to note the survey report’s analysis of regional differences, whereby European investors are confirmed as leaders in terms of taking non-financial factors such as ESG into account. They are also more likely to adopt a more structured approach to the analysis of ESG information and decide where to invest based on non-financial information.
In Australia, some investors attribute our interest in ESG to some Australian superannuation funds having investment committees that include employee representatives. Nearly 83% of Australian investors consider non-financial factors to be relevant in investment decisions across all sectors. This percentage was the highest of any region in the world.
Investors in the United States and Canada place a high level of importance on board oversight of a company’s non-financial disclosures. In addition, the percentage of United States and Canadian investors who view integrated reporting as essential also increased. In contrast to the United States and Canada, the Asia-Pacific region (which includes Australia) lags behind the rest of the world in terms of non-financial reporting, according to investors surveyed.
Revealing widespread investor concern over stranded assets following the 2015 Paris Climate Change agreement, the survey report also draws attention to the regional influences at play that are increasing awareness of the importance of non-financial information in investment decisions. For example, Japan has recently announced plans to improve its corporate governance; and in Latin America there is increasing interest in non-financial reporting.
Both Ernst and Young’s 2015 survey and ‘Tomorrow’s Investment Rules 2.0’ report highlight the importance of non-financial factors in investment decisions. In particular it sheds light on environmental, social and governance (ESG) factors which investors are including in their decision whether or not to invest. Not only does these documents highlight that investors are becoming more discerning; it also clearly shows that companies need to pay more attention to how they assess and disclose them to those looking to invest.
Following the 2015 Paris Climate Change agreement, investor groups are likely to be increasingly careful in terms of which companies they choose to invest in. They are also very aware of the ongoing environmental and carbon footprints that their investments have, and as a result they will increasingly favour investments with the lowest footprints-making it all the more significant for companies and Governments to play their part in limiting warming to 2°C and peaking GHG emissions.
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