Stefan Dunatov is chair of the 300 Club and Daniel Godfrey is programme director of the 300 Club.
When it comes to climate there are only two potential outcomes for investing even if you’re not certain which one you’ve picked.
To be fair, the answer may not always be obvious, and the path that will be travelled even less clear. Either the world will succeed in restricting global warming to levels that do not threaten a collapse of civilisation or even extinction, or we will fail (with all the repercussions of hunger, sea-level rise and mass migration that brings). In this stark light, we would only ever choose to aim for the former.
Investing for success involves making a range of assumptions about the future – for carbon taxes, tax incentives, state subsidies, stranded assets, global co-operation and collaboration and the pace of technological innovation and disruption. And these assumptions have a big impact on your investment strategy compared to what looks like a smart medium-term investment strategy if you believe that we’ll fail.
Whilst every investment strategy is at least implicitly banking on the success or failure of this transition, it’s also quite likely that many investors and investment managers are unaware which they’ve adopted. Sadly, if you don’t know, the likelihood is that you’re investing in failure.
Without a conscious evaluation of the factors that lead to success, it’s highly unlikely that any investment strategy will end up backing them by chance.
This is important, not merely in terms of the impact on the wealth of investors/our clients, but it’s fundamental to the success of the whole transition to a low-carbon economy.
With all the collective influence and powers that investors have, a successful transition is only likely to succeed if we consciously invest for success. This means that we’d back renewable energy at unprecedented scale and in the infrastructure needed to store and move that energy to where it’s needed.
We’d value fossil fuel reserves and high emitters on the assumption that carbon taxes or subsidies will be introduced that make clean energy gradually more competitive, creating more stranded assets. And we’d use our influence and, if necessary, our collective power to ensure that high-carbon companies have strategies and incentives to become part of the future rather than simply falling by the wayside.
The core problem is the disconnect between the time horizons of the investment chain and the crystallisation of the risks of climate change.
Whilst a small proportion of investments in the real world have short pay-back periods, most investments, in innovation, machinery, factories, power stations, infrastructure and so on take many years to reapply rewards.
But the investment chain is impatient and the big prizes are still awarded for shorter-term outperformance of index benchmarks rather than long-term and cumulative absolute returns.
This simply does not fulfill the true purpose of investment, which is to create wealth sustainably over the long term in a way that benefits investors, the planet and society.
To avert the catastrophic risk of failure, investors and the investment industry need to work together to find ways to prize and to incentivise long-term, sustainable wealth creation. We need to fully deploy our collective influence and powers with companies, regulators and legislators.
Most of all, we need to invest in the success of the transition to a low-carbon economy as if our grandchildren’s lives may one day depend on it.