switzerlanden
Two climate change issues most concern investors

Two climate change issues most concern investors

24-05-2018 | Insight

Two issues central to combatting climate change most concern investors, Robeco’s Active Ownership team warns in its quarterly report.

  • Sylvia van Waveren
    Sylvia
    van Waveren
    Engagement Specialist
  • Cristina Cedillo Torres
    Cristina
    Cedillo Torres
    Engagement Specialist

Speed read

  • Companies face transition risks in changing business models
  • Physical threats are growing from extreme weather patterns
  • Climate Action engagement plans target carbon emitters

The first is transition risks that are linked to changing business models as companies progressively decarbonize, moving the investing landscape and potentially leading to stranded assets, they say. The second is the physical risks related to extreme weather patterns that could cost billions in damage, reparations or higher energy costs.

The Active Ownership team is trying to help companies adapt through an extensive ‘Climate Action’ engagement program targeted at high carbon emitters that begins in earnest this year. Robeco also launched a climate change policy in 2017 to align investment practice with limiting global warming to between 1.5 and 2 degrees Celsius, in line with the Paris Agreement of 2015.

“Investors are concerned about two key areas: transition and physical risks,” say Engagement Specialists Cristina Cedillo and Sylvia van Waveren in the Robeco Active Ownership Report for Q1 2018. “Transition risks are linked to the implications of climate-related policies requiring the reduction of greenhouse gas emissions and the adoption of clean technology. For example, a tax on carbon would disincentivize an electric utility company from generating energy from coal, and instead encourage energy generation from renewables.”

“This could potentially lead to stranded assets – situations where man-made capital such as coal plants has to be retired prematurely due to direct or indirect climate policies, or to the falling costs of alternative, cleaner technologies. Fossil fuels are at most risk of becoming stranded if they cannot be burned in order to limit global warming. Those companies that are not prepared for the energy transition will face significant financial challenges as regulations change and energy priorities shift.”

Stay informed on Sustainable Investing with monthly mail updates
Stay informed on Sustainable Investing with monthly mail updates
Subscribe

Switching to renewables

This energy landscape is already changing, as generating companies switch from coal to less pollutive gas, and as more renewable energy from wind or solar comes onstream, they say. “Coal plants in the US are a case in point for carbon-intensive energy sources which are losing competitiveness against lower-emitting sources,” say Cedillo and Van Waveren.

“For decades, coal has been the dominant energy source for generating electricity in the US. However, in 2016, natural gas-fired generation surpassed coal generation in the country on an annual basis for the first time. Natural gas emits about half the amount of CO2 per megawatt-hour of electricity than coal, and is therefore considered by many to be a ‘bridge fuel’ that can help in the transition to a low-carbon economy.”

“Moreover, the share of coal in the US energy mix has also been reduced by the expansion of renewables such as wind and solar power. This growth has been driven by state and federal policies supporting greater investment in renewable energy technologies and the adoption of them.”

Extreme weather costs

Meanwhile, global warming is causing sea levels to rise due to melting ice, and is dramatically changing atmospheric patterns. “Physical risks are linked to extreme weather events such as floods, droughts or hurricanes,” they say. “Although they can be hard to predict as global weather patterns become more unstable, these risks can also have a significant financial impact.”

“The costs of California’s drought between 2012 and 2016 raised electricity costs by USD 2 billion. Electric utilities saw a steep reduction in their low-cost hydroelectric power generation, some of them by as much as half. As a result, energy demand had to be compensated with other, more costly sources of fuel. Some companies reported replacement costs of as much as USD 200 million in a single year.”

Fortunately, asset managers are aware of the risks and taking the appropriate action to mitigate them, the engagement specialists say. “The financial industry is becoming increasingly aware of climate-related risks. There is a growing sense of urgency to understand how investee companies, and the economy in general, will be impacted by climate change, and to what extent they are seizing emerging opportunities.”

“The recommendations of the Task-Force Climate-related Financial Disclosures (TCFD) issued in the summer of 2017 are expected to contribute to this. The TCFD’s voluntary disclosure framework recommends that financial and non-financial organizations provide climate-related disclosures in their annual filings, including scenario analyses that assess the business impacts of climate risks. Robeco supports this initiative, as we believe that such disclosures will help us make better-informed decisions on the climate risks and opportunities of our investments.”

Engagement initiatives

Engagement with the world’s largest corporate greenhouse gas producers is also part of the solution. Robeco is a staunch supporter of Climate Action 100+, an investor-led initiative launched in December 2017. It aims to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures. The initiative has already attracted 256 signatory investors collectively with a total of USD 28 trillion in assets under management.

To support this, Robeco launched a three-year engagement theme in the first quarter of 2018 focusing on the oil and gas, utilities and chemicals industries. “We will be co-leading engagements with three companies, and will engage on both an individual and collaborative basis with a total of 13 companies,” the team says.

The new program builds upon Robeco’s previous climate change-related engagement initiatives that focused on companies in the real estate, utilities, automotive and oil and gas sectors over the past five years, and the climate change policy in general.

Logo

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree