Investors Have a Fiduciary Responsibility to Combat the Climate Crisis
In 1992, the year I was born, international governments began talking about how to solve the climate crisis. To much acclaim in 1997 and again in 2015, governments agreed to set emission reduction targets. And yet this decade was the hottest on record, and 2019 saw the highest concentrations of atmospheric carbon, which are now rising at a faster rate than ever before.
It’s no wonder that scientists are increasingly vocal and younger generations—including millennials—are increasingly disgruntled at the slow pace of progress and the failure to achieve meaningful results. World leaders and even investors have acknowledged the need for urgent action from all sectors: to prevent a climate catastrophe, we need to act – now.
In our capitalist system where “money talks,” institutional investors might be the best positioned stakeholders to influence the climate crisis.
But the investment community is falling far short of its obligation to act.
Engrossed by short-termism and reluctant to rigorously engage holdings on longer-term environmental risks, most institutional investors uphold a system that fails to recognize that protecting the environment protects long-term interests for both companies and investors.
We are already starting to see the ramifications of this myopic mindset, and it’s not just the climate that’s in crisis. In the Amazon rainforest, agricultural expansion has been driving massive deforestation. But the destruction of tropical forests isn’t essential to agricultural production—in the Amazon, soy production increased 400 percent while soy-driven deforestation declined. In fact, deforestation undermines agricultural productivity.
Due to flora density, rainforests generate their own rain and influence weather patterns; consequently, when rainforests disappear, so do the rains. Deforestation in the Amazon is reducing the rains that nourish agriculture in Brazil, and further Amazonian deforestation could negatively impact agricultural production as far as the American Midwest.
Clearing land to expand agriculture has begun to undermine the present and future profitability of Brazilian farmers and cattle ranchers – and the publicly-traded grain traders, meat processors, and consumer goods companies that depend on their commodities.
In December, leading scientists announced that the Amazon lacks enough rain to sustain itself. Unless immediate action is taken, the rainforest could turn into a degraded savanna.
Investors could be the key to reversing this situation.
As a shareholder advocate for an environmentally-responsible mutual fund company, I directly engage companies on their supply chain strategies and have successfully convinced them to adopt practices that have real-world impacts that protect a triple bottom line. I’ve collaborated with Aramark and Tyson Foods to develop robust no-deforestation commitments, and have successfully pressed Kroger, the largest grocery chain in the US, to adopt a no-deforestation policy that will cover its private label products.
More broadly, investor engagement is changing the corporate landscape on sustainability: more than 480 companies have committed to addressing deforestation in their supply chains. But with forest fires blazing and tropical forest conservation instrumental to meeting the Paris Agreement, it’s clear that more investors need to be doing more.
Institutional investors must therefore not only consider long-term climate and environmental risks as fundamentally material, but must act accordingly. This requires a shift in thinking about the prioritization of ESG and using all the tools of active ownership to hold portfolio companies accountable for mitigating the environmental and social harms that have traditionally been treated as externalities.
Simply: more institutional investors need to embrace a more comprehensive approach to climate risk. Climate change will affect all businesses—from increasing public pressure to changing resource availability to disruption of work—making it material to all companies in one way or another. Climate risk assessment should therefore be integrated throughout all portfolios, not just ESG funds, and climate-relevant factors must be considered on-par with, if not supersede, short-term financial factors.
This also requires a broader understanding of financial materiality to reflect the changing perspective of issues for which there is a “substantial likelihood that a reasonable person would consider it important.” As more people view climate change as a crisis and as investors generally—and millennials especially—are interested in sustainability issues that manifest in long-term shareholder value creation, what is “material” is moving away from what is just “immediately material” to encompass factors that create long-term shareholder value.
Similarly, investors need to take a portfolio-wide perspective to risk assessment. As noted by the Principles for Responsible Investment, until externalities, like carbon emissions, are appropriately priced, a company may strengthen its position by shifting externalities and associated harms onto others, which can result in negative outcomes for the portfolio as a whole. In other words, companies that contribute to the climate crisis may negatively impact the (long-term) performance of other holdings.
In tandem, investors need to practice active ownership rigorously. This means going beyond engaging portfolio companies about climate risk disclosure to pressing them about practices, progress, and accountability mechanisms. It means consistently voting on shareholder resolutions that advance climate mitigation efforts and filing resolutions at companies that haven’t set adequate emissions reduction targets. It means sending market signals that investors will not reward companies that pose long-term risks to the planet and profitability. And it means getting creative in finding ways to finance climate solutions through green bonds and impact investing.
We’re only at the tip of the iceberg for what institutional investors can be doing to impact the climate crisis: portfolio holdings of global investors are misaligned with the goals of the Paris Agreement; the world’s largest asset managers often vote against climate resolutions; and green bonds, those used to finance environmental and climate change mitigation projects, don’t even comprise 0.2% of the bond market.
With emissions rising, wildfires raging, and storms surging, our current model clearly is not working. If we want a chance at beating the worst possible outcomes of the climate crisis, everyone – including the finance community – needs to act using all the tools at our disposal. Otherwise, to echo Greta Thunberg, in the face of impending crisis, how dare we say what we’re doing now is enough?
Article by Jessye Waxman, shareholder advocate at Green Century Capital Management, leading the firm’s work to protect tropical forests. Using the firm’s leverage as a shareholder, she presses companies to adopt more environmentally-responsible policies and practices. Prior to joining Green Century, Jessye worked as a research associate at several nonprofits – where her research focused on environmental law, policy, and environmental security – and as an organizer on a sustainable agriculture campaign. In 2019, Jessye was named to the inaugural SRI Conference 30 Under 30 list. She holds a BA in Environmental Sciences and Policy from Duke University.