Investors take companies to task over nature risks

Hello from the thick of London Climate Action Week. Launched in 2019, the initiative seems to have gained significant traction. This week’s flurry of events may go some way to calming those who fear that the government’s lukewarm approach to green policy has weakened the UK’s standing in the global climate conversation.

Much more consequential, of course, will be the outcome of the UK’s general election — now just over a week away. Opposition leader Sir Keir Starmer has put more emphasis than Prime Minister Rishi Sunak on green strategy — though his Labour party has scaled back its low-carbon investment plans.

With green policy increasingly contested around the world, today we look at how investors are navigating this turbulent period. I look at a new initiative in which asset managers are pushing companies to take a responsible approach to government lobbying. And Lee looks at the evolving strategy of one of the world’s biggest climate-focused funds. — Simon Mundy

Watch on demand the FT’s webinar Managing Risk for Energy Transition Projects, hosted in partnership with AXIS, where we delve into the collaboration between developers, lenders, investors and insurance partners to bolster the energy transition. 

INVESTOR COLLABORATION

PRI launches investor group on nature, despite pushback on climate alliances

It has been a tough couple of years for advocates of co-ordinated financial sector action on the environment. Climate-focused alliances have come under fire from Republican politicians in the US, who have accused members of pursuing a vendetta against the fossil fuel sector and raised questions about competition law.

Under pressure, major companies on both sides of the Atlantic have made high-profile exits from these initiatives. But progress has not been derailed, according to David Atkin, chief executive of the Principles for Responsible Investment.

The brainchild of former UN secretary-general Kofi Annan, the PRI is the biggest investor network of its kind, with more than 5,000 institutional members managing about $120tn in assets.

“What you are seeing is perhaps investors not being as vocal. But we can say because we see it — because our signatories report every year on what they’re doing as responsible investors — the underlying work is continuing,” Atkin told me.

An example of that work came today with new details of Spring, a PRI initiative focused on nature and deforestation policy, backed by more than 200 institutional investors.

Under the initiative, investors will focus on 60 companies operating in countries with especially acute nature-related risks. Interestingly, there will be a heavy emphasis on pushing companies towards “responsible political engagement”.

That seems to reflect a wider, growing emphasis on the need for ambitious government policy on climate and biodiversity — and the role that business lobbying can play in supporting, or blocking, such policy. This means that “responsible” investors need to pay careful attention to the lobbying activity of the companies they invest in.

The first 20 companies chosen for the investors’ attention are an eclectic bunch, including Toyota and other major carmakers; several Brazilian banks and two of the country’s biggest beef companies; Chinese cleantech businesses BYD and CATL; and consumer goods companies L’Oréal and Reckitt Benckiser.

Atkin said the companies were selected not necessarily “because they’re not doing the right thing”, but rather because of their influence on policy related to nature risks, especially deforestation.

The investors who have volunteered for leading roles in this initiative are a fairly mixed group, too. European investors such as Storebrand and Scottish Widows feature, as does Federated Hermes of the US and Japanese names like Sumitomo Mitsui and Nomura. Several Brazilian asset managers, including JGP and Neo Investimentos, are also playing leading roles — a key development, Atkin said, given that country’s centrality to the deforestation challenge.

It’s still an uncomfortable time for some asset managers, especially in the US, to be tackling environmental issues, Atkins said. “But if you believe that these risks can materially impact your portfolio, you can’t unbelieve that — and you are obliged from a fiduciary point of view to continue working on them.” (Simon Mundy)

Energy transition

The case for more ‘brown’ investments

General Atlantic’s $3.5bn BeyondNetZero fund is among the world’s largest pools of climate-focused private equity — making it a good indicator of how attitudes towards transition finance are evolving in private markets.

At a Monday event launching its 2023 annual report, panellists made the case for focusing transition finance on “brown” companies and sectors, where there is substantial room to bring down emissions, rather than simply investing in green companies that look good on paper.

As part of the BeyondNetZero fund, General Atlantic recently acquired a majority stake in Dutch environmental, social and governance ratings provider GRESB, which scores the sustainability of real estate and infrastructure projects owned by private equity firms and asset managers.

“I’ve got all the time in the world for credible transition plans,” Chris Pyke, an executive at GRESB, said on Monday’s panel. “We need to put the capital where the brown stuff is. That’s what the current paradigm doesn’t do.”

Yet, to date, BeyondNetZero has largely favoured capex-light, technology-driven solutions, such as ESG data and ratings providers. They’ve also invested in the likes of renewable energy company Sun King, which provides home solar power systems to African households.

In an interview with Moral Money, fund co-founder and chair Lord John Browne said recent government investments in industrial policy, such as the US Inflation Reduction Act, had created more opportunities for green tech transfer and manufacturing. Governments had become more willing to “de-risk” green industries by taking first loss, he said.

Most of the first fund had been deployed, Browne said, but the opportunities that industrial policy could create for private markets would probably figure into the next fund’s strategy.

“Re-shoring is in the cards, and creates an investment opportunity,” Browne told me. In some climate-linked sectors, he said, investment “will never happen unless the upfront risk, the one-off first risk, is taken by the government.”

Browne said he saw significant opportunity in countries’ efforts to manufacture green goods closer to home. While Chinese manufacturers had built a dramatic lead in key green technologies, such as electric vehicles and solar modules, Browne said the question was not if, but when the US and European countries would compete in those industries. Improvements in engineering would bring down costs, he predicted.

General Atlantic could be one vehicle for that technology transfer. “A Chinese company [might] say, ‘we’ve got a portfolio of end-to-end activity in solar. Can we bring it to you and make you the majority shareholder in the west?’” he said, adding that there had been “huge discussion” about investing in such a strategy.

However, state support was no guarantee of success, Browne warned, and could easily become corporate welfare. “We have to think very carefully whether what is being done by governments is enduring — whether it actually falls down to the population, society, rather than just for the corporate sector.” The US IRA had done a good job avoiding this, he said, adding that the investments in the law had been distributed “between red and blue states in a way that is very creative”. (Lee Harris)

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