Climate change the biggest challenge facing the investment industry


Only those investors who are able to take seriously the value destruction potential of climate change will survive.

Asset managers have a lot to worry about at the moment: from managing money in an environment where low and negative interest rates are distorting asset prices, to disruptive technologies that are changing the ways in which markets and assets can be analysed, accessed and valued.

For many in the industry, however, the biggest question they will need to address over the next few years is not one that is as immediate as these. It is a longer term problem:

“I think the disruptor that is going to have the most influence on the investment industry is the question of climate change,” John Green, co-CEO of Investec Asset Management told the recent Morningstar Investment Conference in Cape Town.

“If you’ve been in London in the last few weeks, you would have been massively disrupted by the protests going on there,” he added. “That is just telling you that the collective society, and the world, is saying that we need to take this question much more seriously.”

Watch: Is Europe about to outlaw future investments in the coal industry?


Green is far from alone in this belief. The same sentiment was shared earlier this month by the president and chief executive of State Street Global Advisors, the world’s third largest asset manager. Speaking at the Fiduciary Investors Symposium at Harvard University, Cyrus Taraporevala, said that climate change is “the biggest challenge for our industry and human life”.

He argued that only those investors who are able to take seriously the value destruction potential of climate change will survive.

Another industry luminary, Dan Fuss, who has more than 60 years of investment experience and is vice-chairman of Boston-based firm Loomis Sayles, told the CFA Institute Fixed-Income Management conference last month that climate change is now the greatest challenge facing society and the markets.

“I’ve been doing this for a while,” said Fuss. “Many times during this period, I have looked at things and said: ‘boy, I’ve never seen anything like this before’. That was easy to do in the early years, because I hadn’t seen much.

“Now I’ve seen more, but I’ve still never seen anything like this before,” Fuss said.

These comments illustrate how a growing number of asset managers are realising the enormity of the challenge this presents to their businesses. That is because its potential impacts are largely unquantifiable, and are enormously long term.

“In the discounted cash flow model, which is arguably the cornerstone of active investment management, year 50 is almost irrelevant,” the president and chief investment officer at Morningstar Investment Management, Daniel Needham pointed out. “Years one to 10 make up the largest proportion of what you look at.”

The impacts of climate change on business models and industries, however, have to be considered way beyond this kind of time frame. For example, how do you assess an investment in a coal miner, when the use of fossil fuels will fall dramatically over the next few decades? Models that rely on historical data are inherently incapable of assessing these sorts of risks and opportunities.

“Consultants and clients are typically backward-looking,” Green noted. “But this is not a backward-looking problem you can solve. We love data and crunching spreadsheets to come up with answers, but this is not an answer that is going to come out of a spreadsheet.”

New approaches

Asset managers, as Green noted, therefore have to “think about this very differently”. As fiduciaries, they have a responsibility to be proactive because the risks in waiting to see how things play out are simply too great.

“One of the ways to do that is through active ownership,” Xolisa Dhlamini, a lecturer in development finance at the University of Cape Town’s Graduate School of Business told the recent Changing Course conference hosted by Just Share.

“You are not just buying instruments and leaving them there – you are being more active in forcing the corporates that you are putting money into to behave better.”

Another important consideration is how asset managers have the ability to influence how new markets develop.

“We as investors have a genuine opportunity to deploy capital in a way to support climate solutions and embrace opportunities,” Taraporevala said.

Importantly, asset managers can also be proactive in how they deal with clients, particularly pension funds. Since they have the best view on the risks and opportunities climate change presents, asset managers should be encouraging their clients to invest accordingly.

“Things can change if asset owners flex their fiduciary muscles,” said Nicholas Firzli, director-general of the World Pensions Council. “Pension funds own trillions of dollars in assets. By flexing their muscle, the board members of pension funds can change the world.”

If asset managers are really to look after their clients’ interests, they cannot simply be mandate-takers. They have to be willing to set the agenda.

“As a global investment manager, I sit in front of clients and say that my home town, Cape Town, nearly ran out of water,” Green said. “That is what climate change is doing. So what are you doing about it as a pension fund?”