
| Renewables like this wind farm in Germany are Source: Associated Press |
With climate change a top priority for world leaders meeting at the United Nations in New York, business and investor groups have been rolling out eye-catching plans to reduce emissions with more "green" financing.
Banks with more than $47 trillion in assets, for example, agreed to align their business strategies with national and international climate targets. A group of pension funds and insurers overseeing $2.4 trillion in investments said it will transition to carbon-neutral portfolios by mid-century. And companies in the newly formed Coalition for Climate Resilient Investment said they aim to "transform infrastructure investment by integrating climate risks into decision-making."
"Achieving the transition to a carbon-neutral future will require mobilizing mainstream private finance," Bank of England Governor Mark Carney said in a Sept. 23 news release.
However, investors need better information to ensure their money is going to companies that are "doing the most to mitigate ... climate change," the American Council on Renewable Energy, or ACORE, said in a Sept. 25 report.
Renewables, which International Energy Agency Executive Director Fatih Birol recently called "mainstays of the world's efforts to tackle climate change," could get a significant boost from funds focused on environmental, social and governance, or ESG, investing, according to ACORE. But the "subjective nature of ESG scoring does not always acknowledge companies who are leading the transition to a low-carbon economy," the advocacy group said.
That criticism echoes comments by U.S. SEC commissioner Hester Peirce, who in June said ESG ratings "can vary so widely ... that it is difficult to see how they can effectively guide investment decisions."
To better reflect renewable energy use and investment, ACORE called for ESG scores to disclose the extent to which companies are supporting the construction of new projects; to give financiers credit for the avoided greenhouse gas emissions that result from their investments; and to use "standardized, material and forward-looking data," as well as a universal climate benchmark, so that companies can be judged and held accountable for their progress.
The Climate Bonds Initiative, which advocates for sustainable investing, is also pushing for tighter green-financing standards in debt markets. Citing a "lack of consistency across sectors," the group on Sept. 24 issued U.S. guidelines for determining when projects are "compatible with a climate-resilient economy."
Unclear if sufficient data is available
Companies that are the subject of ESG reviews also are grappling with how to assess and disclose data.
In the energy sector, pipeline companies are not "properly" sharing ESG information with investors, analysts at BMO Capital Markets said Sept. 19. Companies, portfolio managers and research analysts, along with proponents of ESG standards, have said guidelines for ranking pipeline firms' environmental performance are developing more slowly than investors' interest in climate change.
And at German automaker Volkswagen AG, executives are conducting a "materiality assessment" of ESG issues, Ralf Pfitzner, the company's head of sustainability, told analysts Sept. 20.
ESG is "really a broad topic," Pfitzner said. "So one of our tasks ... is really to focus on those things that matter, focus on those things that are material for us, for our investors and for all our stakeholders." He said climate change is the "most important" ESG topic for the company. Pfitzner made the remarks days before German prosecutors filed charges against Volkswagen executives for market manipulation in connection with the "dieselgate" scandal.
"People are asking for more disclosure, more transparency, more common taxonomy ... and that's something I absolutely support. Because there's nothing that stokes distrust like that black box," said Adam Gillett, head of sustainable investment at Willis Towers Watson PLC.
However, available ESG data is "already good enough for lots and lots of investment decisions," Gillett said. "One of my worries is that we hold ESG to a very different standard [than] other investment data ... partly because it's just a bit newer."
Assets managed using sustainable, responsible and impact investing strategies totaled $12 trillion at the start of 2018, a 38% increase from 2016, according to US SIF, which advocates for sustainable investing.
ACORE hopes that by attracting more ESG investment, the renewables sector can make up for the scheduled phase-down of U.S. tax incentives.
"[We] know that the upcoming end of the tax incentive program is motivating quite a high level of activity at the moment and through 2021. So it's quite likely that we'll see a peak of activity and then a bit of a lower run-rate going forward," Aron Willis, a senior vice president at Canadian power producer TransAlta Corp., told analysts Sept. 16.
But corporate ESG targets "are going to continue to drive this market at what will be a pretty exciting pace," Willis said.
