Hello there, blue sky investors!

on 22 Nov, 2019

Delhi’s apocalyptic air has once again drawn attention to the widespread hardships caused by unplanned economic activity. Along with that, it also raises questions of transitional justice — namely, how to compensate farmers, if and when they move to a new cropping pattern.

Farmers of Punjab and Haryana have faced flak for having caused a crisis across northern India by burning crop stubble. But the onus of reducing emissions lies on India’s corporate sector, another prime user of natural resources. Corporates, however, exist at the pleasure of their investors. Investors in companies are inexorably focused on short-term returns. But any meaningful climate response works in the longer term, and may even imply sacrifices of short-term profitability.

Much speedier responses to climate change will come from the market, if the largest investors in the food chain actively drive climate-friendly behaviour.

These investors are large pension funds and insurance companies who control about $80 trillion. These large investors are moving slowly in the direction of sustainable investing. But much more needs to be done, and in the interest of these organisations themselves.

Pension fund investments in coal, oil and gas, and electric utilities are expected to have value drops of 4-8% a year on account of global warming.

This would effectively wipe out market capitalisation of affected companies in a decade. Pension and insurance funds across the world are expected to meet liabilities to generations of retirees through the profits they make on these investments. Their assets in companies that depend on fossil fuels will lose value as countries inevitably respond to climate change.

Adecline in the values of their assets has dramatic consequences for their ability to meet the needs of their pensioners and insures over the coming decades. Their trustees will be sued by those who expected pensions and couldn’t get them. Governments will fall when pensions or insurance claims are not met.

In the breathing business.

Over the past two years, such funds have begun to feel the sharp end of climate change impact. Some of these effects are direct, such as, when companies have invested in assets lost in floods in Kerala last year. Other challenges will be more subtle — IT companies in Chennai that shut down for days due to flooding, or governments that need to spend more on healthcare.

The breathless excitement with which investors are funding companies that provide ‘cool co-working places’ or that let us share cute photos of pets is largely absent when we speak of climate change. If climate change were the new ecommerce, we would have solved the problem by now.

In India, neither pension funds nor insurance companies have yet any specific responsibility to integrate climate issues into their investment decisions. These large pools of capital do not address causes of air pollution in Delhi, unseasonal rain in Mumbai, or water shortages in Chennai and Bengaluru. They don’t penalise climate-unfriendly strategies or reward innovative champions of sustainability.

Indeed, many are expressly prohibited from taking exposures to corporates.

Elsewhere, regulators of pension funds have begun to mandate the consideration of climate risks impacts into their portfolios. The provincial government in Ontario, Canada, requires pensions to disclose how environmental and social factors are being considered in their investments. Regulators in California, US, require insurance companies to disclose the climate-related risks to their portfolio.

EU requires managers to examine the impact of climate change on the risk profile of their funds.

Funds have responded to these demands by signing to the UN’s Principles of Responsible Investment, and by a steady increase in interest in funds focused on ESG (environmental, social and governance) criteria. The next stage of this movement is for asset owners increasingly asking fund managers to engage actively on their behalf, and demand that investee companies commit to measurable and challenging environmental and social targets, and disclose these, just as they disclose financials. This is not a new idea.

The Sustainability Accounting Standards Board already has a well-defined and widely accepted rubric for reporting.

Given that India is a major participant in global climate change mitigation, the ministry of corporate affairs, the pension fund regulator, as well as the insurance regulator, need to examine whether a detailed integration of climate-related issues into investment theses is required by entities they regulate.

Doing so will be aligned to global trends, and will encourage more foreign pension investments to flow into the Indian economy.

It’s time that large investors, the most influential entities in the corporate food chain, step in to nudge corporate behaviour in favour of the right climate actions to prevent a recurrence of the travails so visible in Delhi’s skies.

The writer is former COO-CFO, Tata Capital.DISCLAIMER : Views expressed above are the author’s own.

This post was originally published in The Economic Times dated November 22, 2019