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“I was asked ‘What is the most consequential thing investors could do to address climate change?’ and I said: ‘Probably the most meaningful thing we can do is make nuclear energy a recognised impact investing category like micro finance or windmills.’ And half the room was laughing and the other half was aghast.” This came in the middle of an interview with Harald Walkate, head of corporate social responsibility and ESG at active portfolio managers Natixis Investment Managers, who was describing to RI his experience on a panel at an impact investment conference.
“Of course I was being tongue in cheek,” he continued, “but also wanted to make a serious point: ESG, in many ways, has become like a religion, and there are things you can do and say and things you can’t do and can’t say, or risk being called out; I believe this is holding us back. At the end of the day we are just trying to solve problems, and all possible solutions involve difficult trade-offs – let’s have a reasonable discussion about these trade-offs. Jane Goodall said, about protecting the environment ‘It’s a whole area that we should learn to address. Not by pointing fingers, but working out ways ahead’. I think the ESG and impact discussion should be much more about working out ways ahead and not about making it a competition in moral purity, or pointing fingers.”
RI asked why nuclear energy generation is ‘off the table’. “It is tarnished with its link to nuclear weapons – of course there have been some spectacular failures with nuclear power plants – and it comes with the challenge of disposing waste, but if you look at serious studies [Walkate referenced this example] that compare nuclear energy to fossil fuels, weighing all the costs and benefits, typically they conclude it would make sense to use nuclear more.”
Walkate continued: “I think many people avoid having a discussion about nuclear energy by suggesting that we will get to net zero in a reasonable time frame using only wind and solar, though – again if you look at what will be needed to scale these energy sources up – that doesn’t appear to be a rational position to take. In any case, in most countries, we’re not even having a normal conversation about the potential of nuclear compared to the potential of other energy sources. I would argue that if we are serious about our desire to act urgently on climate change, we need to carefully consider all the options, with the upsides and downsides. If we do decide to leave it off the table, we owe it to ourselves and to future generations to make it clear why we are doing this, as it could mean the difference between achieving or not achieving the Paris goals.”
Walkate went on to say that scientists and engineers will say that non-fossil fuel sources such as nuclear are essential, but that there must also be investment in new and emerging green technologies, for example better batteries and more effective carbon capture (CCS). But new technologies are risky and not suitable for institutional investors like pension funds, “it tends to fall to VCs [venture capitalists], perhaps family offices & endowments,” he said.
“Blended finance is a tool that can help governments circumvent this problem,” said Walkate “it uses financial engineering to structure projects with public money in a way that it ‘crowds in’, or mobilises, private financing. This requires financial expertise that is more common among Wall St bankers than among ESGers.” In an email, Walkate clarified his use of the term ESGers. He wrote that people in his kind of position don’t have an investing background, and don’t allocate capital to strategies. “We are ESGers, not ESG investors.”
Walkate described a situation where blended finance could be most effectively brought in to an ESG project. “In a previous role, at Aegon Asset Management, I had some involvement in a successful blended finance project, that gave me insight into what’s needed to do this well. Climate Fund Managers, a joint venture in Holland between FMO, a Dutch development bank, and Sanlam Infraworks, a South African company, set out to build a large blended finance vehicle, Climate Investor One. This fund wanted to finance renewable energy infrastructure projects in emerging markets, including Africa and South-East Asia, projects that are not typically at the top of the list of preferred investments for institutional investors.
“They approached me in the very early stages of setting up this fund, and I put them in touch with a colleague, a portfolio manager managing about $5 billion in sovereign-related investments on behalf of insurance companies and pension funds. I asked him simply to spend some time with these people to discuss how capital allocation decisions typically get made by large institutional investors, which is what they wanted to understand with the intent of building this kind of thinking into their fund structure, and to share his expertise. He ended up meeting with them multiple times, advising them what the fund structure should look like in order for institutional investors to be comfortable allocating money to it; central to his recommendations was to obtain a guarantee from the Dutch export credit agency, which effectively made the risk/return profile of the fund very similar to that of Dutch government bonds – i.e. modest return, but also very moderate risk.
“He ended up spending four or five afternoons with them and actually investing in the fund himself on behalf of his institutional clients. But most ESGers do not have the know-how or investment decision-making power to be able to help companies like Climate Fund Managers.”
The role of government
As this example shows, complex financial engineering requires the involvement of different parties including development banks, investment banks, NGOs and institutional investors. “Governments and politicians typically don’t have the patience or capabilities for this. Furthermore, people are always accusing investors of being short-termist, but one could easily accuse governments of the same thing, as there is always the next election, and then the incoming administration throws out all of the plans – both good and bad – of the previous one.”
Walkate contended, however, that governments can be effective, even at investing in new technologies, but must start to subsidise renewables instead of fossil fuels. “Regardless,” he said, “it would be good to see a consistent agenda and moving onto the next susbidised cycle once one type of fuel, such as wind power, can stand on its own feet.”
Corporations cannot fully replace the government’s role, Walkate stressed, but they can work with governments to develop policies that would use market forces to solve problems. “A tax on carbon is a good example: this is not something the private sector can create, but the private sector can argue why it would be effective, and can help governments design it in a way that it would result in the desired changes.”
Governments think they are doing enough by creating taxonomies such as SFDR [Sustainable Finance Disclosure Regulation] proposals so investors can understand what is and isn’t green, Walkate explained. But institutions are likely to respond: “It’s good to know definitively what’s green and brown but it doesn’t change the investment case for us.”
“Governments aren’t directing sufficient time and attention at creating the necessary price signals,” said Walkate, “many energy companies are working on things like CCS, but the economics still don’t favour development or deployment on a large scale because the economics for fossil are still favourable; governments could change the economics by introducing carbon prices/taxes, but of course doing this globally or even regionally is very difficult and often not something that plays well for politicians.” Walkate held out some hope from the election of US president elect Joe Biden and his climate plans, including the appointment of John Kerry as ‘climate czar’.
What investors can do
In an email, Walkate gave a list of three things investors could do to help. The first was to hold managers to account on energy transition and investing in new technologies. Secondly, at the very least provide expertise on blended finance. And third, help shape public policy and “avoid policies that don’t solve problems or only solve the problem of greenwashing, which in the bigger scheme of things is the least of our worries”.