Op-Ed: Winston Churchill: the ESG community must fight climate change with massive stewardship push

Link to sign up for a free trial to Responsible Investor

As you have been seeing and experiencing, anthropogenic climate change is disrupting how we live. Continuing to act as though it is not a major challenge that has been worsening year upon year offers our children and theirs the grim prospect of a world scythed of civilisation by the extreme forces of nature run amok. This dire forecast is not alarmist rhetoric. The leading climate scientists are in agreement that we may well be on track for a world that will be 4 ºC or more warmer before the end of the century. They warn that the perils of inhabiting Earth under such conditions are multifarious and that whilst human society will continue, there may be widespread, perhaps even crippling hardships.
This spectre also does not bode well for investment prospects. To be sure, the effects of climate change represent universally faced, non-diversifiable, value-destroying portfolio risk. Risk that cannot be addressed with some adept stock picking or even re-weighted asset allocations; the standard risk management strategy used by your sector today. The blade of climate change will hack away at the profits of many more companies than those not afflicted by its cut and those that seek to capitalise on the destruction it reaps. Even long-term, well-diversified investors may suffer large losses compared to where they would have been in a world without warming. Such economic devastation, however, can be largely averted if the environmental, social and governance (ESG) investing community realises the tremendous untapped potential it has.Investors, like governments and companies, have been alerted to the dangers of uncontrolled climate change for two or more decades. As a consequence of our collective neglect, society now faces the procrastinator’s penalty: there are only radical solutions from which to choose.
Although some maintain that our only hope is to focus our united energies on governments by prevailing upon them to fund research and development in market transforming technologies, impose new regulations, and guarantee energy subsidy parity, I am quite certain – and it saddens me greatly to say this – that being faced with such powerful vested interests that are so close to home, most governments lack the resolve to rise to the occasion. Tragically, today we can trust governments to do the right thing only after they have managed to exhaust all other possibilities. Personal experience has taught me that when faced with such a fundamental deficiency, a multi-pronged offensive is best employed. I have also learnt that positive action undertaken by a powerful group to address a problem faced by equally powerful entities encourages similar positive action, even among traditional adversaries, and in some cases collaboration in the name of mutual benefit.
Considering the associated failures resulting from being outflanked by short-termism, what is needed – and what I am calling for from the ESG community in particular – is stewardship of a type and scale that has never been seen. By undertaking this call to arms, humanity may find a common project around which it can rally and civilisation will literally be saved from virtually certain ecological ruin. In the process, large asset
owners may find investment opportunities to match their liabilities, thus providing investors with reasonable assurance of financial security during their golden years. The ESG community has demonstrated a nascent ability to gainfully integrate global sustainability issues into investing strategies. The performance results so attained entitle responsible investors to infuse their proposals for change with the potency necessary to foil the business as usual agendas of companies who have every reason to delay the transition to a low carbon development future.Yes, the technical and political challenges are many. Which strategies will result in sufficiently reduced carbon emissions? What needs to be done to transition to a low carbon economy? How can mitigation and adaptation costs be equitably allocated between countries that have largely brought about this predicament, those desirous and capable of tremendous growth, and frontier regions facing imminent danger yet with little capital resources? But these issues can be solved with the technological and diplomatic ingenuity of which humans have proven capable.
Among the most intractable problems the ESG community faces is that there are very powerful companies within our midst who are doing their utmost to ensure that collaborative action that is “fit for purpose,” as you now like to say, is unsuccessful. Various factors fuel the desire to prevent the needed actions, such as the receipt of misbegotten financial rewards and the preservation of ideologies, which have passed their time. Let it be known, the Allied Forces would not have won World War II had we allowed this brand of enemy within to undermine an otherwise unified response to such machinations.But all is not lost in this regard. Corporate power can also be used in the opposite direction to assist in the design and passage of effective, environmentally responsible legislation. Thus, responsible investors are not today called upon to buy this stock or sell that stock or even engage in smarter asset allocation; no, that time has long past. Fiduciary duty, recently referred to as fiduciary capitalism by John Rogers, a former President of CFA Institute, requires good governance, stewardship and above all, it requires taking an integrated portfolio-wide view. In light of the analogous situation that exists today concerning climate change risk, I urge you to engage with the wrongdoers and convince them of the merit of aligning their business interests with the greater needs of society. You must present a compelling business case that appeal to Boards of Directors – you must play on their turf. You must challenge their dealings with and support of trade associations that attempt to discredit science and cast you, their shareholders, as misguided or worse. You must respond to their will-sapping media campaigns with vigour and incisive wit. Beginning with those suspected of actively scheming against progress, you must request all of the companies you own to report on their carbon emissions and climate change strategies to CDP, the world’s only global environmental disclosure platform. To further inform your evaluation of their position, pay particular attention to their responses to questions focused on corporate political lobbying. Keep firmly in mind, however, that although disclosure of emissions and political influence is a critically important initial battle to win, it will take ever more forceful action before our formidable foe will concede.

Channelling the spirit of Winston Churchill are authors: Paul Dickinson (Executive Chair, CDP), Robert Schwarz (Senior Associate, Preventable Surprises) and Raj Thamotheram (CEO, Preventable Surprises)

Link to the second part in the series: Op-Ed 2: Winston Churchill: the steps responsible investors must take to prevail on climate change

The authors do not claim to be Winston Churchill scholars or to be gifted with his speech writing abilities. We are also aware that his career was not perfect. There is little, if any, doubt, however, that he rose to the challenges presented by international emergencies. That is to say, we consider his forthright approach to extreme adversity apropos. Given the lack of societal and investor response to climate change relative to the scale of the threat it presents, we hope to motivate more of the ESG community to act in accordance with their values by invoking his leadership. Our hope is that the ESG community – which now accounts for 48% of the institutional investment world – will act as a “tipping point” for investors as a whole.