Why US president's fossil friendliness could fuel a brighter future in green energy sector
Eyebrows may have been raised worldwide by Donald Trump's selection of oil-drilling advocate Rick Perry as his energy secretary, and of climate-change sceptic Scott Pruitt as head of the Environmental Protection Agency.
But, these and other fossil-fuel-friendly picks may actually lead to investment opportunities in renewable energy and sustainable natural resources.
Any drop in funding from political sources represents an opportunity for investors to bridge the gap. As a result, Mr Trump's election and his climate-change-sceptic cabinet may increase the role of pension schemes and other institutional investors in this area.
Just last month, Ireland became the first country in the world to introduce legislation banning fossil fuel investment for state-sponsored investments. The Ireland Strategic Investment Fund, worth over €8bn and managed by the NTMA, will fully divest from fossil fuels by 2020. This is a clear statement of intent and more countries are likely, if not obliged, to follow.
What is sustainable investing and why is it important?
Sustainable investing takes account of environmental, social and corporate governance (ESG) factors in the investment process. Traditionally, such a focus has been seen as taking an "ethical" stance, one reserved mainly for charities and university endowments. However, incorporating ESG factors actually involves a consideration of real risks likely to drive future returns.
Environmental factors, in particular, are becoming more important. Some 194 governments have signed up to the Paris Agreement, the world's first comprehensive climate accord, which commits to set a limit on global warming.
The Paris Agreement aims to lower greenhouse gas emissions by reducing reliance on fossil fuels, with a longer-term target of carbon neutrality by 2050. This is likely to result in huge structural changes globally as government action to mitigate climate change could render many proven fossil fuel reserves unusable or "stranded".
It is also increasingly likely companies will have to start disclosing financial risks they face from climate change, allowing investors to value them more accurately and identify the risks and opportunities created by the transition to a lower-carbon and more sustainable economy.
Why should pension scheme trustees invest in a sustainable way?
Irish pension scheme trustees will have no choice but to address sustainable investment in the coming years.
First, regulation is set to increase, with the EU placing responsibility on pension schemes to consider ESG factors as part of their overall risk assessment, particularly risks relating to climate change and the environment. From 2019, all pension schemes will need to outline their ESG policy in their annual reports to members.
Second, as pension scheme members become more aware of climate change and sustainability issues, they are looking for sustainable fund options.
Third, there are newfound company-led pressures, as pension scheme sponsors increasingly wish to have their sustainability beliefs reflected in their pension schemes' investment strategies.
Given these pressures, Irish pension scheme trustees should:
Consider their investment beliefs on climate change and establish a policy on sustainable investing;
Review their current position and gain a better understanding of their exposure to ESG risks, particularly those related to climate change;
Have a plan in place to manage or reduce these risks.
What investment options are available?
Investing in a low-carbon index designed to track a specific index (for example, global equities), but with lower carbon footprints, can be an important first step.
However, a better option would be to consider specialist asset managers who are leaders in integrating ESG factors and long-term sustainability. A focus on sustainability should help drive long-term success of the companies held and, by extension, long-term investment results.
Rob Meaney is a senior investment consultant at Mercer