LAST year, as Covid-19 ravaged the world, there was something of a silver lining for climate change, albeit short-lived.
Global greenhouse gas emissions fell by around 6 per cent in 2020, thanks to pandemic-induced lockdowns. But emissions are expected to soar again in 2021 - to worrying levels. The International Energy Agency has sounded a warning that emissions in 2021 are likely to be second only to the spike seen in 2010, when economies recovered following the 2008 financial crisis.
This year, demand for coal - the most pollutive among fossil fuels - is projected to rise by 60 per cent more than all renewables combined. Emerging and developing economies now account for over two-thirds of global emissions. But even emissions of advanced economies are expected to rebound.
These factors lend a special resonance to the coming COP26 meeting in Glasgow. COP refers to the Conference of the Parties, which has met annually since 1995. The meeting in November is seen as critical if the world is to succeed in limiting the global temperature rise to 1.5 degrees Celsius, as stipulated in the Paris Agreement. On the agenda is a concerted push to get countries to set more aggressive emission reduction targets.
Ahead of COP26, the United Nation's sixth assessment report has issued an urgent call for "immediate, rapid and large-scale reductions". Failing this, the goal of a 1.5 degree cap - or even 2 degrees - will be out of reach.
That half-degree differential carries serious consequences. At 1.5 degrees, scientists warn of increasing heatwaves, longer warm seasons and shorter cold seasons. At 2 degrees, the heat extremes would breach critical tolerance thresholds for agriculture and health.
To date, more than 130 countries and over 200 large corporations have committed to achieving net-zero emissions by 2050, with immediate plans to halve emissions by 2030. Net zero means that the amount of carbon dioxide emitted should not exceed the amount removed from the atmosphere.
The current commitments, however, are not nearly enough. They result in less than 1 per cent reduction in emissions by 2030 compared to 2010 levels. But to keep the goal of 1.5 degrees in sight, emissions have to be cut by at least 45 per cent by 2030.
Customers more aware
For its part, Prudential plc has committed to achieving net-zero emissions as an asset owner by 2050. Its immediate targets include a 25 per cent reduction in the carbon emissions of all shareholder and policyholder assets by 2025.
It will also divest from businesses that derive over 30 per cent of their income from coal. Equities are to be fully divested by end-2021 and fixed income by end-2022. And, it will engage with companies responsible for 65 per cent of portfolio emissions to help to accelerate the transition to a low-carbon world.
In a statement earlier this year, Mike Wells, group chief executive of Prudential, said: "Any future climate crisis will disproportionately affect the communities we serve in Asia and Africa. As a steward of long-term capital and a protector of people's lives, we need to use our scale and expertise to drive decarbonisation at pace - and to do so in a way which is just and fully inclusive, is engaged with our stakeholders and delivers green growth which benefits everyone."
Even as the world leaders gather for COP26 to firm up urgent action, awareness of the climate emergency is already high among consumers.
In its second survey on ESG (environmental, social and governance) topics in Singapore, Prudential found that the top 5 most important topics for its customers are: responsible investment; workplace health and safety; environmental practices; and customer privacy and ethics. Responsible environmental practices featured strongly, with 67 per cent of those aged 35 to 44 citing this as the top area of concern.
Customers have become more aware of the environmental and social impact of their investments, and this is reflected in the emphasis that Prudential needs to adopt an investment strategy that considers both financial returns and social and environmental good.
Here is a sample of verbatim survey responses: Responsible investment should "make sure investee companies adhere to good ESG practices", and investment products should "support green initiatives and give good return''.
Climate change is often cited as one of the most powerful megatrends for investors. This is because to finance the net-zero transition, there is a dire need for capital, which governments are unable to fund. Energy transition alone is expected to require as much as a cumulative US$50 trillion, or US$5 trillion a year until 2030. Hence, private capital has to step up.
Global investors are heeding the call. The Global Sustainable Investment Alliance in its 2020 report estimated that assets in sustainable investments rose 15 per cent over the past two years to US$35 trillion. As at end-June, Morningstar estimates that inflows into sustainable funds hit US$2.3 trillion.
Individual investors can play a part as well, and they have a wealth of choices. Among funds, the basic discipline is the application of an ESG lens to investments. The environmental aspect looks into a company's track record and policies relating to environmental stewardship. The social aspect looks into how employees and stakeholders are treated. Governance looks into policies and actions that build trust in a company's management.
A competitive advantage
In short, companies that perform strongly on ESG factors are expected to have a competitive advantage, and are more likely to attract and retain capital.
Investing with an ESG lens takes a number of forms. A basic form is the application of an exclusionary screen to avoid coal, for example, or stocks with a poor human rights record.
Other approaches are a best-in-class or positive screen where securities are chosen based on top ESG rankings. Funds may also pursue ESG integration, where ESG factors are systematically applied in the research and stock selection process.
An ESG discipline is expected to generate a number of benefits. The foremost is risk reduction, as it helps to avoid companies with poor environmental and/or human rights practices. Such practices heighten the risks of regulatory penalties, litigation and consumer boycotts, which can have lasting negative impacts.
An ESG approach also helps investors to anticipate regulatory and taxation trends. For instance, as pressure builds globally on governments to "build back better" - that is, to ensure that post-pandemic recovery is green - more governments are considering tax incentives in favour of green assets or, on the flip side, to penalise brown assets.
To date, around 27 countries including Singapore have a carbon tax. Singapore has said it is looking into raising its carbon tax rate. A revised rate for 2024 is expected to be announced in next year's Budget.
A second benefit is potential outperformance. MSCI looked into the performance of companies in the MSCI All Country World Index, sorted according to MSCI ESG ratings. It found that over a seven-year period between 2013 and 2020, the top third of companies outperformed due to higher earnings growth. The middle third's performance was attributable to higher reinvestment returns from dividend payouts and share buybacks.
Some asset managers may add a layer of proprietary ESG analysis to give them an edge in the selection of securities that could help the portfolio to outperform.
A third benefit is the ability to channel funds into specific themes or areas that matter most to investors, or where they believe that the need is greatest. The range of thematic funds is wide; some examples are clean energy, cybersecurity and water management.
Investing sustainably can be a win-win for investors who seek a purpose for their capital, while still generating returns.
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