Mirova Insight 4: Investing For a Low Carbon Economy

Published on 10/14/2015

Understand, take action, and be accountable. If we are to successfully address the challenge to our civilizations posed by climate change, these are imperatives that must be heeded, not only by political decision-makers and regulatory bodies, but companies as well. Obviously, the responsibilities and levers for action relevant for various parties will differ significantly. But few today can claim that these issues are no concern of theirs. The financial industry especially, and more broadly, the many players holding roles in the capital markets, possess considerable leverage for driving change. This conviction is the cornerstone of Mirova’s foundation as a business, as a company.

Mirova

Today, on the eve of the COP 21, we have dedicated a special issue of our research periodical, Insights, to a comprehensive panorama that describes our understanding of the issues raised by climate change, the investment solutions on the financial markets that we have identified, and, lastly, the tools at our disposal to provide accountability for our actions and measure their impact.

Understanding means more than just being cognizant of the scientific conclusions that the IPCC has done such a tremendous job of making available and updating. It also involves being attuned to the murmurs of impending regulation and the technological innovations that are transforming our economic environment at an ever-increasing rate. In Europe, especially Germany, renewable energy is ever more present, and the venerable players that long dominated the market, such as E.ON are being forced to adapt. Across the Atlantic, innovations in communication are proliferating. Actors like Tesla are changing the way we thing about mobility and forcing dominant players like Volkswagen out of complacency. No matter where you look, buildings are developing a different relationship with energy; they consume less to do more, and some are even energy producers. The same conclusion is evident at every turn: the climate issue has percolated to a micro-economic level. The first chapter of our publication is dedicated to describing the transformations underway.

Taking action—in this rapidly changing environment, doing something about climate change is no longer merely a question of altruism or concern for the environment. A world of opportunities is opening up, ready for investments in companies and projects that contribute to the energy transition.

Who could ignore the potential of (and the commensurate advantages of holding shares in) companies whose offerings, whether products or services, make it possible to consume less energy or use it better? Who can ignore the rise of green bonds, which give investors on the bond markets an ideal tool for financing the investments of issuers displaying an ever-widening palette of types, scopes, and credit ratings? Who can ignore the advantages ‘green’ infrastructure investment funds present in the context of volatile markets and low interest rates? It is now possible to invest in and for the climate without foregoing a fair return on capital. On the contrary. The second chapter of this issue unpacks the full potential of the financial markets in equities, fixed-income and renewable energy projects.

 

Improving accountability begins with measuring the carbon footprint of our investments. But to be meaningful, the yardstick needs to be relevant and reliable. This is what led Mirova to participate in developing the Carbon Impact Analysis method of Carbone 4, a carbon strategy consulting firm founded by world experts in climate economics, Alain Grandjean and Jean-Marc Jancovici. Henceforth, Mirova will be able to measure not only the GHG emissions of its portfolios, but also, and almost more importantly, the emissions avoided by investments in assets that are beneficial from a climate perspective.

It is also crucial that each economic agent, institutional investor and asset management company be accountable for the way it shoulders its responsibilities. This is why Mirova has a policy of active engagement, both within the realm of finance, and through direct dialogue with companies to encourage a better integration of climate issues.

The last chapter of this Insights focuses on the guiding principles that direct how we measure the impact of our investments, and how we imagine our role as responsible investors.

The transition to a low carbon economy is no longer a utopian vision: the technologies required have graduated from the laboratory, and many are being deployed on an industrial scale. Their arrival presents a multitude of investment opportunities for those who are able to seize them, meaning those ready to fulfil the true role of investors by allocating their capital to the projects and companies which create economic, environmental and social value. Naturally, investment decisions are subject to market constraints and the unique position of each investor. Imposing norms as to sectoral allocation is out of the question, however, it is incumbent on each and every investor to use what leverage they have in their sphere of activity. And, perhaps we could go so far as to think outside the box… Thus allocated, capital flows will further accelerate innovation and spur the investments needed for our model of economic development to successfully confront the challenges of climate change we are facing.