Climate Action: amplifying the voice of investors

The vital role of stewardship in the last stand against climate change

Watch our COP26 #FurtherFaster conference

Federated Hermes hosted on 4 and 5 November, to address three interlinked emergencies of Climate, Nature and Social Injustice.

“The 1.5°C warming target is not out of the world’s reach, but we are fast running out of time.

“Coal, carbon markets and financing are among the issues upon which we hope to see meaningful progress at COP26. However, we are acutely aware of the power and responsibility that we all have as investors. Engagement and stewardship are primary tools in delivering a positive ‘real world’ contribution to the fight against climate change. As the crisis becomes more urgent and the impact more visible in our everyday lives, our willingness to mobilise our influence as investors will be pivotal to how this global story plays out.”

“The 1.5°C warming target is not out of the world’s reach, but we are fast running out of time.

“Coal, carbon markets and financing are among the issues upon which we hope to see meaningful progress at COP26. However, we are acutely aware of the power and responsibility that we all have as investors. Engagement and stewardship are primary tools in delivering a positive ‘real world’ contribution to the fight against climate change. As the crisis becomes more urgent and the impact more visible in our everyday lives, our willingness to mobilise our influence as investors will be pivotal to how this global story plays out.”
Eoin Murray
Eoin Murray
Head of Investment, International at Federated Hermes
Sunset on the steppe landscape
Eoin Murray
Eoin Murray
Head of Investment, International at Federated Hermes
Mountains landscape around the lake
Saker Nusseibeh
Saker Nusseibeh, CBE
CEO, International at Federated Hermes

Key takeaways

  • Science tells us that there is a climate crisis that we must deal with urgently
  • Scientists need to talk science to powerful people who can then make the necessary changes. One of the problems is that business leaders and scientists don’t necessarily speak the same language
  • Positive tipping points have led to some big changes in climate friendly tech adoption. These have included a surge in electric vehicle use in Norway and the elimination of UK coal power stations. Tipping points are hard to plan but policy makers and public sentiment can help tilt trends the right way
  • Get your kelp on: Seaweed could help capture carbon dioxide from the atmosphere in a similar way that forests do. They could be the forests of the sea, and seaweed is also a nutritious food
  • A shift to net zero aviation will need a shift in the infrastructure that supports the industry. In other words, it may be a costly change

Key takeaways

  • The investment industry is not set up to deal with the climate crisis. It is too short term focused where the climate solution needs long term focus
  • We are the temporary stewards of our infrastructure assets, some of which will last far longer than we will
  • Many of the UK’s infrastructure assets are owned by the private sector including gas, water and power, utilities, as well as rail and air travel facilities
  • The renationalization of these infrastructure assets won’t be enough to solve the climate crisis
  • Ignoring science is at odds with fiduciary responsibilities of investors and business chiefs

Key takeaways

  • Over 99% of fashion products are either incinerated or end up in landfill
  • Pollutants from fashion manufacturing are leaking into the ocean
  • A circular economy business model could unlock a lot of value for the fashion industry
  • The fashion industry needs better ways to recycle its products
  • The industry needs targets for clothing recycling
  • « Consumer preference and government regulations are big risks for fast fashion, » says Lisa Lange Federated Hermes

Key takeaways

  • Climate models are the result of incomplete data. They are by their very nature less than perfect
  • To better tackle the climate crisis, communities need to be integrated with nature
  • The world needs to embrace sustainability science to reach net zero

Key takeaways

  • Fixed-income investors, more than stock owners have the possibility to steer industry to reach climate goals
  • Corporations refinance their debt every seven years and so need to engage with their lenders frequently
  • Companies that do better on climate change will ultimately have lower borrowing costs
  • We need to be transparent about what compromises are involved in fighting climate change

Key takeaways

  • The move to a net zero world isn’t a zero-sum game
  • We must account for the costs of the communities affected by a move to a climate friendly economy. If we don’t then it won’t work, because some communities will bear a larger burden than others
  • Disasters linked to climate change have killed 150 people per day
  • We can’t deny the link between social justice and climate change
  • Finance can help advance social justice
  • The cost of making the economy greener should not be paid for by regressive taxes. It should be borne by those who can afford it, rather than those least able to bear it

Spotlights from our #FurtherFaster conference

Key takeaways

  • Science tells us that there is a climate crisis that we must deal with urgently
  • Scientists need to talk science to powerful people who can then make the necessary changes. One of the problems is that business leaders and scientists don’t necessarily speak the same language
  • Positive tipping points have led to some big changes in climate friendly tech adoption. These have included a surge in electric vehicle use in Norway and the elimination of UK coal power stations. Tipping points are hard to plan but policy makers and public sentiment can help tilt trends the right way
  • Get your kelp on: Seaweed could help capture carbon dioxide from the atmosphere in a similar way that forests do. They could be the forests of the sea, and seaweed is also a nutritious food
  • A shift to net zero aviation will need a shift in the infrastructure that supports the industry. In other words, it may be a costly change

Key takeaways

  • The investment industry is not set up to deal with the climate crisis. It is too short term focused where the climate solution needs long term focus
  • We are the temporary stewards of our infrastructure assets, some of which will last far longer than we will
  • Many of the UK’s infrastructure assets are owned by the private sector including gas, water and power, utilities, as well as rail and air travel facilities
  • The renationalization of these infrastructure assets won’t be enough to solve the climate crisis
  • Ignoring science is at odds with fiduciary responsibilities of investors and business chiefs

Key takeaways

  • Over 99% of fashion products are either incinerated or end up in landfill
  • Pollutants from fashion manufacturing are leaking into the ocean
  • A circular economy business model could unlock a lot of value for the fashion industry
  • The fashion industry needs better ways to recycle its products
  • The industry needs targets for clothing recycling
  • « Consumer preference and government regulations are big risks for fast fashion, » says Lisa Lange Federated Hermes

Key takeaways

  • Climate models are the result of incomplete data. They are by their very nature less than perfect
  • To better tackle the climate crisis, communities need to be integrated with nature
  • The world needs to embrace sustainability science to reach net zero

Key takeaways

  • Fixed-income investors, more than stock owners have the possibility to steer industry to reach climate goals
  • Corporations refinance their debt every seven years and so need to engage with their lenders frequently
  • Companies that do better on climate change will ultimately have lower borrowing costs
  • We need to be transparent about what compromises are involved in fighting climate change

Key takeaways

  • The move to a net zero world isn’t a zero-sum game
  • We must account for the costs of the communities affected by a move to a climate friendly economy. If we don’t then it won’t work, because some communities will bear a larger burden than others
  • Disasters linked to climate change have killed 150 people per day
  • We can’t deny the link between social justice and climate change
  • Finance can help advance social justice
  • The cost of making the economy greener should not be paid for by regressive taxes. It should be borne by those who can afford it, rather than those least able to bear it

Key takeaways

  • Over recent years, business leaders and their companies have come to realise they are a part of society, rather than apart from it. They need to ask themselves whether their companies make the world a better place.
  • The International Sustainability Standards Board is a great leap forward, as it will help hold businesses accountable for their actions. However, we must make sure those standards are appropriate.
  • Benchmarking shows that many companies are not planning for a future of sustainable growth.

Key takeaways

  • The climate crisis is a wake-up call to the world, which faces mass plant and animal species extinction and systemic collapse.
  • The crisis is terrifying, but it does not have to be the legacy we leave. We can act now to save the future.
  • Investors need to think about how their stewardship of capital can be used to make the world a better place.

Key takeaways

  • Your morning cup of coffee is under threat, with 60% of coffee varieties at risk of being wiped out due to biodiversity loss caused by climate change.
  • Our oceans are at risk. Pollution and acidification have been responsible for the loss of 70% of the world’s fish since the Industrial Revolution. By 2050, there is expected to be more plastic in the sea than fish.
  • Pollution is harming the health of ocean organisms, and that threatens everyone’s wellbeing. About 80% of our breathable air comes from the oceans and relies on healthy clean seawater.
  • Ocean acidification is the evil twin of climate change. It is caused by toxic pollution.

Key takeaways

  • Greenwashing alert: $2tn (£1.5tn) of assets labelled as compliant with ESG need to be relabelled because they were not actually in line with ESG goals.

  • Every investment can have an impact because investors can use their influence to get companies to change. Big business knows the power of money, so when the people investing the cash talk, corporate chiefs tend to listen.
  • Fiduciary rules for pensions need tweaking. Pension regulations all but demand that investments get made based on financial returns, not on their social benefits. Keeping the rules as they are only exacerbates the climate crisis because money continues to be funnelled into unsustainable businesses.
  • Shareholders can support the efforts for more social justice through community organising. Such efforts can help reduce pollution, which contributes to about 40,000 early deaths a year in the UK.

Reflecting on COP26

Federated Hermes spokespeople offer their perspectives.

Light bulb in hands
Silvia Dall’Angelo, Senior Economist, international at Federated Hermes

As COP26 approaches its close, the feeling is that it has been a mixed bag. There has been progress in many areas, most notably with respect to deforestation, methane emissions and the involvement of the financial sector. Both the public and private sectors have put forward new commitments, with private initiatives showing dynamism and creativity.

 

While 90% of the global economy has now pledged net zero over the next 30 to 50 years, ambitions still fall short of the Paris’ goals. According to IEA’s estimates, updated government pledges would put the world on a 1.8°C post-industrial warming trajectory, compared to 2.1°C before COP26, but still above the all-important 1.5° C threshold. In addition, the lack of details underpinning commitments suggests there is a risk COP26 was an exercise in climate change diplomacy, masking a deficit of political capital, a sense that was reinforced by the prominent absence of China’s President Xi. In addition, the divide between advanced and developing economies was largely unaddressed, implying an unfair burden for developing countries.

 

A bright spot has been the finance industry stepping up its efforts in the fight to climate change, by committing $130tn of capital to achieve a net zero economy by 2050, under the Glasgow Financial Alliance for Net Zero (GFANZ). The headline number – which probably overstates advances – stole the light from advancement in discussions concerning crucial aspects such as the need for harmonised ESG standards and the role of central banks and regulators. In these respects, the IFRS Foundation announced the establishment of a dedicated International Sustainability Standards Board (ISSB), while the Network for Greening the Financial System (NGFS) committed to exploring new and better ways to integrate climate change (and biodiversity) considerations into monetary policy.

 

At the end of the day, the hope is that what happens in Glasgow does not stay in Glasgow. The conversation needs to continue, broaden and, crucially, yield concrete action. Developments outside and beyond COP26 are the real deal. Going forward, we need more ambition, underpinned by robust and timely implementation – including detailed and actionable plans that can be rigorously monitored against measurable intermediate targets. Also, at the macro level, we need a new framework to assess economic performance that goes beyond GDP and integrates environmental and social standards. This mindset shift is a precondition to ensure we successfully transition to a sustainable world, along the lines of a fair and inclusive process.

Mitch Reznick, Head of Research and Sustainable Fixed Income, international at Federated Hermes

US Treasury Secretary Janet Yellen delivered keynote remarks on Finance Day of COP26 in Glasgow on the 3rd of November.  After outlining the economic imperative for the global economy to rapidly decarbonise, she offered up a three-decade price tag:  $100 to $150 trillion, a number as large as the intimidating challenge of the world cutting its net emissions to zero by 2050.  In her address, Yellen admitted that the ability to finance the transition stretches beyond the means of government: “The gap between what governments have and what the world needs is large, and the private sector needs to play a bigger role.” This statement is nothing less than a call for action.

 

While it would be helpful to see governments like the US deliver into their own promises stretching back to COP21, the asset management industry cannot wait.  Our investors do not want us to wait.  And, with 20% of all primary investment grade issuance in Green, Social or Sustainability (GSS) format, and the volume of the GSS bond market now at over $1.7tn—a 50% jump year-on-year according to Natixis—the global bond market is making room for sustainability.  As fixed income managers, we can do much to deliver into the call to action from the Yellen, the UN, and many others.  We can continue to create thematic investment solutions and investment processes that direct capital to companies that earnestly and credibly seek to decarbonise, whilst simultaneously having the potential to deliver superior risk-adjusted returns.  These are well-governed companies with a vision for where governments and regulators are directing the global economy to be over the next three decades: net zero.

Fraser Lundie, Head of Credit, international at Federated Hermes

The Glasgow COP was always seen to be an invaluable opportunity to action on previously agreed visions.  The past fortnight has indeed seen significant progress to galvanise consensus towards common standards and frameworks.  Credit market participants will welcome clarity and consistency in this area, noting the significant pledges agreed on coal phase-out, deforestation, methane and emissions.  Their absence to date has often hampered the sustainable finance movement, by injecting confusion, encouraging indecision and unfortunately, aiding greenwashing. 

 

More than ever, Finance and Asset Management have been at the forefront of discussions which are key to facilitating the onboarding of externalities.  The Glasgow Financial Alliance for Net Zero drives further direction of lending away from coal mines and related power stations.  Energy, Utility and Basic Industry sectors are definitively on watch, but no segment of the market can afford to be passive.  Markets love certainty, and with it, comes the ability to plan in a strategic and long-term manner.  With a plan, companies can borrow the trillions of debt financing required for uses such as the energy transition, carbon capture, and biofuel technology.  And, fixed income asset managers such as ourselves can allocate investment capital to fund this.   

 

COP26 will continue to drive an ever more nuanced marketplace – rewarding companies with a keener eye on climate related risks and opportunities through the lens of governance, strategy and risk management. Companies will increasingly have their decarbonisation strategies analysed with science-based targets (or SBTs), with many signing up via the SBT Initiative.  Holistic financial and sustainability analysis is key to delivering positive outcomes.  This can be aided through active engagement.  As metrics and targets become better understood, so too will the differentiation between corporates, financials and sovereigns, leaving active asset managers with a wealth of opportunity to add value.