It's the environment, stupid!Comment

Channels: Carbon, Corporate, Debt, Equity, Investment, Policy, Renewables

Companies: Pimco

People: Barack Obama, Douglas Hodge

The environment has muscled its way up the financial agenda, and can no longer be ignored by prudent investors, says Peter Cripps.

The sense of expectation surrounding the Paris COP has helped to raise awareness of climate risks.

But environmental themes now have a momentum of their own, and will continue to make ground even if COP turns out to be a damp squib.

As argued in this article, strong policy signals are already reverberating across the globe. Numerous countries have woken up to issues such as climate change, air pollution and water scarcity, and are taking action without waiting for a consensus through the UN climate negotiations.

Just look at the US, where Obama is pushing through a radical overhaul of the country's power plants. Of course, there will be a relentless onslaught of legal challenges, but the message is clear – the current administration believes the US needs to urgently decarbonise. And that marks a stepchange for a country that was, until recently, a laggard on climate change.

It's a similar story in China, where the government is intent on peaking its emissions intensity and is making all the right noises about green economic growth. Its pilot carbon emissions trading systems will next year be expanded into the biggest cap-and-trade scheme in the world.

The EU, for its part, has raised the bar again with its 2030 targets, and has begun picking up the pieces of its shattered emissions trading system.

The chart below compiled by HSBC's climate analysts illustrates this trend.

Amid this policy backdrop, the argument for pricing carbon into investments is compelling. Companies that are more efficient than their peers are likely to have a competitive advantage, while carbon-intensive companies are a risk.

Environmental, social and governance (ESG) factors are increasingly on the radar of mainstream investors. It was fascinating to hear Pimco CEO Douglas Hodge tell the PRI's annual conference that ESG investments "simply make good business sense".

ESG may seem like common sense to many, but as reported in September, interpretations of fiduciary duty continue to hold it back. Policymakers need to start sending out the right signals here too, by clearing up this legal confusion. EF