Climate crisis tops investor agenda

27 May 2021
Investors must focus on a just transition as we strive to combat climate change

This package on environmental, social and governance (ESG) also includes:

Profiting from ethical investing
Investing in the long term with ESG
> Successful firms driven by purpose not profit
> ESG underpins Taqa 10-year strategy
> Technology helps deliver sustainability agenda

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The issue of climate change is at a tipping point. With global temperatures at a three-million-year high, it is now widely recognised that we face a significant threat to our way of life if we do not respond quickly and effectively to the climate emergency. 

Climate change has rapidly moved up the agenda for investors in recent years. While some, such as Actis, have always had sustainability at their core, others are now finding that employees, clients and society as a whole all demand that they contribute to the solution. 

Climate change – and how to mitigate its impact – is therefore now front and centre. Investing in renewables is vital if we are to meet the challenges. 

In order to limit global warming to 1.5 degrees Celsius, we need to reduce our net carbon emissions to zero by 2050. Such an energy transition will require major changes to how we live and, critically, how we generate electricity. 

Few regions will be more interested in this transition than the Middle East, which still produces huge quantities of oil and gas; and Africa, where abundant untapped energy resources could boost economic growth and help millions out of poverty.  

Sustainable investments

Increasing solar and wind energy production will be crucial to moving the world away from its dependence on fossil fuels. However, in the emerging markets in particular, unless investments in renewables are carried out in a sensitive way, they could have significant negative impacts on societies, livelihoods and families.

For example, large infrastructure projects in rural areas that do not respect local people could aggravate inequalities and prove detrimental to the wellbeing of their communities. Businesses that do not address such challenges will lose their social licence to operate and could face business interruption threats as a result. 

There are also wider sustainability and social challenges linked to the transition, beyond dynamics in local communities.  

A successful energy transition requires the development of storage solutions for power generated by solar farms. However, many components of the batteries required to harness that energy are difficult to extract from the ground. That can lead to risks in the supply chain concerning human rights, environmental degradation, workplace safety and child labour. 

There is also an energy supply reality check to recognise. In parts of Africa, for example, gas remains an important medium-term source of power generation, despite significant recent investment in renewables projects across the continent. Gas is available and critical to local populations, and renewables cannot yet supply the entire grid – and maybe will not be able to for decades. 

This reality is far from ideal given the climate emergency, but encouraging gas use in certain parts of the world is far cleaner than burning coal, and it will enable faster economic expansion. For now, its continued use must be considered in the energy transition, even though some investors and multilateral agencies are excluding gas. Emerging markets investors will need to take a broader view.


A just transition

Investing in green, clean sources of fuel without considering the wider impact this may have on communities is not enough. That is why the notion of not simply an energy transition, but a ‘just’ transition, for people and the planet, is so important. A just transition demands that we shift to a low-carbon global future in a way that is equitable, inclusive and benefits all, such that no-one is disenfranchised or left worse off. 

A responsible investor cannot choose to support the environment while ignoring the social side of their commitment. If they want to invest responsibly and contribute to sustainable outcomes, they need to take a holistic approach that addresses environmental, social and governance risks. 

First, investors should ensure they work with an asset manager that has the breadth and depth of expertise in-house to diagnose risks accurately, and to deliver value creation opportunities that are sustainable. They need to select a partner that understands the holistic impact of the projects they are developing or investing in, and one that works with local groups to ensure projects are carried out in a fair way.

Second, that partner should have a proven track record when it comes to these investments. Investors need to look for evidence that their partner has applied the right judgment in the past, delivered on its promises, knows how to manage sensitive issues, and can secure both competitive returns and positive sustainability outcomes.

Finally, investors need to work with a partner that has solid on-the-ground expertise in each of the important markets. There is no one-size-fits all solution to a just energy transition, so it is vital to be able to understand each opportunity from a local perspective to achieve desired results. 

Global investors, including many from the Middle East, will play a vital role in ensuring the energy transition is fair to all. The move to a zero-carbon economy must be carried out in a way that is not just environmentally effective and value creating, but also socially inclusive. 

For investors – particularly those who are focused on the long term – there can be no more important area in which to allocate capital than in a just and fair energy transition.

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