For Myles Allen, Professor of Geosystem Science at Oxford University’s School of Geography and the Environment, and Head of the Climate Dynamics Group in the university’s Physics Department, the most important climate change investment institutional investors can make in coming years is in technology around Carbon Capture and Storage, CCS.
Speaking at the Fiduciary Investors Symposium in Rhodes House, Oxford University, Allen argues that, realistically, economies will continue to burn fossil fuels because “leaving fossil carbon in the ground is a financial sacrifice that won’t happen.” He reasons the only way to limit global warming to no more than two degrees, the de facto target for global climate policy, is to completely cut carbon emissions to zero over the second half of the century involving massive investment in CCS technology. “Getting emissions under control is the most crucial thing and a formidable financial challenge,” he says, adding to the gathered delegates: “You own the problem, your decisions determine where we go in terms of global climate.”
In progress that he describes as “glacial” Allen urges investors to start backing CCS investment before regulation devalues their fossil fuel assets. Successful climate policy will make carbon burial compulsory at some point in the next few decades he warns. The only institutions with the resources to get carbon burial technology deployed fast enough to prevent more than two degrees of warming is the extractive fossil fuel industry and this will have to be done by regulation. “The only safeguard you have is CCS. Everyone is waiting for someone else to pay for it but the technology is too expensive to leave to tax payer,” he says.
Although CCS technology is too risky for many institutions more investors are positioning their portfolios to respond to climate change. Leaders in the field include the UK’s Environment Agency Pension Fund and Sweden’s AP4. Strategies involve supporting change within corporations to alter corporate behaviour, diversifying and building flexibility into investment strategies and choosing ESG managers. Some funds have scaled back on UK equities because of the high exposure to stranded assets in listed mining companies, other funds have committed to new, low carbon world indices and are considering green bonds.
“Just start doing it,” urges fellow panellist Ulf Erlandsson, Senior portfolio manager credit, global macro trading, Fourth Swedish National Pension Fund, arguing that doing something is “a lot better than not doing anything at all.” 35% of AP4’s global equity allocation is now in a low carbon footprint strategy with the fund “taking most risk in companies that are progressive on climate change.” Explosive growth in the green bond market which has grown over the past three years from $3.1bn to $36.9bn makes this now part of AP4’s strategy too. “On the fixed income side we are looking at green bonds as a way to diversify our funding mix. Sustainability issues are at a much senior level in corporations now,” he says.
