June 19th, 2019

How more patient investors can help tackle the climate crises

As printed in the Sunday Telegraph - 5th May

Climate change deniers still exist in the City. Increasingly financiers accept that man-made climate change is a danger, but they are still in denial of an equally obvious truth: that climate change is also a glaring failure of the financial system.

Paying lip service to sustainable strategies is no longer enough. More radical change is needed – in both the way funds report on their portfolios, and in their approach to longer term, activist investments.

The UN and national governments have stressed the need for the pension industry to take environmental, social and governance (ESG) issues seriously. The UK Government has recently taken this agenda a step further, with new legislation coming into effect in October 2019 that will require investors to justify why their decisions fit with their stated ESG goals.

Despite this progress, the UK pension industry – along with the rest of the global finance industry – is moving at a glacial pace. A study by Pinsent Masons in November 2018 suggested that fewer than 5pc of UK pension funds are ready for the changes that come in later this year – and even then their impact is likely to be marginal. The story in Europe is similar: a Schroders survey of European institutional investors last year showed that four in five felt sustainable investment was becoming more important; yet only a quarter felt this had made any significant impact on their investment decisions to date.

Is it all just too complex? Combining environmental, social and governance frameworks demands a range of qualitative and quantitative metrics that are hard to calculate, reliant on long-term forecasting and at the mercy of subjective judgment. True – but funds that have focused on environmental and social impact as well as financial returns, such as Bridges Ventures and Generation Investment Management, have been producing ESG reports for investors for almost 20 years, with competitive returns to boot.

While perfect measurement of the outcome of investments may be highly complex, we don’t have time to let the perfect be the enemy of good when it comes to climate change.

Another reason we hear from institutional investors is simply that there is nowhere to put the capital that meets their need for both returns and sustainable outcomes. Global equities markets have taken an increasing share of pension funds’ assets over the last decade. However the intense short-termism of these markets, driven by global competition for returns and intense scrutiny of quarterly reports, has made long-term investment in more sustainable business models a hard sell for CEOs trying to appease their consumers and shareholders at the same time. Furthermore, as tracker funds of public equities have grown in popularity, getting transparency on the impact of all the underlying assets held in such fast changing portfolios has become even more complex.

The shortcomings of public markets when it comes to responsible investments are well documented. But then institutional investors should be encouraged to take on longer-term, more patient forms of capital to plough into sustainable innovation. While there are as yet few venture funds with an environmental focus, sustainable technologies and business models are already a major target for venture.

Beyond Meat, for example, is a company selling plant-based meat alternatives. It had a hugely successful IPO in the US last week, which valued the Californian company at $3.8bn by the end of its first day’s trading. The company is still loss-making but managed to raise $130m from investors. It just wouldn’t be possible to raise that amount of capital, and to make a product that is competitive in terms of cost and taste with meat without patient investors. Innovation like this is only possible through investment in assets like venture funds.

A man uses a VOI scooter on the streets of Lyon, France
Shared scooter companies have attracted investors who like the idea of backing sustainable transport CREDIT: NICOLAS LIPONNE/NURPHOTO VIA GETTY IMAGES

In Europe, venture capitalists are also following the increasing demand from consumers for technologies and products that tackle global climate challenges. More sustainable forms of transport – such as Voi’s shared electric scooters and Munich-based Lilium’s personal electric planes – have raised over $500m in venture capital in the last year. Vegan food brands such as All Plants and Simple Feast have found funding to build on the huge consumer interest in healthier and more sustainable diets.

Investors are going ever deeper into the global supply chain, too: companies such as Berlin-based Infarm and Paris’s Agricool raised funding last year to build efficient crop-growing units in supermarket car parks. It may seem like science fiction, but these companies are already able to replicate the agricultural output of entire farms while radically reducing the need for both carbon-fuelled transportation and fertilisers.

Building the technology and teams required to tackle issues such as global climate change is not possible when you have a quarterly earnings target to report on. And yet the UK’s Financial Conduct Authority explicitly restricts direct contribution pension funds from investing in securities that are not readily realisable in the short term, hardly an encouragement to take the long view. Putting complex new reporting structures in place, and increasing investment in long-term, active investment strategies such as venture capital may be a big change for the UK’s pension industry. But it’s clear the time for change is now.

James Wise is a partner at Balderton, an investor in Voi, Infarm and Simple Feast