Sustainable Investing After the Paris Accords

In 2014, I was asked by the United Nations to spend a year helping the UN think through the Paris Climate Agreement and the Sustainable Development Goals (SDGs). That was a fantastic year, working with world leaders, working with the biggest CEOs of the world, and the largest asset owners, helping them to figure out how to solve this climate crisis from a sustainability perspective.

During the talks that led to the Paris Agreement, every major CEO of every major sector was there, or their firm was represented. And it wasn't just about risk. We needed to think about what happens if public policy changes, and we're no longer allowed to invest in coal or fossil fuels. The mindset was about opportunity. There are multi-trillion dollar prizes on the flip side if you can figure out the electric vehicle transition. If you can figure out the renewable energy transition, that's a multi-trillion dollar prize. 

This is the big question for today. At a macro level, our sustainability and profits—can they actually coexist, or does one come at the expense of the other? The greatest story about sustainability over the last 20 years is the massive reduction in cost for low cost energy, for carbon offsets, and so on. So the question of whether you want to be sustainable or not is no longer a profit versus expense one—at least to the same level as it was before.

At the same time, one has to look at the risks involved. If you're a business that has a large potential carbon footprint, and if the world is actually going to be serious about a 2°C standard, as called for in the Paris Accords, that means that a lot of that carbon footprint is actually a huge liability.

So the Paris conference was extraordinary for a few reasons. One was the belief that we would actually do this. Secondly, and very importantly, was that the business and investor community was there They weren't there as a thorn in anyone's side, but they were there hand-in-hand with policymakers saying, okay, we're with you now, and we're going work together to make this happen. The feeling in the room was that we can get there, and that business and finance are with us to get there.

This change is going to be driven, as all transformations are, by the entrepreneurial spirit of individuals in the private sector. It's going to be created by a great technology or a great new financing vehicle or a great new financial institution that becomes the breakthrough.

It's a good sign. It shows the power of progress and the power of capitalism, the power of technologies—so all of that is positive, but then the question is, how do you actually implement that in a large way across a global economy?

I’ve advised governments and financial institutions on how they should think about the allocation of capital to the best businesses, and I boil it down to five points:

• Investors need to understand that there's a quiet revolution happening in sustainable finance. It's new data. It's new risk tools. It's new measurement. It's new disclosure policies. It's been happening for a while, and it's now taking off.


• Investors need to understand the risks that are involved with a two, potentially three or four degree Celsius climate change scenario, and there are risks that are very direct, i.e. stranded assets. If we actually take two degrees Celsius seriously, it means that trillions of dollars of market cap value for large oil and gas companies, for example, actually shouldn't exist because their assets will have to stay underground. They're stranded. Coastal real estate is a risk. Political upheaval is a risk. If you go to Saudi Arabia or Nigeria or Venezuela or Russia or the United States, large oil, fossil fuel producers, what does your economy look like in 50 years if you can't actually go and use carbon assets?


• This transition means opportunities: new businesses, new business models. It means old businesses looking at the world a little differently. It means old technological companies looking at the world differently as well as new technological companies engaging with the world. An investor should be thinking, how am I going to allocate capital profitably?


• This a global transition. You actually have to think about geography when you think about sustainability because there are certain parts of the world that are in the lead. And there are certain parts of the world that are going be hit the hardest from climate events. Sadly, the African continent that contributed the least to climate change will actually bear the largest brunt of it. So having a global perspective and thinking about the nuance of geography will matter a lot.


• You shouldn't be a purist when it comes to climate change or sustainability when you're allocating capital because there is a lot of nuance in this space. It could very well be the fact that large oil and gas companies become the leaders of the renewable energy transition. I'm a believer, personally, that it's more about engagement, that you should invest in these companies because they're large parts of the economy. They're how the energy system of the world operates today. You should ask Exxon, Chevron, Shell—what are you all doing to stay at two degrees Celsius? What is your plan? How are you contributing? That is a much more useful and thoughtful and I think, productive way that an allocator of capital should be operating as opposed to just divesting and letting somebody else deal with it.

I think there are investors who are engaged in this space who are figuring these things out every single day. That's part of this quiet revolution. These are inputs into processes that some people can use, some people can't use, but it's a source of data that five years ago, didn't exist and for some investors, it's actually very helpful as they think about the risks and opportunities

This is a major transformation, a multi-decade transformation.

It’s now becoming a global phenomenon. Most of the large financial institutions, many of the large wealth managers, have built products, have built capabilities, and are talking about this, because clients are talking about it.

This revolution isn’t just a mandate or a dictate from governments or from the United Nations. This is coming from clients. We want our investments to keep these issues in mind because we know that this change is real, and we know that this is going to be one of those big transformations that our investments need to be mindful of.

Excerpted from the World Financial Podcast, a production of OppenheimerFunds.

Image credit: COP Paris/Flickr