COP21 means change is in the air for investors, says Peter Cripps
The line it is drawn;
The curse it is cast;
The slow one now;
Will later be fast;
As the present now;
Will later be past;
The order is;
Rapidly fadin';
And the first one now;
Will later be last;
For the times they are a-changin'.
Sorry to quote an old protest song, but Bob Dylan's classic lyrics are as apt now as they were in the '60s, because change really is in the air.
The Paris climate summit and its agreement to limit global warming to "well below 2°C" above pre-industrial levels, has officially ushered in the end of the fossil fuel era.
So, the destination – a zero carbon economy in the second half of the century – is now clear, even if the route there still needs to be navigated.
Many investors are already on this journey. But to those who are not, the landmark agreement has delivered a sharp kick in the pants.
For me, the most telling of all the announcements at COP21 was that the Portfolio Decarbonisation Coalition has attracted $600 billion, trouncing its $100 billion target.
As Mats Andersson – who was named Environmental Finance's Personality of the Year for his work spearheading the initiative – told the summit, the initiative is now targeting trillions.
Capital is already shifting at scale. And I suspect that no investor will want to be the last to move. The laggards in the space will perhaps begin to shift capital en masse, which could begin to have a self-perpetuating impact on company valuations.
But what form of action will decarbonising investors choose?
Divestment is an increasingly popular – and headline-grabbing – tool. See the billions attracted by the Divest/Invest movement. But it's not appropriate for all. Many mainstream investors will want to retain some exposure to carbon-intensive sectors, by picking the best-in class.
Surely, the coming months will see yet more innovative products such as low-carbon equities indexes, and more investors using them? Innovation and research are also needed on the fixed-income side, where there should be an important role for green bonds.
The coming years could also be a boom time for actively managed, environmentally-themed funds, which are in a unique position to seek green alpha – to pick the stocks that are slow now, but will later be fast.
On behalf of the team at Environmental Finance, I wish you a happy Christmas and New Year. Rest well, for 2016 is set to be a very busy and exciting year.
Companies:AP4