The news of Exxon’s shareholder vote resulting in two new board members owing to activist Engine No. 1 and Shell’s ruling to cut its greenhouse gas emissions by 45% by 2030 serves as a milestone for the beginning leg of sustainability’s marathon. Numerous countries, firms and other entities have pledged to be net zero by 2050. Over 60% of countries and 20% of Forbes-listed firms with sales near $14 trillion have committed to net zero goals; however, only about 20% meet robustness criteria set forth by the U.N.’s campaign standards. Still, in the realm of momentum and sentiment, the signs are more promising.
Further changes are afoot in investment activity in response to managing portfolio risk related to climate change. Bond investors in Europe are positioning themselves ahead of anticipated changes to monetary policy, according to the Wall Street Journal. Credit analysts and strategists suspect the European Central Bank, Bank of England and other central banks may tilt their bond-buying programs toward sustainable companies. They attribute the widening spreads to these potential policy changes. Though oil prices have increased, which typically tightens spreads of the past, they are widening, even among the Majors like BP, Total and Shell with the more advanced pledges of carbon emissions reductions.
This is very interesting for the future of asset prices related to risk management. We know that ESG investing is a matter of screening firms for environmental, social and governance factors. There is also variance in its application by firms and authoritative bodies globally. Convergence on standards may allow for better comparisons over time, but expect asymmetries to exist for some years. In a recent ESG conference, experts in policy, academia and institutional investing echoed the observation of divergent standards in Europe and the U.S., even within large swathes of participants by industry. Thus, top-level policy changes and firm-level responses to trends offer a confluence of events that will increasingly shape and hopefully ground asset prices.
The whipsaw of financial markets between sustainable-oriented or green firms and “the rest” has not been grounded in today’s reality on a macro level. The spaces in-between and the divergences in practices offer new opportunity for thoughtful investors—and new strategies for firms carving out their positions—in the evolution of sustainability investment and its many manifestations.