The Misguided Role of Institutional Investors in Climate Change

On October 22, 2020, in a history-changing remark during an election debate with President Donald J. Trump at Belmont University in Nashville, Tennessee, presidential candidate Joseph R. Biden, leading strongly in the polls, said he would transition away from fossil fuels.

The world hardly blinked.

That is a measure of how far the movement to slow and stop climate change has come. Recently, one of the chief drivers of that movement has been institutional investors.

And yet, the institutional investor’s role in this matter is misplaced. I will get at that in this article.

Part I: The background

Fossil fuels have powered almost all of civilization’s economic development.[i] For millennia prior to about 200 years ago, global economic growth was nearly zero. The overwhelming majority of all of the world’s growth – both in its economy and in its population – has occurred in the last 200 years. This was the period during which fossil fuels were intensively put to use. Now, a prospective American president was declaring that soon, we would no longer use them or need them.

An alphabet soup of organizations of institutional investors, and of investment strategies and philosophies has helped to bring matters to this point, by endorsing the science and lending credibility to calls for action. One leading group is Climate Action 100+, which is coordinated by five partner organizations: Asia Investor Group on Climate Change (AIGCC); Ceres; Investor Group on Climate Change (IGCC); Institutional Investors Group on Climate Change (IIGCC) and Principles for Responsible Investment (PRI).

Investment strategies and philosophies, broadly called “social investing,” that are intended in part to combat climate change, include socially responsible investing (SRI), impact investing, ethical investing, and most prominently of late, environment, social, and governance (ESG) investing, also known as sustainable investing.

A new report has provided further mainstream investment industry validation of investors’ role in the movement. It is “Climate Change Analysis in the Investment Process,” from the CFA Institute, the professional organization that offers the Chartered Financial Analyst designation, whose stated mission is “To lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.”

The CFA Institute report begins by going through the basics of climate change. A greenhouse effect is enhanced by emissions into the atmosphere of several greenhouse gases created by industrial processes. These gases cause heat to be trapped in the atmosphere and in the oceans by retarding the escape of heat radiation from earth to outer space. The greenhouse gas whose emission causes most of the effect, directly or indirectly – more than 80% of it – is carbon dioxide or CO2, which results from the burning of fossil fuels.[ii] The presence of these greenhouse gases in the atmosphere – chiefly CO2 – has for tens of thousands of years moderated Earth’s temperature so that it has been ideally conducive to human and animal life. But their rapid increase in the last 200 years, particularly the last 50 years, threatens to raise that temperature to a dangerous level (see graph).

The anticipated result, according to the CFA Institute report, is that “A hotter planet means more drought, more famine, more extreme weather events, more property damage, and more dislocation of humanity than any of us have seen in our lifetimes. We cannot know when on the calendar these disasters will arrive, but we can be confident that they will.”