EU Deal Forces Investors to Shift Gears on Climate Threat

One of the biggest achievements of the European Union’s climate strategy could be forcing investors to view global warming less as a distant menace and more as an imminent threat.

The bloc’s ambitious Green Deal, which it announced on Wednesday, touches everything from cars to cement and is designed to cut pollution by at least 55% by 2030 from 1990 levels. And though it says little directly about the finance sector, the so-called Fit for 55 package has significant ramifications for money managers by making them consider the near-term economic impacts of the earth’s changing climate, said Daniel Klier, former global head of sustainable finance at HSBC Holdings Plc and current chief executive of ESG data company Arabesque S-Ray.

“It brings a discussion that felt quite distant into something that is tangible and will happen in this decade,” said Klier. “It brings what for many people was a conversation about the world in 2050 to something that will actually translate into real profit and loss impact within the next five years.”

EU Deal Forces Investors to Shift Gears on Climate Threat

To achieve net zero emissions by 2050 -- the target scientists say must be reached to limit global warming to 1.5 degrees Celsius -- greenhouse gas pollution must be cut in half by 2030. And though an ever increasing number of companies and financial firms have announced their own net zero objectives, many have been criticized for failing to show how they’ll reach that target.

The EU’s 2030 objective forms part of its broader mission to make Europe the first carbon neutral continent. The vast package it announced on Wednesday includes expanding the world’s largest carbon market to include shipping companies, eliminating new combustion-engine cars and imposing a levy on imports of steel, cement and aluminum. And while the announcement was focused more on the real economy than the financial sector, it follows a swathe of new rules that were proposed earlier this month to bring the world of finance in line with the carbon neutrality target.

For Andrew Jackson, head of fixed income at Federated Hermes, one of the most interesting and somewhat overlooked elements of the wide-ranging green deal is the requirement for countries to increase so called carbon sinks, such as forests and grasslands, to absorb more carbon dioxide. Sinks could be valuable for investors since they offer a kind of offset for emissions, though high standards should be observed, he said.

A Really Big Problem

Jackson also singled out the carbon border tax as an important initiative for investors since it will have particular significance for large companies operating across multiple countries. Overall, he said, the package will probably be good for markets.

“What the EU is saying is, we recognize that a really, really big problem is coming, and coming rapidly, and we need to do something huge; we need to pull on some really big levers,” said Jackson. “We have seen over the last 18 months that when it is necessary they can pull levers and that signals to me they will use the markets to fund a lot of this and that’s supportive of markets more generally.”

Aeisha Mastagni, a portfolio manager at California Teachers Retirement System, says the link between climate change and corporate finances is becoming increasingly apparent.

“There’s a recognition by the broader marketplace really wanting to make sure that the companies that are part of portfolios are going to be resilient in a changing world,” she said.

Meanwhile, the pursuit of green assets has led to intermittent warnings that an ESG bubble is forming, as environmental, social and governance investments get increasingly pricey. But even taking regular bouts of exuberance into account, the ESG trajectory is so strong that demand isn’t likely to suddenly disappear, according to Andreas Osterheden, chief investment strategist at Nordea Bank Abp.

“A lot of capital is chasing relatively few companies” because “more and more investors want a green profile,” he said. But, the trend “is here to stay and for that reason I am not worried. When we look at ESG in general, we do not see a bubble building.”

©2021 Bloomberg L.P.

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