Articles - Carbon an engagement or disinvestment

To tackle the climate crisis we need, among other things, to transition away from a carbon economy. There are a few ways to do this, but we can fundamentally boil them down to three: Invest in replacements (e.g. buy a wind farm, support green research, etc.). Engage with carbon emitters to reduce emissions. Disinvest from the highest emitters. In pure impact terms, the first is likely to be the most effective.

 By Alex White, Head of ALM Research, Redington
 If you can generate clean energy, or lab-grown beef, then you make coal plant and cattle ranches less viable. The UK energy mix produces around 0.23kg of carbon (and carbon equivalents) per MWh, and 1MW of renewable power costs about £1.7m. Assuming marginal replacement, £1m investment in renewable power could therefore reduce carbon emissions by around 500 tonnes per year.

 For context, the UK stock market is worth about £4 trillion, and the UK emits around 400 million tonnes of carbon emission per annum.

 So if all emissions were from stocks, a £1m investment would equate to 100 tonnes per year. Renewable energy, unsurprisingly, is effective at reducing carbon emissions.

 However, direct investment in green tech or renewables is unlikely to be viable for all investors, who may have size, liquidity, return, risk, fee and concentration constraints. Fortunately, there are other options. In particular, you can invest in managers who restrict their investments, or who engage with the companies they buy to reduce carbon emissions.

 But which is more effective?

 Disinvestment has some obvious advantages. Its objective (at least on the surface- there are complications with measurement), and it should generally change demand. It’s also likely to look good on any metrics used. Whereas engagement can be a box-ticking exercise that allows companies to greenwash and pollute, it’s much clearer whether a company is avoiding investments in, say, coal plants.

 Moreover, engagement without at least a credible threat of disinvestment is likely to be toothless, so disinvestment is a key tool.

 However, there are some issues.

 Basically, if you want to improve something, the most effective way is generally to make the worst bit less bad (think Loris Karius at Liverpool). Coal plants emit around 1000g/Kwh, with natural gas at around 500g and solar/nuclear/wind at around 30-50g (very roughly, source IPCC). That means making a nuclear power plant 100% carbon neutral is about 1/3 as effective as a 10% reduction in emissions from a Coal plant. And, admittedly without knowing the science, I suspect the latter is likely to be far easier as there will be more options as to how to do it, and more scope for inefficiency. That’s why, in general, 10% moves are easier than 100% moves. However, if the only investors in a coal plant are those who care less about reducing emissions, and total investments are lower, it’s arguably less likely that those changes will get made.

 What this means is, if you can engage meaningfully, the scope for improvement is likely to be higher. Engagement has the potential to achieve more. Moreover, it enables you to keep the investible universe, which can make it easier to track the broader market and maintain fiduciary responsibilities. Set against that, it is easier to game, and it is easier for unscrupulous managers to say they’re engaging without really doing anything. As so often, the conclusions are somewhat trite- but here again, having a robust process and the research to pick the right managers is not just important financially, it’s also critical for the climate.

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