6. How asset owners can better allocate capital to achieve climate impact

In the podcast "Investing for Tomorrow" hosted by Isabella Martin, the discussion focuses on the intersection of climate change and investment strategies, highlighting the urgency of aligning capital allocation with sustainability goals. Featuring Colin leduc of Generation Investment Management and Alison Loht of OP Trust, the conversation explores the evolving landscape of sustainable investing and the challenges of integrating climate science into financial decision-making. Leduc emphasizes the need for climate-led investing and closing the climate finance gap, while Loht discusses the importance of balancing fiduciary duties with climate impact. Both guests advocate for innovation, collaboration, and education within the investment community to drive meaningful change.

• The podcast focuses on the intersection of climate change and investment, exploring how asset owners can allocate capital for impactful change.
• Discussion includes fiduciary duty, aligning portfolios with sustainability goals, and insights from investment industry experts.

"Today, we dive into one of the most pressing issues of our time, climate change and how asset owners can better allocate capital to drive meaningful impact."

• Explores the critical role of investment in addressing climate change and achieving sustainability.

• COP 29 in Baku, Azerbaijan, is termed the "Finance COP" due to its focus on new global climate finance targets.
• A significant funding gap exists; an additional $500 billion to $1 trillion per year is needed to address the climate crisis effectively.

"Back in 2009, developing nations committed to providing 100 billion annually by 2020. But it's clear now that this figure falls far short of what's needed."

• Highlights the inadequacy of existing financial commitments and the need for increased funding to combat climate change.

• Colin Leduc is a founding partner at Generation Investment Management, with a diverse background in sustainability and investment.
• The firm was founded in 2004, focusing on sustainable investing and integrating sustainability to drive financial performance.

"I bumped into Al Gore and David Blood and one thing led to another and we created generation in 2004 as a dedicated sustainable investor."

• Emphasizes the early focus on sustainability and the evolution of sustainable investing over the years.

• New York Climate Week featured over a thousand events and was characterized by a mix of optimism and challenges.
• Key themes included the centrality of nature in climate discussions and the rapid manifestation of physical climate risk.

"What really struck me as well was the centrality of nature to the climate debate."

• Nature's role in the climate conversation was emphasized, marking a shift in focus.

• Despite progress, challenges such as backsliding on commitments, greenwashing, and the need for transformational change persist.
• The investment industry has improved in integrating sustainability but must accelerate efforts to meet climate goals.

"Unfortunately, the worst of times would be characterized by backsliding by many people who have gone back on their commitments."

• Acknowledges setbacks in commitments and the ongoing issue of greenwashing in sustainable investment.

• The climate finance gap is closing, with significant investments in clean energy, but an impact gap remains.
• Capital is not sufficiently directed to high-emission sectors or the global south, which is crucial for future emission reductions.

"The problem is there is an impact gap within that climate finance gap."

• Identifies the disparity between financial investments and their actual impact on reducing emissions.

• Regulatory bodies are increasingly targeting greenwashing, both intentional and unintentional, in investment products.
• The politicization of ESG investing in the U.S. adds complexity to the sustainable investment landscape.

"There are asset managers who are now being fined by the regulators in the U.S. and in Europe around unintentional greenwashing."

• Highlights the regulatory crackdown on misleading sustainability claims and the challenges of ensuring genuine impact.

• The role of lawyers in sustainable investing has become increasingly significant, impacting communication and actions in the market.
• Sustainable investing is crucial for fulfilling fiduciary duties, protecting long-term asset value, and addressing climate risks.
• The legal framework for impact, developed with Freshfields, supports the case for sustainable investing as a fiduciary duty.

"Not leading on climate and sustainability is actually a dereliction of that fiduciary duty."

• Emphasizes the importance of integrating sustainability into fiduciary responsibilities to protect and enhance asset value.

"We've done quite a bit of work on that with the legal framework for impact with Freshfields."

• Highlights the collaboration with Freshfields to establish a legal basis for sustainable investing.

• The market for sustainable investing experiences fluctuations, but long-term trends indicate its necessity.
• Investors need to evaluate their stance on sustainability from various perspectives, including advocacy, branding, and risk management.
• The Generation Sustainable Trends Report outlines progress and challenges in the sustainability transition across multiple sectors.

"The business case is around sustainable investing. It definitely goes through ups and downs."

• Acknowledges the cyclical nature of sustainable investing but underscores its long-term relevance.

"The Generation Sustainable Trends Report... is a really important annual report that we put out."

• Refers to an annual report that tracks progress and challenges in the sustainability transition.

• Climate change represents a systemic risk that affects all asset owners globally, requiring collective action.
• The "tragedy of the commons" describes the self-defeating behavior where individuals avoid action, expecting others to bear the cost.

"Climate hits every part of the world. And so it is the ultimate systemic risk."

• Highlights the pervasive nature of climate risks that necessitate global attention and action.

"We're all caught in this tragedy of the commons where a lot of people are saying, I'm not going to move because some other guy is going to get the benefit."

• Describes the challenge of motivating collective action in the face of shared risks.

• The finance industry must innovate and evolve to address climate challenges, requiring collaboration between asset owners and managers.
• Incentive structures should reward achieving impact goals, not just financial returns.
• Real-time emissions tracking and reporting are crucial for managing systemic climate risks.

"The finance industry is not a static industry. We have evolved finance before, we can evolve it again."

• Stresses the need for financial innovation to tackle climate challenges.

"If we come out here with some really impactful product, but no one's going to fund it, then what's the point?"

• Emphasizes the necessity of collaboration between asset owners and managers to drive impactful investments.

"Climatetrace.org... gives real-time emissions transparency on hundreds of millions of point source emissions."

• Highlights the role of technologies like Climate Trace in improving emissions reporting and transparency.

• Incentives play a crucial role in driving sustainable investment practices and achieving impact goals.
• Climate-led investing focuses on high-impact decarbonization opportunities, guided by scientific insights.
• The Just Climate initiative exemplifies a science-driven approach to capital allocation for maximum decarbonization impact.

"People respond to incentives."

• Reinforces the idea that well-structured incentives can drive desired behaviors in investment practices.

"Climate-led investing is being led by science in terms of how you think about the opportunity set."

• Defines climate-led investing as an approach guided by scientific understanding to target high-impact areas for decarbonization.

• Just Climate was launched in 2021 to address high-emission sectors that are underfunded, such as steel, cement, aviation, and regenerative agriculture.
• The initiative aims to reduce risks in these sectors and capture decarbonization opportunities, betting on the increased value of truly green commodities and products.
• Climate-led investing aligns capital allocation with climate science and emission data to effectively decarbonize the economy.

"What Just Climate was created to do and launched in 2021 is to focus in on these highest emitting, most off track sectors that require enormous amounts of capital."

• Just Climate targets sectors with significant emissions and inadequate funding, aiming to redirect capital to these areas.

"What climate led investing really does is it sets her opportunity set based on climate science and where the emissions actually are in the economy, and then seeks to allocate capital accordingly."

• Climate-led investing uses climate science to guide capital allocation, ensuring investments are made where they can most effectively reduce emissions.

• Asset owners should heed climate scientists to avoid greenwashing and ensure genuine climate impact.
• The investment industry needs more focus on climate-led strategies to achieve meaningful impact.

"Well, listen to the climate scientists who will help you avoid greenwashing."

• Listening to climate scientists is crucial to avoiding superficial environmental claims and ensuring real climate impact.

• Alison Loht has a diverse background, including founding FCLT Global and roles in healthcare technology and democracy think tanks.
• Her varied experiences contribute to her current role in sustainable investing, emphasizing collaboration, innovation, and adaptability.
• Loht's work at FCLT Global and her consulting background provide a foundation for her role at OP Trust.

"It's a slightly circuitous path, but a wonderful one. Immediately before so I've been at OptiTrust for about five years."

• Alison Loht's career path is diverse, with experiences that contribute to her expertise in sustainable investing.

"I always think, you know, consulting is a great kind of foundation for the generalist because you really learn how to walk into any situation, do your best to understand it and try to make a difference to the people working there."

• Consulting provides a versatile skill set that is valuable in understanding and impacting various situations, essential in sustainable investing.

• OP Trust's primary mission is the retirement security of its members, with climate impact as a secondary but important consideration.
• Investments in climate opportunities are seen as a byproduct of the fiduciary mission to ensure pension security.
• The focus is on managing assets responsibly to support a sustainable economy while maintaining fiduciary duties.

"Our number one job is to understand our liabilities and understand how we take the appropriate level of rift to ensure that our pensioners receive that check every month."

• The primary focus of OP Trust is ensuring pension security, with climate impact considered within this fiduciary framework.

"Our job isn't necessarily to address climate change or kind of change the world. It's to ensure the pensions are paid and that we are managing our assets, our members assets responsibly."

• OP Trust prioritizes pension security, with climate impact being a secondary goal achieved through responsible asset management.

• Sustainable investing has grown significantly, driven by net-zero commitments and accelerated by the COVID-19 pandemic.
• OP Trust focuses on both risk and opportunity in climate investing, integrating climate risks into portfolio management and seizing opportunities from global shifts in sustainability.
• The investment industry is adapting to changes in regulations and consumer expectations, driving innovation and sustainable practices.

"The kind of growth of sustainable investing and climate investing...has kind of taken off massively in the last handful of years."

• Sustainable investing has rapidly expanded, influenced by net-zero commitments and the global pandemic.

"It's both a risk and opportunity lens that we take and they entail very different tasks internally but both have to be addressed by any responsible asset owner."

• OP Trust addresses climate change through both risk management and opportunity identification, essential for responsible investing.

• Asset allocation involves strategic decisions on where to place capital, historically climate agnostic but now evolving with climate considerations.
• Climate scenario analysis is used to understand potential paths towards net-zero and their implications for different geographies and sectors.
• The goal is to responsibly allocate capital to ensure member security while adapting to climate-related changes.

"There's kind of a top down function and a bottom up function. The top down is sort of how do we choose strategically where we're going to place our money?"

• Capital allocation involves both strategic and detailed considerations, evolving to include climate factors.

"It's climate scenario analysis...trying to understand as the world takes a yet unknown path towards net zero."

• Climate scenario analysis helps in understanding potential future scenarios and their impact on investments.

• The transition of energy supply impacts fossil fuel valuations differently depending on the speed of the transition.
• Fossil fuels may become less valuable over time if energy transition accelerates.
• The energy mix influences inflation and economic performance.
• Investment portfolios may need to adapt to changes in industry and geography over the next 5-10 years.
• Carbon footprints are used as a risk measurement tool for transition risk, indicating the increasing cost of holding greenhouse gas-emitting assets.

"If we do evolve very quickly again it also means fossil fuel will become less valuable over time."

• The rapid transition to alternative energy sources could devalue fossil fuel assets as demand decreases.

"Carbon footprints are essentially proxies for what we call transition risk."

• Carbon footprints help measure the financial risk associated with transitioning to lower-emission assets.

• A diversified portfolio requires understanding market, regulatory, supplier, and supply chain risks.
• Climate change presents known unknowns, making risk pricing challenging.
• Continuous learning and adaptation are crucial for effective capital allocation.

"We have been putting in place much more rigorous diligence toolkit."

• Enhanced due diligence processes are necessary to assess various risks associated with long-term investments.

"All you can do is do your best with what you have, be upfront about what you know and don't know."

• Transparency and acknowledgment of uncertainties are vital in managing investment risks related to climate change.

• OPTrust has a history of investing in renewable energy and energy transition opportunities.
• The sustainable investing team focuses on early-stage climate and energy transition ventures.
• Investments in transportation, mobility, circular economy, and industrial decarbonization are emphasized.

"My colleagues in our infrastructure team, for example, have been building renewables platforms for probably 18 years now."

• Long-standing experience in renewable energy investments provides insights into energy transition opportunities.

"Transportation and mobility is a big one. So we have exposure to a company that's doing fleet charging."

• Investments in transportation focus on enabling a transition to greener, lower-emission vehicles.

• Achieving climate impact requires multiple small efforts from various organizational parts.
• Internal education and flexibility are necessary for effective energy transition investments.
• Leadership and boards play a crucial role in allowing teams to explore and innovate.

"It isn't one thing, it's going to be a lot of little things from a lot of all parts of the organization."

• Climate impact is achieved through collective efforts across different organizational areas.

"There's an internal education I had to do, my colleagues all have to do and we have to think hard about how we don't overly constrain ourselves."

• Continuous learning and overcoming internal constraints are essential for successful climate-related investments.

• Effective climate communication avoids technical jargon and uses relatable language.
• Connecting with people requires using terms that resonate with their everyday experiences.
• The guide "Talk Like a Human" offers practical tips for communicating climate change.

"If we want to connect with them, we need to use language that they actually understand."

• Simplifying language helps bridge the gap between technical climate concepts and public understanding.

"People care about other people, not abstract concepts."

• Emphasizing human-centric messaging can enhance engagement with climate issues.