Major investors are increasingly taking sustainability criteria into account. They are starting to impute value to companies who systematically integrate climate protection into their business policies – and devaluing those who don’t. And this is having an effect. After all, the world’s ten largest investment players manage assets worth more than US$ 20tn. To put that figure in perspective, it is seven times greater than the value of all EuroStoxx50 companies combined – i.e. the most valuable companies in the entire eurozone – and more than 17 times the value of all German DAX companies together.
Institutional investors holding assets of over US$ 4tn have joined together to launch the “Net-Zero Asset Owner Alliance”, led by the United Nations. The goal is to make their investment portfolios 100% climate-neutral by 2050, which corresponds to the Paris summit’s target of limiting global warming to 1.5 degrees if possible. We at Munich Re have now also joined this Alliance and are committed to making our investment portfolio carbon-neutral by 2050. We are therefore expanding our climate strategy and bearing a share of the responsibility.
Though in practice, upholding such a commitment is extremely complex and involves considerable time, effort and expense. Increasing our investment in renewable energies is obviously a must. But even there, we have to develop the skill set to properly assess the risks and potential of these often massive investment projects. This is our responsibility as the trustees of our clients’ money. At the same time, when we invest we will be conversing with companies in a variety of different sectors, in order to motivate them to increase their efforts on climate protection.
By acting strategically and long-term, politicians could allow the market economy to become a driving force – and an ally – in achieving the necessary transformation of our energy infrastructure to protect our climate.
Another challenge altogether is how to assess and deal with the carbon footprint of government bonds, which constitute the most important asset class for insurers and macroeconomic financing. Will it still be appropriate to hold US, Chinese or European government bonds in 2030, 2040, or 2050, if their carbon emissions are still too high? Investors must start asking themselves these questions.
But are such measures, taken by a “coalition of the willing”, enough in themselves? The answer is no! To put it bluntly: the majority of coal companies will continue to mine coal as they always have done, for the simple fact that they lack sufficient economic incentives not to. And the same goes for the other fossil fuels such as oil and gas.
Governments already have the tools in hand for creating the right incentives: by palpably increasing the price of carbon dioxide, while at the same time creating a stable and dependable environment for renewable energy investments. By acting strategically and long-term, politicians could allow the market economy to become a driving force – and an ally – in achieving the necessary transformation of our energy infrastructure to protect our climate.
Though in order for these rules of the game to apply internationally, we need more than just a European coalition of the willing. We need a “coalition of the powerful”, including China and the USA. This coalition also needs to find a solution for the poorer countries, to allow them to get onto a path towards wealth and growth that is in harmony with the Paris targets. Without support from the powerful, those hundreds of millions of people will, for many years to come, still be more interested in overcoming poverty than in curbing their carbon emissions.
The Green Deal initiative from the new President of the EU Commission Ursula von der Leyen is a first, courageous step in the right direction. Now the challenge is to define concrete and appropriate incentives to get the private sector to contribute to financing it. Indeed, many major investors – including we at Munich Re – are ready and waiting.(Published in the German daily Frankfurter Allgemeine Zeitung on 13 February)