NZI Annual Conference: a turning point for the energy transition

The one-day event at the London Stock Exchange was kicked off by James Corah, head of sustainability at CCLA, who highlighted that the issue of climate change is becoming front and centre of investors’ minds, with “net zero targets no longer just being words on a page and are actually starting to bite”.

Joining Corah for the first fireside chat of the day was David Russell, chair of the Transition Pathway Initiative (TPI), who’s key message to delegates was that “without data, change doesn’t happen” but it is up to investors to use that data to decarbonise their portfolios.

The TPI is a global initiative led by asset owners and aimed at providing investors with access to data on companies’ transitions to a low-carbon economy. Russell highlighted that the TPI has so far evolved in size to cover the net zero journey of 1000 companies but noted that there are still areas, such as sovereign debt and private equity, where it is struggling to access information.

While progress on transition planning has been made, delegates in the room indicated a greater need for data and an information gap, with the majority in the room calling for a greater depth of information on companies net zero transitions.

Return constraints

Net zero investing in a return constrained environment was the key theme of the next panel session. The impact of quantitative tightening represents a new challenge for investors in the energy transition.

The panel, which featured Morten Nilsson, CEO at Brightwell, Hyewon Kong, vice president and head of responsible investment at IMCO and Elaina Elzinga, principal investments at Wellcome Trust acknowledged that investors are now facing a more challenging time.

For Hyewon Kong, this meant that diversification was even more important and greater investments in renewables could play a key role in that. IMCO, the C$73bn pension fund for public sector workers in Ontario has committed to investing 20% of its assets in climate solutions. This has helped the fund to put net zero to the forefront of all its capital allocation strategies, Kong argues.

Meanwhile, Nilsson is dealing with a slightly different challenge with some of Brightwell’s funds now being quite mature, investment horizons are shorter and there is an additional need for liquidity.

Nevertheless, Brightwell remains cautious divesting from high emitting companies and highlights the importance of delivering real world impact A case in point is Brightwell’s investment in Kings Cross, which Nilsson describes as a “great success.” The development of this Central London train station has transformed it from a brown into a green asset, Nilsson claims, but Brightwell is now gradually reducing its stake in order to enable similar transformations in other brown assets.

Strategies to reduce carbon footprints are now maturing, argued Elaina Elzinga, principal investments at Wellcome Trust. The health research foundation has implemented a net zero target in 2021 and initially made significant progress in reducing its carbon footprint in listed markers. “A lot of the low-hanging fruit has been picked, now we are getting into the nitty gritty on what this means for other asset classes” she explained. Decarbonising private market assets such as real estate could become a key challenge going forward, she predicted.

Natural capital

The keynote of the day was delivered by Martin Davies, global head at Nuveen Natural Capital. Coming from a farming background himself, he spoke passionately of, what he described the failures of the agricultural sector in crossing planetary boundaries.

Instead, he advocated for a more holistic approach towards agriculture focused on incorporating biodiversity criteria. A practical example could be Nuveen’s investment in a an Australian almond farm. The land has previously been used to grow irrigated cotton but has now been transitioned into an almond orchard, including pollination strips with bee-friendly plants because almonds are dependent on pollination.

From an investment perspective, such nature positive assets could offer returns with a relatively low correlation to the economic cycle and strong inflation hedging characteristics, he argued.

Biodiversity risks

This theme of nature-positive investments and biodiversity was picked up in the next panel session.

Gustave Loriot-Boserup, responsible investment manager at London CIV, kicked off the panel discussion by stating that when asset owners come to invest in biodiversity it is critical that they also assess the risks that come with it. He explained that the first step to managing these biodiversity related risks is engaging with companies operating in certain sectors, such as mining.

“Measuring your risks associated with biodiversity and nature is much, much more complex than climate. With that said, there are many things you can do as an institutional investor to measure your exposure to nature, such as assessing your sectoral exposure, for instance in mining and agriculture, through engagement.

“Leveraging your stewardship channels are recommendations of the TNFD and a recommended first step in order to mitigate your exposure to these [biodiversity] risks rather than thinking about setting exclusions,” Loriot-Boserup added.

Coming off these points Anna-Stina Wiklund, head of responsible investing, portfolio manager at the Church Pension Fund Finland, encouraged asset owners to look at the information disclosed under SFDR regulations. She highlighted that within these disclosures’ investors can find biodiversity related areas and lists.

“Also, from a TNFD perspective, we will get more data in the coming years. So, we are at the early stages of biodiversity thinking in the investment world,” she explained.

Geopolitics

The debate moved from nature to politics, with Kingsmill Bond, senior principal at RMI, Phillip Dawes, head of Distribution at BNP Paribas Asset Management and Edward Baker net zero manager at LGPS Central discussing the impact of geopolitics on the energy transition.

Referencing the UAE’s role in hosting this year’s COP28 summit, Kingsmill Bond argued that financial markets were still failing to grasp the scale of the changes ahead: "We stand of the cusp of the greatest energy transition since the industrial revolution yet large parts of the financial sector are still behind the curve."

He told delegates: "Cardiff once was the centre of the world's coal trade. I would argue that what Cardiff was in 1913 is Dubai in 2023."

For Phillip Dawes, head of Distribution at BNP Paribas Asset Management this required thinking beyond conventional assets: "If you are looking to get access to carbon capture in listed markets, you would probably buy into firms like ExxonMobil, I guarantee you that will not give you the outcome you want. To get access to new technologies, you need to get into venture capital."

Taking a more cautious stance Edward Baker, net zero manager at LGPS Central Limited argued: "We have seen more opportunities coming through on the back of policy developments in the US and EU, the opportunities are there and are growing, it is just that if you benchmark it against the net zero pathway, it is currently not sufficient, we need to move faster and that needs to be supported by the right policy environment” he warned.