Financing the low-carbon economy: the variations of green

Investing in clean growth means different things to different people, from the refurbishment of a thermal coal-power plant through to the most efficient offshore wind turbine.

As an asset owner, with a mainstream asset management arm, Aviva covers the whole spectrum from the large, low carbon infrastructure assets we have been focused on through our climate change strategy over the last few years, to passively held shares in companies in indices such as the FTSE350.

Regardless of the types of assets, we believe that key to driving clean growth is engagement on the side of the investor, and transparency and disclosure on the part of the company invested in.

An overseas’ lesson

A couple of weeks ago I travelled with Aviva Investors on an investor trip to Poland, where we engaged with companies in the thermal coal sector – mining, power generation, and distribution. It was the ‘first of its kind’ for Poland, focusing on understanding the companies’ thinking on climate risks and opportunities, and the financial impacts these could create.

Each company we saw contributes to a changing climate of which we all are increasingly feeling the effects. They were all concerned about energy security and they all had customers and shareholders. And they all wanted stable policy conditions in which to work.

However, as may be expected, the range of responses given to a similar range of questions belie where their priorities lie in the short, medium and long term. Some only see challenges, risks and costs of the here and now; others view unavoidable costs in the near future; while just a few are anticipating the future, diversifying their business models and grasping the opportunities to move into new markets and provide ‘clean’ solutions.

The importance of disclosure

Drawing out this type of information is precisely what was recommended by Michael Bloomberg’s global Task Force on Climate-related Financial Disclosure. Launched a year ago, the task force was set up to help firms understand what financial markets want to know in order to measure and respond to climate change risks. As a recent progress update indicated, there have been some encouraging first steps, but much more work is needed on this.

If more organisations publish decision-useful climate risk information, it would enable a better understanding internally of the risks and opportunities that climate change presents, and in turn promote more informed investment, credit [or lending] and insurance underwriting decisions.

As the lead on Aviva’s TCFD disclosure, I understand the complexities involved. To find the true value in this work, it’s vital the board and experts from across the business get involved.

In the short term, I believe that being able to translate non-financial information into figures on the balance sheet will do more to shape our internal decision-making process, before we realise the full value that external disclosures create. For example, it will help us to understand how increased prices will affect profitability for the companies we invest in that are exposed to a carbon pricing mechanism. It could also help us evaluate the opportunity to invest in electric vehicle charging infrastructure, if policymakers set an ambitious target to ban the sale of new internal combustion engine vehicles.

Likewise, as we continue to ‘put on our own oxygen mask’ we will seek to help others put on theirs.  We will increasingly expect more transparency, disclosure and demonstration of clean, green growth from companies where we invest, regardless of the sector or country.

This first UK Green GB Week showcases newer businesses with clean growth at their heart. But this should not be to the exclusion of any company that understands the systemic risks of climate and the business imperative of addressing it in the way we do business today, so that we can continue to do business tomorrow.