‘Trump’s nightmare’: What should ESG investors expect from the G20?

Climate change will dominate the G20 meeting starting today in Germany powering a shift in the global energy system that will be Trump’s “nightmare”, while other countries’ reaction to the environmental issue may drive new geopolitical relationships.

Michael Bloomberg and Mark Carney’s report from the Task force on Climate-related Financial Disclosure, which focuses on governance, strategy, risk management, and metrics and targets, will be presented to G20 leaders.

It would require companies most impacted by the transition to a low-carbon economy to include climate risk disclosures in their financial reporting.

Following Donald Trump’s withdrawal of the US from the Paris Agreement, questions remain over how the report, completed under Carney’s chairmanship of the Financial Stability Board, will be received by the US president.

The FSB itself was established from the London G20 summit in 2009.

“Trump’s action of moving to an American First nationalist position based around fossil fuels has prompted a reaction, which has accelerated the spreading of power around the world and the forming of new alliances,” says chief executive of climate think tank E3G Nick Mabey.

“In particular, an early alliance between Europe and China and it seems India around the clean economy.”

The president has forced “his own worst nightmare” by driving demand away from fossil fuels, Mabey says. “America does not control global energy market, does not control the world’s largest clean tech market, and is not the world’s largest investor. India, China and Europe combined are all of those things.”

Trump has previously been described as a “fillip” for ESG as investors step up their commitments to responsible investments despite US president’s contentious policy positions.

Climate change ministers have been developing new networks following US withdrawal from the Paris Agreement and Mabey is interested to see whether that translates to government leaders. Mabey says it will also be interesting to see if the domestic progress made on climate change in emerging markets like Brazil and Mexico will translate into geopolitical relationships.

Leaders’ reaction to G20 protests, which are likely to focus on climate change, and the response of major oil producing nations, like Russia, Saudi Arabia and Turkey, to the TCFD recommendations are “wild cards” to watch out for at the forum, Mabey says.

Environmental risk for investors

Environmental risk is possibly the biggest concern for ESG investors, says chief executive of French asset manager ERAFP and vice chair of the Institutional Investors Group on Climate Change (IIGCC) Philippe Desfossés.

“What do we want from the G20? We want better communication, better transparency from corporates. We are invested in those companies so it is totally legitimate to expect from them clear communication on exposure to climate change risk.”

Schroders, LGIM, M&G and Aviva Investors are among a coalition of investors representing $22trn in assets that wrote an open letter in the lead up to the G20 calling for support of the TCFD recommendations.

Stranded assets are already a large risk for pension funds, says Desfossés. “The idea that you have investors invested in something that has already lost part of its valuation is quite scary. It’s even more scary to think that maybe you are still investing in assets that might also become stranded.”

ERAFP started measuring the carbon footprint of its portfolios four years ago and began decarbonising stock portfolios three years ago.

The asset manager must also comply with France’s Article 173, which requires mandatory climate change-related reporting from institutional investors. The UNPRI has recommended investors globally understand the law suggesting it heralds the direction of travel for policy makers around the world.

Desfossés would also like to see policymakers incentivise long-term rather than short-term investing and send clear policy signals to the market.

“There are still too many subsidies that goes to use of fossil fuels and on the contrary we have no clear carbon price that would be useful for investors to change their investment strategy. The ETS (emissions trading scheme) has been a perennial disappointment.”

Trump is repeating mistakes of the 1970s

US business is concerned about competitiveness following Trump’s statement on withdrawal from the Paris Agreement, says Nigel Topping, chief executive of the World Economic Forum’s responsible business coalition We Mean Business.

“A company like GM, for example, sells more cars in China than America. It has to think globally about technology and strategy.”

The US could repeat the mistakes the oil crisis, which prompted the establishment of the original G8, when it failed to produce more efficient cars, says Topping. “The whole rise of Japanese industrial and particularly the auto industry is based on the wrong response from America in the seventies to the oil crisis.”

The geopolitics of energy will change the competitiveness of manufacturing and where and how infrastructure investment take place, says Topping.

“China is rapidly ramping up battery production, electric vehicle production. India’s talking about 100 per cent electric vehicles by 2030 and it’s great to see continued European leadership.

“From a business perspective, it’s a question of where to invest in R&D and where to invest in new production facilities to build the industries of the future and whether or not individual countries who take a step back from leadership cause long-term hard to competitiveness.”

Volvo limiting production to electric or hybrid cars by 2019 and Canadian tar sands developer Suncor abandoning exploration and returning money to shareholders are examples of the pace of change, he says.

Topping would like to see the G20 build on the French government calls for a carbon-pricing corridor or the World Bank’s carbon pricing leadership coalition.

“In simple terms it needs to get up to $50 a tonne and going upwards and accelerates the shift from coal to gas and renewables.”