US withdrawal from Paris accord no threat to ESG investing

Several large asset owners contacted by Pensions Expert confirmed that their strategies would not change, despite the world’s second largest contributor to greenhouse gas emissions abandoning the pledge.

The agreement aims to limit global warming to an increase of less than 2 per cent from pre-industrial levels. It also seeks to promote development of and investment in green industries.

While the treaty does not bind any signatory or party to a particular course of action, President Trump’s decision has been viewed as a symbolic blow to recent progress in tackling climate change.

At a state level there’s a lot that’s happening in terms of regulation that this won’t affect

Lucy Thomas, Willis Towers Watson

However, institutional investors seemed unfazed by the news. Mark Fawcett, chief investment officer at Nest, said the mastertrust would not reconsider its commitment to a climate-aware fund.

“This approach is designed to prepare members’ portfolios for a lower carbon future, and we’re confident that it remains appropriate,” he said.

Fawcett noted the continued support of the accord’s other signatories, and its backers in business and finance, as evidence of the limited effect of the US withdrawal.

What will withdrawal achieve?

Political leaders in France, Germany and Italy issued a joint statement against the move, and Prime Minister Theresa May reportedly contacted Trump to convey her “disappointment”.

“The fact is that the transition to a low carbon global economy is becoming increasingly inevitable. Regardless of short-term political shifts, the long-term trend is unlikely to change,” said Fawcett.

Georgina Laird, sustainable investment analyst at Kames Capital, said it looked unlikely that any other countries would choose to leave the agreement.

“They’ll be joining a lonely club with the US, Syria and Nicaragua,” she said, adding that even the US’s departure looked uncertain.

“It does take four years to withdraw, so it will be around the time of the next election that this will be taking effect,” she said.

State governments within the US have also voiced their continued support for the agreement.

California, New York and Washington were among nine states who committed to meeting the reductions in greenhouse gases pledged by the Obama administration.

Lucy Thomas, global head of sustainable investment at consultancy Willis Towers Watson, said this made it unlikely that the federal government’s decision would feed through into all local regulatory environments.

“At a state level there’s a lot that’s happening in terms of regulation that this won’t affect,” she said.

She said that increased regulation, the potential added risks of investing in carbon-intensive sectors, and pressure exerted by socially conscious consumers would continue to make ESG a key focus for pension fund investment strategies.

Funds take action

Large institutions on both sides of the Atlantic have continued to act on these drivers in recent weeks.

On Monday the Local Authority Pension Fund Forum announced it was partnering with the 50/50 Climate Project, a not-for-profit organisation challenging the world’s most carbon-intensive companies to formulate long-term sustainability strategies.

Last week a consortium of investors were able to pass a motion requiring oil giant ExxonMobil to report on the impact climate change could have on its business.

Large asset managers such as Vanguard, BlackRock and State Street have also begun to use their voting powers more extensively.

Many smaller pension funds are yet to develop a comprehensive strategy on ESG issues, conceded Thomas, but should look to incorporate broader themes into their assessment of asset class returns.

While it may be unclear which long-term climate risks are priced into individual markets, investors should be aware of their ability to move prices, she said.

“We’re witnessing an incredible regime shift in energy markets in different areas,” she said.