Pragmatic approaches to transition investing and the need for green populism
In November, Tell Media Group, in cooperation with Blackrock, IFM Investors and Robeco, organised a roundtable event at the Thief hotel in Oslo, discussing climate transition investments.
With the roundtable being held only days after the US presidential election, the initial discussion centred on change in leadership in the US and what that could mean for climate transition investments in terms of political risks and regulatory frameworks.
LARS ERIK MANGSET: “It remains of course to be seen what the more long-term effects will be. I think the short and most obvious answer is that the uncertainty around policies for green industries will increase. Will we see a pull back from the Paris agreement? Will we see a pull back from the IRA programme and so on? Another aspect is the impact of trade policies on production and innovation of green technologies.”
GJERMUND GRIMSBY: “I think we need to remember that wind and solar are cost efficient technologies. So even if we will see a pull back of incentives and changing policies, I do think that the economics of it all will be a balancing factor.”
NIKLAS TELL: WERNER, YOU FOCUS ON INFRASTRUCTURE INVESTMENTS, WHICH ARE TYPICALLY LONG TERM IN NATURE. WHAT IMPACT ARE YOU SEEING?
WERNER KERSCHL: “We do take a long-term view because we don’t have to exit our assets, so we can look through political electoral periods and focus on the fundamentals. Sustainability and renewables make sense for a country in the long term and is a trend that’s here to stay. Before the election, I would have said that we will see more interesting renewable investment opportunities in the US under the IRA. Now, it remains to be seen.”
CHARLES LILFORD: “I don’t think there are any doubts that there will be significant changes ahead. There are, however, also positives if you revisit the previous Trump presidency. Wind and solar investments actually went up quite remarkably in comparison to the previous four-year cycle with solar capacity increasing by 52 per cent and wind increasing by more than 80 per cent during Trump’s administration. Furthermore, there were in fact more drilling permits on federal land issued during Biden’s administration than during Trump’s. Perhaps more notably, the energy outlook is fundamentally more important and particularly different today than it was in 2016. This is due to a heightened focus on domestic energy security and also fundamental growth in energy demand. We are seeing ever increasing focus on energy security and domestic energy resilience – notably in Europe but elsewhere globally, including the US. Furthermore, fundamentally there’s an increasing demand for electricity, driven by the switch to electrification, re-industrialisation and the evolution of artificial intelligence. Renewables will play a key role here given the rapid deployment model, cost competitiveness and low reliance on commodity inputs.”
YANXIN LIU: “If we look at the macro picture, the Trump win will play a critical role and if he moves ahead on all his trade policies, which will add friction, that will probably mean that rates will stay higher for longer. What does that mean for infrastructure investments? Another question is of course the renewable energy supply chain and I think it’s fair to say that the ultimate goal of Trump is about national security on energy. I think that means we will see less wind and more nuclear within the clean energy mix in the US.”
NIKLAS TELL: WHEN INVESTING IN THE CLIMATE TRANSITION, YOU COULD EITHER FOCUS ON DECARBONISING YOUR PORTFOLIO TODAY OR FOCUS ON THE PATH AND FINANCE THE TRANSITION. HOW DO YOU BALANCE THIS?
GJERMUND GRIMSBY: “For KLP as an owner and responsible for the future pensions of our clients, our starting point is that increased global warming will result in higher pension costs. With our primary focus being to minimise the pension costs for our clients, we invest with an aim to have a real economic impact with respect to actually reducing emissions. We have a dual-track strategy where we on the one hand focus on the transition of high emitting sectors and on the other hand financing the solutions.”
CHRISTOPHER GREINER: “We have a perpetual time frame, so the main focus is that we should keep the real value of the portfolio – inflation adjusted and also taking into account the grants that we give out annually and the cost of running the foundation. We do, however, also have a mandate to reach a net-zero portfolio, so we’re mindful of that. As of right now, it’s more about establishing the reporting functionalities of the portfolio to ensure we have a base level and are able to track the transition going forward. We only invest in funds, so we lean very much on the fund managers that we select. We currently don’t have any requirements that says that we need a certain percentage in climate transitions funds, so it’s very flexible. Once we have the reporting structure in place and are able to follow the development, the plan is to engage with the fund managers to ensure that they don’t deviate from the needed path. As of today, it’s, however, a little bit too early to make any changes in the portfolio based on the net-zero pathway.”
NIKLAS TELL: AT GRIEG, WHAT DO YOU HEAR FROM CLIENTS WITH REGARDS TO BALANCING THESE DIFFERENT PRIORITIES?
LARS ERIK MANGSET: “Firstly, I think it’s fair to say that we see investors with different ambition levels. Some are very ambitious and have set net-zero targets for 2040 and are intent to meet them, even though they’re not quite sure how to do that. We’re in the process working with them on exactly how to do it. It needs to be a connection between the goals in the net-zero target and the decisions that they make and it needs to be done in a sensible way where the boards and asset owners are aware of the trade-offs they’re making. For many, I think it’s a new way of thinking, because you’re bringing in a completely new target and it doesn’t necessarily balance perfectly with the traditional way of thinking around portfolio construction. I also think that for clients that set these short-term targets, it’s extremely important that there’s some stability in the way that you measure it. What we see is that when we apply science-based data, there’s more stability in the Paris alignment results over time, while the opposite is true when applying financial carbon intensities, which can be influenced by changes in interest rates as opposed to actual emissions reductions, for example.”
… continued … the roundtable discussion was originally published in issue 06, 2024 of Nordic Fund Selection Journal and a PDF of the complete story can be found here.
//PARTICIPANTS
- LARS ERIK MANGSET, Head of sustainable finance at Grieg Investor
- GJERMUND GRIMSBY, Chief advisor climate change at KLP
- CHRISTOPHER GREINER, Investment analyst at Gjensidigestiftelsen
- CHARLES LILFORD, Portfolio manager at Blackrock
- WERNER KERSCHL, Executive director at IFM Investors
- YANXIN LIU, Portfolio manager at Robeco
