Even though the Paris Agreement (COP21) still hasn't been ratified and the latest temperatures are still causing alarm (according to NASA, August 2016 was the hottest month of August in 136 years), the French Minister for the Environment, Ségolène Royal, urged the Finance sector to speed things up during a conference of the Task Force on Climate-Related Financial Disclosure (TCFD), an organization presided over by Michael Bloomberg whose goal is to promote the integration of carbon risk. Taking the carbon footprint into consideration when managing financial assets is, unfortunately, far from being settled. This is in fact what pushed asset manager BlackRock, with $USD 4,9 Billion in assets under management, to clearly encourage all investors to integrate global warming into their decisions from now on.
Isn't there a risk in expecting too much from the finance sector?
First, this sector is confronted with the pressure of a short-term dynamic, which does not encourage taking into consideration problems that will come to a head in 10 or 15 years, a phenomenon analyzed in a study from Generation Foundation and 2°i Investing Initiative, "The Long-Term Risk Signal Valley of Death."
Second, asset management practically demands sector diversification, in order to offer clients a reasonable risk. Hence the large investment funds' presence in almost every sector, including those with a high level of carbon intensity (even if coal is now persona non grata for certain pension like the giant CalPERS).
On the other hand, financiers can retain only the least polluting companies in any sector (the Best-in-Class Strategy), like the TIAA-CREF Social Choice Equity Fund, a US equity fund with $2.8 billion under management whose approach is to "include companies that are Environmental, Social and Governance (ESG) leaders among their industry and sector peers."
Will the so-called "Best-In-Class" strategy be enough to "de-carbonize" the economy?
A report from the NGO Bank Track entitled "Banking on Coal 2014" affirms that "2013 was a record year for coal finance, with commercial banks providing more than 88 billion dollars to the main 65 coal companies - over four times the amount provided in 2005".
In 2015, Oxfam and Les Amis de la Terre claimed that French banks finance seven times more fossil energies than renewable energies.
Within this context, American regulators are studying ways to intervene by setting up reporting rules that will make listed companies accountable for climate risks, as pointed out in an article from the Wall Street Journal.
Shouldn't we also bet on the buyer-supplier couple?
The largest tremors of progress lie in the supply chains, which represent up to four times the direct greenhouse gas emissions (GHG) of those multi-nationals that do the buying.
Moreover, buyers tend to work in the long-term with their strategic suppliers. And, if suppliers are impacted by global warming so are their clients: when a factory is set up in a high risk zone, it can block virtually every single one of its clients. Buyers have much to lose. According to the Carbon Disclosure Project and BSR, 72% of them think that climate change represents a significant risk for their operations.
Let us also take advantage of the close relationships between buyers and suppliers, as the former can incite the latter to get engaged. "The client is king" philosophy can be used to convince manufacturers to reduce their imprint.
L'Oréal: Carbon neutrality by 2020
To cite one example, L'Oréal has targetted carbon neutrality by 2020. To succeed its goal, the company has set up a "renewable sourcing" program that consists of selecting the most virtuous suppliers.
General Mills to reduce GHG emissions by 28% by 2025
General Mills also has understood the massive lever of progress represented by its value chain and has set itself the goal to reduce, by 2025, GHG emissions across its entire lifecycle by 28%; from farm to fork to landfill.
The stakes are such that we should not hesitate to combine the lever of "Responsible Purchasing" with that of "Responsible Investment."
Buyers and suppliers already collaborate within electronic marketplaces. The next step could be to equip these platforms with applications that follow both engagements and results, in terms of reducing the GHG, and facilitate collaboration in order to profit, thanks to a network effect, from the dissemination of good practices throughout all strata of the economy.
Sylvain Guyoton, Vice-President Research EcoVadis