Ritu Arora is the CEO & CIO Asia - Allianz Investment Management Singapore Pte Ltd. and India Advisor to Allianz SE Board
Globally, the Covid-19 lockdowns have helped us witness a cleaner environment. Major Indian cities like Delhi and Mumbai enjoyed the lowest pollution levels in the last decade as emissions plummeted. Yet, India is grappling with intense climate change twists and repercussions, with most recent examples being the Amphan cyclone and severe heat waves. These have damaged livelihoods and adversely impacted health and wealth of societies and businesses.
Covid-19, combined with these climate change disasters, have made it amply clear that the world’s sustenance is based on its ecosystem. These fast-changing images of our reality serve as a stark reminder of how far, and perhaps further ahead, countries need to flatten the global warming curve and safeguard the ecosystem.
If our recent experiences of environmental benefits and disasters were to be analysed, the resulting impact would serve as a huge incentive for governments and businesses to develop post-pandemic ‘green’ recovery plans. Asset owners, who are at the forefront of the financial industry’s value chain, will play an important role in facilitating this. They can deliver real economic action by steering portfolios and enabling sensible and sustainable investment choices to deliver positive, measurable and enduring changes for tomorrow’s climate.
Turning constraints into opportunities In the post-Covid reboot phase, India, like other economies, is most likely to return to emissions growth. According to the Allianz Risk Barometer 2020, climate change has risen to its highest-ever position of 7th among other business risks. Ignoring climate change risks could prove more expensive than the transformation costs of making businesses climate neutral, and in the long-term, could mean losing out significant investments.
There exists a compelling risk-reward opportunity in advancing transformation to sustainable businesses during this reboot phase.
A report by IRENA titled ‘Global Renewables Outlook 2050’ highlights that increased investments in renewables would result in eight times more savings than the cost of reduced health and environment expenditures, and four times the number of jobs by 2050.
India runs one of the world’s largest clean energy programmes, aiming to build clean energy capacity of 175GW by 2022. Prime Minister Narendra Modi recently called for each state to have one ‘solar city’, highlighting India’s intent to build on its clean energy champion image. Environmental, Social, and Governance (ESG) funds in India also witnessed highest inflows of $507 million in the first quarter of 2020, showcasing willingness of sustainability investors to stay put and focused on the long-term horizon.
Indian companies accelerating the adoption of alternative energy are likely to grow more rapidly, even if that is visible only once the economy is on the right footing. Prudent green investment decisions taken now would enhance asset value, generate long-term returns, and deliver incremental positive social and environmental value.
Integrating climate protection into business investment strategy Investors need to increasingly base their capital and extend support to portfolio businesses on the condition of climate commitments to achieve zero emissions.
This does not mean immediate divestment from emissions-intensive assets, but a planned phasing-out of coal-based business models and working to find suitable decarbonised business models. It would be critical to structure investment portfolios in a climate-smart manner. Moving to assets that do not emit greenhouse gases, few that emit small amounts, and others that function as greenhouse gas sinks are prudent in the long run. As rational steps towards this transition, investors should set intermediate targets as milestones in the overall journey. Investors should simultaneously focus on increasing their exposures to low-carbon assets including renewable energy, certified green buildings, and financing low-carbon technologies.
There is also a growing consensus that ESG investing would exert a positive influence on corporate behavior and governance. Encouraging companies to report comprehensively on their climate-related risks and actions to tackle them and advocating improved disclosures would lead to greater transparency and better solutions.
Joining forces: The key to holistic success Given the magnitude of the challenge, asset owners need to join forces with peers, governmental institutions, policymakers, scientists, academia and NGOs to think about and adopt sustainable principles and practices. Initiatives such as the UN-Convened Net-Zero Asset Owner Alliance, launched in September 2019 by 12 global asset owners and is today, a coalition of 23 international asset owners (comprising insurance companies, pension funds etc., with total investments of about $4.6 trillion), can be real game changers. Such alliances are examples of investors listening to science and stepping up to protect the people and planet while leveraging their influence to help companies realise opportunities the crisis presents.
It is said that anything you can imagine is possible. And large-scale global crisis recovery programmes are no longer hard to imagine. We have seen governments and businesses, globally, investing their minds, might and money to orchestrate the Covid-19 recovery and showing great commitment to a quick global economy reboot. This sense of deep commitment also needs to be channelled into transitioning to a climate-friendly world. We as asset owners, with our influence and partnerships, are excited to nudge financial services globally in this constructive direction.
The writer is CEO & CIO Asia - Allianz Investment Management Singapore Pte Ltd. and India Advisor to Allianz SE Board