Tackling sustainable investment in challenging economic climates

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Higher education institutions must change the fossil fuel industry from within, HSBC financial experts advise

In an age of heightened awareness about the impacts of climate change, universities, like many businesses, face increasing pressure to divest from fossil fuel industries and cut their carbon emissions. But higher education institutions in particular are putting their finances at risk by cutting ties with these unsustainable companies too soon, experts have warned. 

Speaking at a seminar on the issue of sustainable investments for charity and education organisations, Sandra Carlisle, head of responsible investment specialists for HSBC Global Asset Management, advised university bursars and other stakeholders to hold out on moving their investments in the short term – regardless of the how controversial these investments may appear.

“I know you are all under pressure from student bodies and potentially other stakeholders to at least consider divesting, if not divest,” Ms Carlisle said. “But the message loud and clear is, right now in 2019/2020, stay diversified. There is an issue around values alignment, but from an economic and financial return point of view, choosing to divest today is a very expensive decision for universities. 

Ms Carlisle’s comments follow the publication of “Low-carbon transition scenarios: Exploring scenario analysis for equity” – the first in a series of reports published as part of HSBC Global Asset Management’s ongoing assessment of the implications of climate change on investment strategies. 

Ms Carlisle, a former board director of the Principles for Responsible Investment – an international network of investors working together to put the United Nations’ set principles on climate action into practice – said that the report had been commissioned in order to help clients navigate "the really difficult territory" of responsible investment “at a time of economic uncertainty”.

As part of the United Nations Framework Convention on Climate Change (UNFCCC), 197 governments have committed to reducing the effects of climate change. In addition, the UK government has committed to cutting down and offsetting the country’s greenhouse emissions to net zero by 2050. “So one of the reasons we are talking about this now is because we have no choice,” Ms Carlisle told university associates, “it is policy-led but we want to help you do this in a way that still allows you to still make a financial return on your investments”. 

Research undertaken by Vivid Economics on behalf of HSBC takes into consideration the consequences of different climate change scenarios for charities and businesses, depending on the speed of changes and policies different industries might take. 

In every scenario, industries linked with coal, oil and gas were predicted to lose value in the long term. “But financial markets can't price uncertainty,” Ms Carlisle explained, "and that's the challenge we face today: it's still too uncertain”. 

In being hasty in cutting their investment ties, universities would likely suffer disproportionately high costs, she warned, giving the example of the German utilities market – which lost 50-55 per cent of its value between 2000 and 2015 as a result of being priced out of the market during a time of high risk.

In the short term, universities could work to offset their carbon footprint in other ways, and in cases where their investment means they are a shareholder, “keep a seat at the table and push for greener decisions,” she said.

According to the UK’s National Union of Students, 80 per cent of students say that they believe their institution should be doing more to act on sustainable development. However, university financiers attending the meeting pointed out that many of the students requesting divestment have bursaries funded by endowment portfolios, which have benefitted from investments from oil and gas companies.

Those who did want to make a more rapid change were advised to consider excluding coal-based companies in the first instance, since HSBC’s report found this industry to be the most destructive industry for investment, with highest risk to lost value over time.

Ms Carlisle stressed that it was difficult for universities to appease student campaign groups despite their best intentions. She gave the example of an Ivy League university in the US, which made the decision to cut its investment ties with coal fuel extractions after concerns from the student, academic and wider university body.  “Of course, what happened was once they took out coal, the student body started pressuring for the next step.”

Asked whether there was a non-financial argument for not divesting, Ms Carlisle said: “If you divest, you lose your voice. Even as a passive investor you can ensure your managers are working to shift the system from within to make it more sustainable. It’s a legitimate position, because we do not know today who the winners and losers are going to be tomorrow.”

Brought to you in conjunction with HSBC. Find out more about HSBC’s education team.