Executive interview: A question of positive externalities

‘There is finance, there is money and there is quality – quality of life in a wider sense,’ Günther Schiendl, chief investment officer of VBV Pensionskasse, tells Romil Patel.

How do you approach climate change and ESG in your investments and strategy?
Everybody has recognised over the last two to three years – which were the summers of the hottest average temperatures since records began – that climate change is permanent, and it won’t go away. The question is: what is the pace? Climate change has come to be felt in our everyday lives. In the investor’s life, it comes through different venues, so we got dramatic regulatory changes underway in Europe with the EU sustainable finance regulation that will force investors in Europe to disclose their climate strategies by April 2021. That is regulation that has been drafted and enacted, and the deadline will be in about a year’s time, so everybody has to start doing their homework more thoroughly than ever before and ask where we are, how we see it and so on. 

The big context is, as a sustainable investor, you have to do things more carefully and in more detail. A few years ago, we were saying we are doing ESG integration and we considered the implications of ESG factors in our investment decisions. That is what we are still doing, but we have become more detailed. We started measuring the carbon footprint of our equity portfolios three years ago and now we recognise that the next thing we have to do is come up with climate goals and dedicated climate change strategies. So, we are about to discuss policies that will state, for example, that by 2030, VBV will have become climate-neutral or Paris-aligned in the investment portfolio or in the equity portfolio. What I’m saying is we are forced to address, discuss and decide things in more detail. We have got good blueprints and reference benchmarks – several from the EU sustainable finance regulation, the UN Principles for Responsible Investment (PRI) and the Task Force on Climate-related Financial Disclosures (TCFD), so there’s a real body of regulation, expertise and investor organisations who have things that help investors decide. 

Another thing that will have to be decided is the real goal of climate change strategies. As an example, in saying that by 2030 we will be aligned with the Paris climate goal, we are developing methods, models, metrics, statistics that will put us – and I think many other investors alike – in a position where we say: ‘Yes, we now have appropriate monitoring of our climate strategies. We are on the right trajectory to achieve the Paris-aligned climate goals by the 2030s.’ So, it is becoming much more integrated into the decision process, and right now the major topic is climate change. 

If you deal with the environmental aspects of the different industry sectors, there are so many things to learn, address, evaluate, discuss and ultimately, decide. For example, when it comes to greenhouse gas (GHG) emissions, there is scope 1, scope 2 and scope 3 emissions. The auto-producers’ scope 1 or scope 2 emissions are by and large OK, but for automobile producers of internal combustion engine cars, the real issue is scope 3 emissions – how much GHG emissions their buyers are blowing up into the atmosphere over their lifetime use of those cars. 

What are some of the key barriers for you as an asset owner from an ESG perspective? Is the data accurately capturing the externalities of what’s taking place on the ground or is there a gap?
It comes back to the issue about scope 1, 2 and 3 emissions. On the full value chain if we are really looking at reducing carbon dioxide and greenhouse gases in general in the atmosphere, we certainly have to try to incorporate the scope 3 emissions to get a complete picture. That is a data issue. The commercial industry, meaning the sustainable rating agencies, the data vendors and index providers sense this is a tremendous business opportunity and it has been observed that the typical big US companies have been buying sustainable rating agencies, or boutiques that typically have been founded in Europe. They are working to get ever better data to enable investors to make data-based decisions more than guesswork. The data providers, index providers and others obviously and for good reasons, have slightly different methodologies and data sources, so it will take more time before there is a feeling that the data is of reliable and comparable quality. As long as an investor does not have relevant data in appropriate granularity and reliability, they are doing it more strategically or qualitatively. Yes, there is certainly a data issue, but also one of learning to interpret and understand the data and outcomes of scenario tools and analyses. 

As an investor, are you seeing types of behaviour from companies against the coronavirus crisis that would call the case for future investment into question?
I am not sure it’s because of the way they are conducting themselves now, but because of the way they have been conducting themselves for some time. The coronavirus has shown the world what a global pandemic is – we have not had this before, and climate change will be something like this. Because of several developments described in the beginning, there won’t be any investors left in three years’ time that are not in a certain way investing sustainably and/or following ESG principles. All the investors in the world are on different routes, there is a different maturity in their ESG, climate and social strategies. Over time they will behave and proceed more in sync with industry standards, or at least they will follow the ESG leaders. Furthermore, it has been observable that in the last one to two years, that social elements in ESG got more attention. 

The social implications (of climate change) have become more visible and important and the question is how to address or incorporate them. In general, if I am an investor who does something against global warming and the negative effects of climate change, I’ll continue contributing very generally to an improvement in the social life of people everywhere in the world. If we can slow global warming, life in the cities will remain relatively better than if we don’t do anything, it is a question of positive externalities, I might be able to produce positive social aspects by focusing on climate aspects generally. Clearly, in addition to this, we directly might address specific social issues via targeted, thematic or impact investments. 

As an investor, what needs to change in terms of the way we do things, to avoid falling back into old habits that could lead to a global environmental disaster?
We need to be able to see the effects qualitatively and quantitatively, i.e. financially if we don’t do things that we should do. There are many people in academia who have spent years researching, developing, thinking and writing about carbon dioxide pricing. There obviously is a price to carbon dioxide or to greenhouse gas GHG emissions in general that has to be paid by somebody at some time – in the end: all of us. The academics found out, for example, that the carbon dioxide price is different in Asia to Europe and the US – not by magnitudes, but it is different. 

Academics say the fair price of a ton of carbon dioxide is between €100 and €200. The politicians say this is not feasible in reality and can’t be done. But last year Germany decided to introduce carbon dioxide pricing with €10 per ton starting from 2021, increasing it to €35 by 2025. For investors, the financial effects of GHG arising from their investment portfolios can be made clear and measurable, it just requires models and data, and – more forcefully – it requires prescriptions. Disclosure regulation is doing this – it forces disclosure, thus bringing transparency and information to clients, regulators and the public, and this builds awareness and peer pressure. 

Today it is already possible to give a financial value to carbon emissions not incurred via a low-carbon investment portfolio using models, data and carbon prices. It will really help disclose and we need to have some metrics and the Task Force on Climate-related Financial Disclosures (TCFD) or non-financial reporting is a route in this direction. There is finance, there is money and there is quality – quality of life in a wider sense. A price can be put to this, we just need to agree on the models and input data, but it can be done. Over the next few years, things will develop quite rapidly, and investors will then produce financial performance figures and non-financial performance figures.

Which key ESG development would like to see going forward?
One thing we do as a pension fund is actively seek out opportunities and define investment strategies to enable and strengthen companies working in fields like alternative energies and new technologies to combat climate warming. We will invest and try to earn good returns for our plan members and beneficiaries. There is a sense that there is a new, more meaningful meaning in ‘long-term investing’. 

At the same time, we are developing our low-carbon equity strategy into a Paris-aligned climate strategy. The new Paris climate benchmark regulation has been in force since April 29 – all investors will have to explain their ESG and climate strategies, or if they don’t have such strategies, why they do not. 

Pension funds, insurance companies, investment funds will have to prepare to be compliant to ESG-disclosure regulation coming into force in April 2021. Diligent management will go one step further and think about delivering meaningful ESG and climate reporting to their clients. Diligent boards will incentivise their senior executives with climate and ESG goals alongside to traditional financial goals. 

TCFD regulation will bring non-financial reporting for more and more companies beyond exchange-listed ones. 

The big unknown which is left is the change in societal behaviour. It is difficult to grasp, because it has to do with people and people will go the way of the least effort and as soon as there is no more fear or danger felt from events like the coronavirus or climate change, people might slip back into old behaviours. 

What is needed to really drive change on a large, meaningful scale, is some kind of forward-looking policy guidance – maybe similar to what national banks did for many years. Politicians should clearly make their intentions known and goals should be set to guide people towards desired aims. Change will take time, so goals should be marked with timestamps, and the consequences for not achieving those milestones should be made clear as well. The goals set need not be too distant in the future because that will be useless. For example, here at VBV, we could say our investment portfolios will be climate-neutral by 2050 – that is so unambitious and easy to say because by that time, I will have been in retirement for 15 years, so this is nonsense. Goals should be set much narrower in terms of timeframe. 

The PRI inevitable policy response is a very realistic scenario, because the PRI and the scientists have known for a long time that there are different climate pathways (global warming curves) with critical time junctures. Beyond certain specific time junctures, certain climate pathways will de facto be unachievably lost. What the PRI inevitable policy response essentially is saying is, if we don’t have major changes in climate policies and companies and human behaviour starting within the next five years, then after 2025, we will have a scenario of forced climate policies adoption, where politicians will no longer have today’s remaining degrees of freedom to decide, their hands will be forced, policy changes will be abrupt and more restrictive. The sooner they act, the less rupture will be produced, and potentially less damage to their voters. For a politician, it has never been successful to tell the people something that does not please them, but we probably need some realistic scenarios without producing angst or fear in people, but making it ever clearer that we need change and that we need it fast. fe

VBV Pensionskasse is the largest Austrian pension fund, with assets of €7 billion (£6.25 billion).

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