Poppy Allonby, senior finance executive and former chief executive of BlackRock, has analyzed the link between climate change and investing for more than two decades. “For a lot of it, it was pretty lonely,” Allonby said during his December speech at the MIT Energy Initiative Fall Colloquium. “There weren’t many other people who were interested in this area. And in the last three or four years, that has completely changed.
Increasingly, Allonby said, investors are opening their eyes to the long-term risks of climate change — risks that not only threaten the planet, but their wallets as well. And as more and more institutional investors come to view climate change as a threat to their beneficiaries, they are taking action to combat it. Still, she warned there was still a lot of work to do.
“Different investors are at very different stages in considering climate change,” Allonby said. “Once they realize it’s something they need to think about…they need to do a risk assessment and then develop a strategy.”
“When you look at different institutions,” she said, “some are just at the very beginning of this journey.”
A changing landscape
While there is a compelling moral case to be made for taking action to mitigate climate change, Allonby noted that institutional investors such as pension funds are bound by a fiduciary duty to their beneficiaries. That is to say, they are obliged to put the interests of their clients or members before their own.
“I say fiduciary duty because one of the things that has really changed in the investment space is that more and more investors are starting to look at climate change and climate risk as [impacting] their fiduciary duty,” Allonby said. “It was a change. In my mind, it all makes sense. If you’re a long-term investor… and you’re thinking about the beneficiaries who will need assets over the next 10 or 20 years, and you’re thinking about the risks that could materialize – and climate change, in particular – then that makes a lot of sense. But that’s not where we were five or ten years ago.
Allonby spent more than 20 years with multinational investment management firm BlackRock. For 17 of those years, she was a senior portfolio manager responsible for managing multi-billion dollar funds investing globally in companies in the traditional energy sector, as well as those involved in sustainable energy and l mitigation of climate change. Most recently, she led the company’s global product group across multiple continents, where she oversaw nearly $1 trillion in assets and played a critical role in developing BlackRock’s sustainable product strategy.
“Where I like to think the financial industry is heading is integration,” she said. “That means thinking holistically about virtually every decision you make as an investor and thinking about the impact of climate risk on that investment. It’s a sea change in the mindset around how which people invest.
Divestment versus engagement
For many years, activists have lobbied for institutions — including MIT — to divest from fossil fuel companies. By keeping fossil fuel companies out of their wallets, say these activists, institutions and individuals can exert social, political and economic pressure on these companies and help accelerate the shift to renewable energy.
However, Allonby instead argued for continued engagement with fossil fuel companies, believing this better positions investors to push for change. “My personal view on divestment from oil and gas companies is that it’s not very effective,” Allonby said. “I think there might be examples where you have very specific companies that you don’t think will be involved in the transition. [to net zero], and [divestment] might make sense. Or if you have an institutional investor for whom it is imperative that their investment be fully aligned with their values – ie, certain charities – this might make sense. But if you really care about change, I think you have to keep a seat at the table.
In a way, Allonby said, divestment from fossil fuel companies allows the leaders of these organizations to get off the hook, reducing the pressure on them to make meaningful changes to their operations. “Imagine a company that’s incredibly polluting and unsustainable, and whose shareholders aren’t happy, but they don’t do anything, and those shareholders decide to divest,” she said. “What happens as a result of that, potentially, is the company is like, ‘Oh, that was easy! I had nothing to do and [the activists] are gone. And potentially, those assets end up belonging to people who care less about them. So it’s a risk, when you think about disinvestment.
Challenges and Opportunities
Allonby described several challenges with climate-focused investing, but also noted a number of opportunities – both for investors looking to make money and those looking to make a change.
Among the challenges: On the one hand, some investors have yet to be convinced that climate change is a problem they should be working to address. Additionally, Allonby said, both a formalized methodology and specialized investment products for climate-focused investing are lacking, although she noted that both of these areas are improving. Finally, she said, it remains difficult to encourage investors to channel capital into clean energy projects in developing countries.
Investors can both prepare for financial success and mitigate climate change, Allonby said, through savvy investments in distressed or undervalued assets. “If you can buy assets at a discount or cheaper because people have real concerns about their environmental footprint, then you can work with those companies to improve it and therefore reduce risk and improve valuation,” he said. she declared.
Allonby, pointing to the high cost of waterfront properties in areas vulnerable to sea level rise, also suggested that the long-term risks of climate change have not been fully factored into many assets. “My opinion is that we haven’t really figured that out,” she said. “From a purely investment point of view, it’s also an opportunity.”
Additionally, Allonby noted the recent rise of ESG funds, which invest with environmental, social and corporate governance guidelines in mind. Some of these funds, she noted, have outperformed the broader market in recent years.
“When we talk about climate change, you have a range of emotions,” Allonby said. “Sometimes it feels like we’re not making enough progress. And one of the good things about being here at MIT is that every time I’m here, I always have hope for the future, and a lot of hope for all the technology and the work that you’re doing for transitioning energy systems and getting things done. When you look at what’s happening in the financial services industry, there’s still a lot to do, but it’s also a hopeful story.