In the almost half a century after US geochemist Wallace Broecker popularised the term global warming, the world has seen countless significant efforts to counter the phenomenon, from the Montreal and Kyoto Protocols through to almost 30 UN Climate Change Conferences, which culminated with the signature of the landmark Paris Agreement.
And still, the Climate Action Tracker of NGO Climate Analytics gauges that the initial Paris pledges would, if fully implemented, lead to global warming of between 2.5 and 3.8 °C and that current policies would lead an increase of between 2.5 and 4.4 °C above pre-industrial levels.
Despite the powerful potential of green financing, it has also yet to achieve its full impact on advancing the battle against climate change. Green bonds, which barely existed at the start of this decade, have been growing steeply, reaching a record issuance value of more than USD 1 trillion in 2020. However, a green bond, as with any kind of debt, is simply a temporary source of financing. It simply is not possible to fix a decades-long problem with a five-year bond. The solution to climate change is in equity financing; debt financing alone has not solved and will solve the problem.
Equity investors have been rightly focusing their attention on the business opportunities that climate change is offering. The sheer need of a technological upgrade from a fossil-fuel-based economy to a carbon-lite economy will, without a doubt, provide an environment for businesses to thrive while addressing climate change.
However, meeting the Paris Agreement target is not just about transitioning to a carbon-lite economy; it is about transitioning in a given timeframe (before 2050) by following a given path of annual improvement (reducing emission by 5 to 7% every year). To put things in perspective, the level of annual reduction needed is equivalent to what we will achieve in 2020 as a result of the pandemic.
Technology advancement by itself is only helpful if it is put to work. The speed at which new technology is implemented is not driven by climate change considerations but by the need to replace the old technology that has reached the end of its useful economic life. This is likely to be too slow.
Accelerating the speed of implementation of cleaner technology is always possible. It can be done by governments introducing a proper carbon or other Pigovian tax, or through stricter emission regulations that would accelerate the end of the economic life of existing technology. It can also be done by companies voluntarily retiring assets earlier than planned. Both options come at a cost – either a tax or the write-off of a perfectly functioning asset.
Governments in Europe talk the talk, but so far they are failing to walk the walk and leave open the question to management of companies. Should we do more than what makes economic sense? While the public debate is arguing that managements should not manage companies only with the economic performance at heart but should take into consideration the interest of all the stakeholders, our interaction with investors behind closed doors is much less open to such considerations. Their fiduciary duty to maximise returns is still the number one priority.
The elephant in the room is that accelerating the pace of decarbonisation beyond these opportunities will require companies to sacrifice returns. The urgent discussions that need to take place are around the following questions: How much (if any) are asset owners prepared to give away? Where and to what benefit are they prepared to give it away?
In order to address these questions, we have launched a ‘Green Dividend’. The mechanic of the Green Dividend is to designate around 2% of our total dividend proposal, or one cent per share, to accelerate the pace of action in reducing our company’s CO2 footprint. alstria’s shareholders will have the choice either to accept the Green Dividend or to leave the Green Dividend amount with the company, providing it with a clear mandate to invest outside of the financial norms and to foster decarbonisation. In the case of the latter outcome, the company will invest the capital in projects that would not pay off financially but that do reduce the business’ CO2 footprint.
Through this tool, we are showing our shareholders that we could accelerate the pace of reducing our carbon impact if we were to sacrifice returns. We are at the same time showing the marginal cost of achieving this and are asking two questions: Should we pursue these projects? Are we the best positioned to pursue these projects, or can the capital be used more efficiently somewhere else?
alstria’s ambition is not that it will accelerate decarbonisation alone through the launch of this Green Dividend, but rather that it will trigger a positive dynamic that can be pursued by other companies. The Green Dividend provides a unique tool for companies to signal opportunities to reduce their carbon footprint as well as the marginal cost of doing it. With this information, investors should be able to build more structured Green capital allocations, which in turn can be more properly explained to their stakeholders.
The goal is to catalyse system change through green equity financing. In the absence of the necessary intervention from politicians anywhere in the world, with a clear, realistic carbon price, alstria’s belief is that corporate agents must take this lead and initiate actions that push towards the achievement of the Paris Agreement goals. This has the potential to leverage the power of ESG (Environmental, Social and Corporate Governance) to trigger system change and sustain the decarbonisation pace that is needed.
