Legal & General Investment Management (LGIM), one of Europe's largest asset managers, is urging companies in which it invests to focus on the opportunities, not just the risks, arising from the transition to a low-carbon economy.
"Tackling climate change is not about losing financial value. It is about helping to build a much healthier energy system. If tackled holistically and strategically, our investments would benefit," Meryam Omi, LGIM's head of sustainability, told a meeting in London.
Embracing this transition will lead to "a better society, greater economic efficiency and ultimately better corporate growth and investment opportunities," she added.
Two major forces – regulation and technological change – are transforming the way energy is generated, stored and consumed, Omi said. "As investors we must support companies as they adapt and innovate through this period of transition".
Major opportunities are to be found in energy efficiency technologies, which can significantly reduce energy consumption, and in renewable energy where costs are falling fast, she noted. Other promising opportunities are to be found in energy distribution and management, energy storage, new transport solutions and resilient electricity grid infrastructure, she said.
London-based LGIM, which manages more than $1.1tn on behalf of clients ranging from sovereign wealth funds and pension schemes to retail investors, is also engaging with policy makers, Omi added.
Investors need policy makers' support to help finance the transition to a low-carbon energy sector, she said, noting that the well-publicised subsidies for renewable energy are dwarfed by those supporting the fossil fuel sector. And government spending to deal with the side effects of burning fossil fuels is far higher than the direct subsidies for exploration and consumption, she added.
Decarbonisation of the power sector means companies engaged in fossil fuel extraction face a real risk that many of the reserves listed on their balance sheets could be rendered uneconomic, or 'stranded', Omi warned. "We're having a lot of conversations with clients about that," she said.
But it is not only coal, gas and oil companies that are affected by energy subsidies and changes in energy policy, she stressed.
"Energy is embedded in all our investments ... so we are having different conversations with different industries," she said. These involve asking about companies' long-term strategy for adapting to the energy transition and questioning whether they have the right people on their board to deal with this issue.
In addition, Omi said, LGIM is pressing for more and better disclosure of carbon risks. "We need to go beyond asking 'how much emissions do you produce?' to 'how is the energy transition affecting the products and services you provide?' " she told Environmental Finance, part of the same media group as Insurance Asset Risk.