Prior to joining OppenheimerFunds in December 2017, Shah spent several years advising investors, governments and multinational financial firms on sustainable finance, and on how to integrate environmental, social and governance (ESG) principles into their business practices.
On a recent podcast, Shah joined us to discuss the implications of the United States signaling it will back out of the Paris agreement, the role private industry will play in combatting climate change and why this is an issue that investors can no longer avoid.
Here are some highlights from our conversation.
Brian Levitt, Senior Investment Strategist: How meaningful is it that the United States has started the process of backing out of the Paris Climate Agreement? What are the implications of this over the near- and long-term?
Aniket Shah, Head of Sustainable Investing: There are a few important points here. One is that the U.S. has been decarbonizing for some time now, which is mostly due to two things. The transition from coal to natural gas is one reason. Secondly, there is greater awareness over fuel standards for vehicles, so our emissions have been going down. The problem though is that although emissions have been decreasing, the Paris Climate Agreement is calling for a reduction to zero. And so you can move to a natural gas infrastructure and still have locked-in emissions for the next 30, 40, 50 years whereas what we actually need is to go to zero.
So the first important point is we are already on a process of de-carbonization. The second is yes, the United States has signaled it’s backing out. But there is very positive momentum in cities and states that are doubling down on their commitment to follow the agreement.
Levitt: This brings to mind Michael Bloomberg’s coalition to uphold the Paris Agreement.
Shah: Yes – and indeed a large percentage of carbon emissions both in the U.S. and globally come from cities. The fact that we have a cities alliance in the United States to continue on the path to zero carbon over the next 30 to 40 years is a good thing. That’s what gives me hope.
The sad thing is that the United States could have been – and still could be if it wanted to – the leader in this transformation. And great technologically driven businesses in California and New York want to be operating in this sector. But the reality though is for that to happen, you need to have public policy support in terms of research and development. You also need the right fiscal intervention – and if the United States at a federal level is pulling out, all those other interventions that are needed may not happen.
Brown: From a capital commitment standpoint, where are we in the U.S. with, or without the Paris Accord, and where is the rest of the world right now?
Shah: Total renewable energy spending globally is around $300 billion to $350 billion. China is the largest contributor to global renewable energy. In fact, China invests more in renewable energy than the United States, the UK, and France combined.
Levitt: Is this because of the sheer size of the population, or per capita they’re spending more?
Shah: Per capita, it would be roughly the same as the United States, but the reality is that China sees this as a major business opportunity. They see this as a chance to spread their global influence as they already are through initiatives like One Belt One Road. But also, China is dealing with the impacts of climate change and environmental crises within its borders already. There is an imperative coming from the people who are saying, ‘Look, our water is terrible and I can’t breathe the air.’ So the government is trying to go into this in a big way.
But again, let’s not be naïve about this. Today, China is the world’s largest emitter and still derives a large majority of its energy from coal, and that is a heavy, heavy load to get off your back if you’re an economy growing at 6%-7% a year.
Levitt: How many other countries other than the United States are not part of the Paris Climate Accord?
Shah: All of zero. We are the only country. There are 195 countries in the world.
Levitt: You were there when the agreement was signed. What was it like? What was the vibe in that room?
Shah: It was extraordinary. The vibe in the room was, ”We’re going to go after this as a global community.“ The reason why it worked is because the U.S. and China shook hands a year and a half before Paris and said if the two of us come together and lay out to the world that we’re going to do this seriously and put together a long-term pathway, then that’s a powerful signal to the rest of the world.
Secondly, the business and investor community was there and they weren’t a thorn in anyone’s side. They were there hand in hand with policymakers saying, “‘Okay, we are with you now and we are going to work together to make this happen.”
Levitt: What do investors need to understand about sustainable finance and ESG?
Shah: They need to understand there’s a revolution happening in sustainable finance. It’s not something you would see on the cover of the Financial Times or in The Economist every day. But it’s a quiet revolution. Today there is new data, risk tools, measurements and disclosure policies. It’s happening below the surface and has been for a while – but now it’s taking off.
The second thing investors need to understand are the risks involved. There are risks that are very direct, like stranded assets. Meaning if we take the challenge of not allowing temperatures to rise two degrees Celsius seriously, trillions of dollars of market cap value for large oil and gas companies, for example, actually shouldn’t exist because their assets will have to stay underground. They’re in fact, stranded.
Political upheaval is another risk. If you go to Saudi Arabia or Nigeria, Venezuela, Russia – or the United States – which are all large oil, fossil fuel producers – what does your economy look like in 50 years if you can’t actually go and use carbon assets? So investors need to chart the risks – what it means for their portfolios in their space.
It’s also vital to understand the opportunity this represents. This transition means new businesses and business models. It means old businesses looking at the world a little differently. It is slightly nuanced about how to actually deploy capital for opportunities in this space, but the reality is an investor should be thinking, “This is one of the big, major themes in the world today. How am I going to allocate profitably?”
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.