Impact investment has an incentive problem

Good morning.

In the final issue of The Loop 2019, Katherine Dunn wrote about “climate gaps”—the gap between what scientists say needs to be done to tackle climate change and what is being done; between what policy makers decree and what business leaders actually implement.

Earlier this week, I spoke to Clean Energy Ventures founder and managing director Temple Fennell on another climate gap: the disconnect between what nouveau-green fund managers say they’re going to invest in and the stocks that they actually keep in their portfolio.

“The reality is if you look at the portfolios of certain members of the Ceres Investor Network, they describe themselves as interested in clean energy, for example, but there are very few that have made a single dollar commitment during the time they’ve been a member of the network,” Fennell says.

Fennell suggests a large part of the problem comes down to timelines, that members of Ceres—a U.S. Nonprofit that advocates sustainable investment practices—and other impact investors are still driven by profit and the need for quick returns on investment.

Short term investment strategies emerged as the dominant discourse in the 1980s, when Wall Street became more active in pursuing clients and investment switched from being driven by the buyers to being fueled by the sellers, who craved instant gains.

But it’s not just stock brokers. Managers, executives and the entire business community is built around year-long strategies that pay bonuses for good performance at the end of twelve months.

The problem with impact investing is that it doesn’t fit in with that 52-week cycle. Returns on climate investment are realized years in the future, if at all, and risk is harder to measure over that time.

“What we need is to figure out a compensation system where you’re not just compensating managers for generating short term alpha but rewarding them on a rolling basis,” where a bonus is paid out in installments so that even once a manger leaves a fund, they can still collect or lose part of that compensation depending on the impact of their decisions, Fennell says.

It’s hard to imagine that being a popular model for people in the business, but if you know any impact funds operating that way—let me know.

Eamon Barrett

[email protected]

CARBON COPY

Good luck

Oil and gas giant BP has announced a net-zero carbon emissions plan, pledging to offset the emissions of its business by 2050, including the “majority” of future emissions from the oil and gas it sells to customers (who later burn it.) The pledge doesn’t appear to include future emissions from crude oil sales. BP says it will invest more in oil alternatives and less in oil and gas, but will likely still be in the industry by 2050. Financial Times

Official offsets

A group of U.S. Senators also introduced a bill that would require the U.S. To achieve net-zero greenhouse gas emissions by 2050. If the bill passes it would be left to the Environmental Protection Agency (EPA), currently headed by a former coal lobbyist, to carry out its edicts. While some environmental groups back the bill others say it isn’t tough enough and won’t establish the proper legal framework to ensure the goal is carried out. The Hill

Peddling pangolins

It’s been suggested that pangolins are the intermediate carriers of the novel coronavirus that began in Wuhan and is henceforth to be called Covid-19. Different theories have named different animals as the spreaders, but if it is pangolins that could prove a victory for the scaly anteaters, which are trafficked into China for their use in traditional medicine. Animal rights groups have pressured China to do more to enforce its ban on pangolin sales. A health epidemic might do the trick. National Geographic

Looking ahead

The U.K. Government’s Department for Work and Pensions has proposed an amendment to the Pension Schemes Bill that would require pension funds to disclose how they are investing to combat climate change. The bill, if it becomes law, would enforce the currently voluntary Taskforce on Climate-Related Financial Disclosures framework, which is chaired by Michael Bloomberg. U.K. Pension funds managed some $2.8 trillion in assets as of 2018. Wall Street Journal

IN CASE YOU MISSED IT

Energy emissions plateaued in 2019, as advanced economies gave up coalby Katherine Dunn

Looking to cut emissions, Europe eyes a ‘sustainability’ tax on meatby Adrian Croft

Why investors are cooling on Casper and other ‘direct-to-consumer’ brandsby Lucinda Shen

Click here to oust the board— Inside the A.I. Startup that’s transforming activist investing by Adrian Croft

CLOSING NUMBER

5.5 times

Roses make up 30-50% of the 20-25 billion retail value of cut flower sales in Europe and roughly half of those roses are flown in from Kenya. Kenya actually dominated 38% of the EU’s entire flower market, shipping over 150,000 tonnes per year. Air freighting that many flowers doesn’t sound environmentally friendly but, surprisingly, importing roses from Kenya creates a carbon footprint 5.5 times smaller than ordering the same flowers from the Netherlands. That’s because Dutch greenhouses are heated with gas, while Kenya tends to be naturally warm. Dutch growers are, however, 50% more water efficient.

You can thank me for those fascinating flower facts when you're stuck for conversation on a Valentine's date tomorrow.