In conversation with LGIM’s head of climate solutions

In 2020, Nick Stansbury – then head of commodity research at Legal & General Investment Management (LGIM), the UK’s largest asset manager – realised the way climate change was being faced by his team needed to be radically redrawn.

Stansbury, who had held the role since 2018 (and had initially joined the firm in 2013 as a fund manager in its global equities team), understood the scale of the challenge was too great to view through a singular lens.

“It became clear as a company we needed to analyse these issues across all asset classes – you could not just explore it in your corner of the business,” says Stansbury. “It was something that needed to be explored across the business and bring together expertise across geographies and asset classes.”

Stansbury joined LGIM in 2013 from Revelation Capital Management where he worked in investment research. Prior to this, he was an investment director (working in global emerging markets) for abrdn and an assistant fund manager at Griffin Capital Management.

At the end of 2020 at LGIM, Stansbury’s climate solutions responsibilities grew from a few days a week to a full-time role. As the firm’s first head of climate solutions, Stansbury adopts an overall view across all asset classes and assesses where the opportunities – and risks – of net-zero investment lie.

“Our view is the climate crisis is not just fundamentally an issue of ethics or responsibility, it is at its heart first and foremost an issue of risk and reward,” he explains. “We believe the energy transition is highly likely to have severely dramatic significant consequences for investors, both positive and negative, that requires a shift in research and modelling paradigms.”

Dramatic underinvestment

While many people point to geopolitical tensions as the root cause of the current energy crisis sweeping Europe, Stansbury indicates this is symptomatic of a lag in the capital reallocation being required to make the energy transition successful.

“Today that capital allocation process is clearly not working effectively and everywhere we look we see dramatic underinvestment,” he says. “The energy crisis is caused by underinvestment. The world is not deploying enough capital into the energy system, and especially into transition fuels and low-carbon energy.”

However, this is not as simple as pulling money out of high-carbon sectors and reallocating it elsewhere, according to the head of climate solutions.

As the UK’s largest asset manager, with £1.4trn in AUM, LGIM holds significant stakes in many of the largest corporates in the world. With such influence at its disposal, it’s hardly surprising Stansbury is wary of divestment. According to him, the trade-off between stewardship and divestment is “a more nuanced discussion than people want it to be”.

“We don’t think if we were to divest from every oil and gas company in the world that this is likely to have any statistically significant impact on the climate outcome,” adds Stansbury, explaining these shares would simply be purchased by other investors.

Instead of it being a binary problem, Stansbury and his team are aiming to be as holistic as possible. This can often mean considering the worth of investing in unpopular areas in the near term for the benefit of the long term.

He cites mining as an example. Though a hugely energy- and carbon-intensive industry, it is vital more copper is mined to help electrify the world’s power networks. With the price of copper set “to explode” this poses opportunities as well as risks for investors.

Nuclear energy is another area he points to in the same vein: “Nuclear is unpopular but very important.

“It’s very difficult to model out solutions for a decarbonising world without the world significantly increasing the quantity of nuclear power and generation capacity – it’s not nuclear or renewables, it’s both.”

Moving in the right direction

Stansbury is not blind to the consensus from the scientific community – net-zero targets will be missed if current behaviours are maintained. What happens in the next few years (and, crucially, months) will dictate if targets are met or not.

A working carbon market could make a big difference to this, argues Stansbury.

“Pricing carbon stands several orders of magnitude above virtually every other policy lever and action to drive and fix capital allocations,” he says. “If the world were to start pricing carbon effectively, we think this would lead to very rapid changes in capital allocations and drive real-world change.

“We would also like to see markets putting a price on the risks and opportunities. It’s difficult to see climate risk fully priced into markets and it would need to be, so we see real changes in corporate behaviour.”

In absence of this, and the wholesale reallocation of capital it could command, Stansbury admits he and his team are “cautiously realistic” about society hitting net zero. The challenge is extreme but, he points out, not impossible.

Rather, he is encouraged by the “huge progress” being seen in the current decarbonisation push.

“[Net zero] is achievable if the world was to significantly step up the level of capital allocation needed and policymakers were to really pull their finger out in terms of pricing carbon effectively,” he says. “There are huge amounts of evidence of movement in the right direction. You look at the companies setting net-zero targets, and the number of companies putting those targets into action – what corporates do is very important. We see huge progress.”