INTERVIEW with Charlie Donovan, Executive Director of the Centre for Climate Finance and Investment at Imperial College Business School and Academic Director of the MSc Climate Change, Management and Finance.

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| Do you expect the pandemic to have a tailwind or rather a headwind effect on the low-carbon transition pace, taking into account the concerns expressed by some market participants in regard to possible funding cuts and the risk of unsustainable recovery measures?

The global economic downturn is making the low-carbon energy transition look like a one-way bet.  That can be seen most clearly in the way that markets are valuing renewable power companies over traditional energy players. But progress is moving at two-speeds: for commercial technologies like wind, solar and Lithium Ion batteries, there is a wall of money there to be tapped – it’s all tailwind.  Renewable power is outcompeting fossil fuels on price and that cost advantage will only become greater as governments move to tax carbon to shore up their balance sheets. On the other hand, the next set of innovations needed to complete the puzzle for a low-carbon energy system (for example industrial-scale hydrogen) are suffering from too much talk and not enough action.  The “green premium” is simply too big for most investors. That’s where we could see headwinds from the next phase of this economic downturn.   


| Many jurisdictions and organisations currently work on ESG-related standards aiming at leadership in the field. What impact do you expect from the competing standards, and what will it mean for asset owners in terms of ESG investing efficiency?

Investors are showing an increased interest in ESG – and that’s a good thing. But anybody who’s taken a serious look at ratings and standards in this space will tell you it’s a complete mess. Harmonization is desperately needed as competing standards make benchmarking difficult. The lack of standardized ESG metrics makes it very challenging for asset owners to manage ESG risks within their objectives and constraints.


ESG has been useful in drawing attention to the issues. However, ESG is not in of itself a coherent factor, nor does it consistently represent a well-defined investment characteristic.


Investing efficiency will come to players who make well informed bets on secular trends like climate change and natural capital depletion. Ultimately, the next generation of ESG must be about locating financial risk factors and building intelligent investment hypotheses. In the short-term, that means identifying which ESG-related issues present real financial risks and learning how to position a portfolio relative to them.


| How would you assess the current state of awareness about stranded asset risk amongst European asset owners and managers?

We’re fortunate in Europe to have a range of universities, think tanks, and securities analysts who have put this issue on the map. But the idea of stranded assets is not new. All industries go through intense periods of technological and regulatory change and it’s an inherent risk in business that one kind of widget might become obsolete before you were expecting.


We’ve known for decades about stranded asset risks related to climate change. Investors didn’t care because they assumed that governments wouldn’t take bold action. For many years, they were right. Yet since the Great Financial Crisis, conventional wisdom has been turned on its head. 


As we showed in our recent report with the International Energy Agency, renewable power has outperformed fossil fuels in listed equity markets over the past 10 years. In 2020, there’s no contest: renewables have trounced fossil fuels. So now people are seriously asking about how quickly repricing could occur in other sectors and in markets like the US.   


| The study Estimating Financial Risks from the Energy Transition, co-authored by you, highlights that ‘most models used to assess the impacts of a low-carbon transition lack financial sophistication’. Could you please comment on its key findings? 

How will a broad shift towards low-carbon energy sources affect big players in the energy sector? That’s a question many investors are asking these days, not least because of the historically high dividends paid by these companies. Carbon-intensive energy companies are perceived to be obvious losers from a transition, but too often investors ignore the potential for companies to change and adapt. As just one example, a current stock market darling, Orsted, was not so many years ago Danish Oil and Natural Gas (DONG). 

Using Imperial’s experience in developing and running large integrated assessment models – the kind that produce global scenarios about energy and emissions trends – we set out to simulate the capital expenditures need to transition in line with the Paris Agreement. The paper you mention uses a structural economic model to represent constraints on their adaptive capacity, like maintaining a minimum credit rating. Overall, we found that for a sample of 29 firms in the European electric sector, around 50% of the companies with a current high fossil fuel mix could default within 10–20 years if they fail to invest sufficiently in renewable power. But our goal was not to pick winners and losers. That’s the job of  equity analysts. Our goal was to demonstrate that this kind of granular analysis is possible.  It’s also absolutely necessary for anticipating the value at risk in key economic sectors. 


| brief bio

Charlie Donovan is Executive Director of the Centre for Climate Finance and Investment at Imperial College Business School and Academic Director of the MSc Climate Change, Management and Finance. He is a Professor of Practice in the Department of Finance.  In his corporate career, Charlie was most recently Head of Structuring and Valuation for Global Power at BP plc.  He was part of the strategy team that launched BP Alternative Energy with an $8 billion funding commitment.  Charlie began his career as an Energy Policy Analyst with the US Environmental Protection Agency during the Clinton Administration.    

Professor Donovan holds a bachelor degree in Psychology from the University of Washington, graduated from the MBA program at Vanderbilt University, and completed a Doctorate in Management at IE Business School. He is the editor and co-author of Renewable Energy Finance: Powering the Future, now in its 2nd edition.