We spoke with Lily Tomson, Senior Research Associate, Jesus College, University of Cambridge.
What’s the work that P4NE is funding at Jesus College, University of Cambridge?
Experts say that if we want to have more than half a chance of tackling the climate crisis and building a safe and just planet, no new fossil fuel infrastructure – for example coal plants and pipelines – can be built going forward. We are a team of researchers and practitioners based at the University of Cambridge, testing whether it is possible to build a tool to direct money away from the expansion of fossil fuels. We are focused on changing the way people see the fossil fuel industry, and making it harder for them to gain access to money for expansion. The tool will also direct money away from companies in the power, banking, and insurance sectors as the main buyers and funders of new coal, oil, and gas.
For those with a more technical interest, the tool is a bond index. Approximately 90% of new financing for fossil fuel expansion comes from loans and bonds. Bond indices, therefore, play a critical role in assigning new capital to expansion, which is out of line with the scientific and policy consensus. It would be the first corporate bond index to exclude fossil fuels, power utilities, and financial sector issuers whose actions would result in a world of dangerous heating above 1.5°C (currently most if not all of them). The index will be overseen by a group of leading academics from across the world, presenting a unique opportunity for engagement with companies liable to be admitted or removed due to alignment or loss of alignment with our framework.
How are you making progress on it?
We are in an exciting phase right now, moving from viability to implementation. What that means is that we’ve got a feasibility study ready to try, and earlier than expected. It’s been an interesting cultural process for me and the team in working out what level of uncertainty we are comfortable with to move forward on this. Nothing is ever going to be watertight, especially as we’re building something entirely new and working with new constellations of data and incumbent index providers. We are trying to balance the academic mindset which is very evidence-based, alongside what feels much more like a social entrepreneur or intrapreneur mindset, building evidence up through testing it out in the world.
We’re building something entirely new and working with new constellations of data and incumbent index providers.
So we are currently practically getting in prototypes from index providers and iterating them. We’re also working out how this product will sit within the university and its 800 year old governance models, within which we want to build a not-for-profit financial product. So again, really interesting cultural tensions that we are trying to navigate. The hope is that through these dialogues we can build a ‘systems demonstrator’ which shapes thinking and capital flows within the investment system and ultimately the real economy, but which is also brave and creative about the governance and ownership of the product that results.
What demand is there for the product?
There are three aspects to the work:
- The first is the corporate alignment framework – which is saying which companies that issue bonds should be eligible for the index. We’ve completed the intellectual basis of this and much of the ultimate ‘recipe’ that will be used, and are working with partners to build the rest.
- The second aspect is the ‘build’ work with the index providers and particularly seeing what is possible in terms of things like data provision for the framework that we have.
- The third piece is related to your question, where our focus is on the institutional investor community: both asset owners and asset managers.
Here we are really lucky to be able to draw on the communities we have built as a team; with major global pension funds, with sovereign wealth funds, and with asset managers. Our focus is on the parts of the asset owner world that are holding everyday people’s retirement savings – and ultimately, building the world around them. They are what we call ‘universal owners’ – investors who own a tiny piece of the whole economy and who therefore don’t see the point in stealing from one pocket to put it in the other: they have to manage systemic crises, long term, or their retirees or citizens will lose out.
It’s early days, but I’ve not had a single negative conversation and it’s been really striking how much interest there is from big asset owners internationally. They can see the need for an index aligned with the goals of the Paris Agreement, and with an independent, evidence-based approach which can tackle a lot of the industry’s ‘greenwash’.
It’s early days, but I’ve not had a single negative conversation and it’s been really striking how much interest there is from big asset owners internationally.
We’re focused on working with asset owners who take climate change seriously and are keen to develop better architecture for the investment system to grapple with: not just in terms of the risk to their investments (what we call ‘single materiality), but the way their investments shape the world (double materiality). What we’re doing with most other asset owners is essentially growing the Overton Window. We’re saying ‘look, here are a whole range of themes that you have never thought about that you really have to be thinking about for 1.5°C-aligned investment. So it’s the social discourse shift. I’m also talking with those investors that say: “wow, yes, we get this, we can see the bits that in investment terms you are going to find difficult, and we want to work with you on those and build this together.
What we’re doing with most other asset owners is essentially growing the Overton Window. We’re saying ‘look, here are a whole range of themes that you have never thought about that you really have to be thinking about for 1.5°C-aligned investment. So it’s the social discourse shift.
We very deliberately built enough of the project that the intellectual direction and impact is clear; people can get a grip on it and really play around with it in their heads and with their teams. But we have also left enough of it open so that it can be owned by the asset owners we are collaborating with as it is developed. We have a small number of major global asset owners who are our working group for the project. They have a really tactile sense of the shape of the project, which in the weird and wonderful world of developing systemic financial products is a nice surprise!
What happens next?
We deliberately don’t have a public presence as yet because we’re still auditioning index providers. Should we be able to launch this intervention, the index provider and asset manager that works on the accompanying index-linked fund will want to do a lot of outreach and engagement work. In the meantime, we are doing as many meetings with asset owners and fund managers as possible, and going through multiple networks to have as many of these conversations as we can. We’re also exploring doing a global survey of asset owners, to get more information.
We’ve structured the project such that it is at the edge of what’s possible. It certainly is not something that anybody else is anywhere near doing, we can only really do it because of our positioning at the University, and because we’re not a corporate actor.
We’re not looking to build a for-profit venture, so that means we can say and do a lot of things that wouldn’t be possible within the mainstream product development world. And hopefully that means that no matter how big the actual index fund becomes, it shifts a lot of perceptions around our key themes. We hope it gets fixed income teams thinking much more drastically about climate change and other systemic risk.
We have to start building these themes into financial products and therefore into the flows of capital right through the investment system and muscular ways of engaging in corporate practice, instead of ‘tea and biscuits’ chats once the money has already been allocated to companies.
Debt markets haven’t cottoned on to climate change anywhere near fast enough, given that they’re both huge and play a big role. We’re driving a focus on company actions and outcomes, instead of just their disclosure (which might not even be linked to changing what they do). Within that, the really big intellectual contribution of the project is to say, “look, if you care about 1.5°C, you have to care about fossil fuel expansion because very explicitly in the IEA’s 2050 Net Zero scenario, it says we can’t build new fossil fuel infrastructure.” We hope to then get investment teams looking at the impact of banks and insurance in facilitating and financing fossil fuel expansion.
We have to start building these themes into financial products and therefore into the flows of capital right through the investment system and muscular ways of engaging in corporate practice, instead of ‘tea and biscuits’ chats once the money has already been allocated to companies. We can’t do that by just focusing on fossil fuel expansion and demand: we also have to look at the wider carbon budget, and also specifically at the banks and the insurers that are financing, underwriting, syndicating, and essentially facilitating fossil fuel expansion. We have to cut in at that point too – and that’s very new for investors.
So, the hope is that regardless of how many investors pick up the actual index and accompanying fund, enough early adopters engage that discourse shifts are channeled through the industry because they’ll be championed by universal owners that do have clout.
How could our P4NE community support you or get involved?
Because we’re such a tiny project, we have no broader engagement strategy at this time. If you’re interested, I’m always up for a chat – just reach out.
Three key things that I really encourage people to think about (and weave into their work where it’s related) are the importance of having a focus on primary markets (new flows of capital, as opposed to peer-to-peer trades within investment markets), stopping fossil fuel expansion, and zooming in on how the banking and insurance sectors play in facilitating this expansion. These firms are playing an absolutely central role in financing the crisis that we’re in but there’s not yet enough stringent focus on them as actors who could be seeing the world otherwise and could be doing something differently. And unlike, for example, a fossil fuel firm, facilitating expansion activity isn’t their core business model: it shouldn’t be that difficult for them to change their activities. So, those two elements are things that I’d encourage people to explore, and I love to talk to people about.
These firms are playing an absolutely central role in financing the crisis that we’re in but there’s not yet enough stringent focus on them as actors who could be seeing the world otherwise and could be doing something differently.
Lily Tomson
Senior Research Associate, Jesus College, University of Cambridge.