The global transition to a low carbon economy is changing the investment scene. Responsible investors recognise climate change as a key risk.
Investors are accustomed to considering various environmental, social and governance (ESG) factors when building their portfolios. Trailblazer responsible investors also screen the climate change strategies and climate risks of their investments.
This behaviour is driven by a need to manage the risks of direct investments in fossil fuels during the global transition to a low carbon economy. The climate negotiations in Paris have also triggered investment restraint and divestment from fossil fuels.
Systemic climate risks are more concerning. With indirect investments, underlying climate risks of individual organisations are bundled together and these assets are sold to multiple investors as complex financial instruments. It is no wonder that responsible investors are worried, as it is not easy to understand these risks and react to them.
In a recent benchmarking study, Gaia examined 29 organisations representing combined assets under management (AUM) of close to 4 000 billion euros. The selection of organisations was partly based on the rankings of the Asset Owners Disclosure Project. The objective of Gaia’s study was to identify best practices in low carbon investing. The findings are based on public disclosure by investors.
- 55 % of the organisations had articulated a specific approach to climate change (e.g. raised it as a focus area) and 17 % had a dedicated climate policy.
- A third of the benchmarked organisations listed carbon risks in their exclusion criteria.
- 14 % provided guidance on how climate change issues should be considered in shareholder voting.
- A promising signal is that 41 % claimed to engage in climate dialogue with the companies they had invested in.
Recognising climate change as a relevant issue and providing guidance on how it should be considered is a necessary first step. However, risks and opportunities cannot be fully understood and managed without analysing climate scenarios and their impacts on asset performance and allocation. Research is now available on asset sensitivity to climate risk factors as well as on trends and drivers influencing shareholder value-at-risk.
This is of course great news for responsible investors, yet there is still work to be done in implementing these findings in practice. A solid process for integrating climate aspects into responsible investment actions is needed. Climate change is only one part of the “E” in ESG, and everything from investment strategies and ESG screening to active ownership and engagement needs to be in order.
Responsible organisations need to address ESG issues at a strategic level making sure that the E’s, S’s and G’s do not fly in and out with the season. More importantly, these strategic decisions need to drive concrete actions to result in real improvement.