Focus falls on asset owners’ climate risks

For the past decade, investors have asked the companies they invest in to disclose their carbon emissions through the Carbon Disclosure Project. Now moves are afoot to get those investors to do some disclosure of their own.

An initiative called the Asset Owners’ Disclosure Project (which is inspired by but no relation to the CDP) plans to ask the world’s 1,000 largest  institutional investors to report on how they manage the climate risks in their  portfolios.

Julian Poulter, executive director of the AODP, says these investors manage  more than $52tn, “and of this less than 2 per cent is invested in low carbon  assets, while 50-60 per cent is invested in high carbon assets, whether that’s  in energy, transport, agriculture, mining or property”.

Climate  change and regulations to deal with it create the risk that many large,  long-term investments could become stranded assets.

The AODP aims to measure investors based on their information disclosure,  investment in low carbon companies, and engagement activities – both with the  companies they invest in and their asset managers and advisers. It will create a  disclosure database and an index rating to allow comparison of funds’ carbon  exposure, as well as a social media platform that it hopes pensioners will use  to engage with trustees and pressure them to focus on climate risk.

“The AODP is the last piece in the puzzle. The CDP has done a lot to generate  a database of emissions and investors signed up to the [UN] Principles for  Responsible Investment are demonstrating their intent to invest sustainably,” Mr  Poulter says. “What is missing is the driver that will make asset owners  implement better investment practices. It is really important that we have some  measurement of what the owners are doing.”

Ben Caldecott, head of policy at Climate Change Capital, agrees. “Greater  visibility on high-carbon assets is crucial for investors so they can manage  their risks and maximise their opportunities. At the moment, there is a profound  lack of data.”

The asset manager was among several organisations that earlier this year  wrote to the Bank of England and the European Systemic Risk Board, urging them “to investigate how the European Union’s exposure to polluting and  environmentally damaging investments might pose a systemic risk to the financial  system and prospects for long-term economic growth”.

“As technology developments and policy rightly reduce returns in coal, oil,  gas, mining and other high carbon assets, while supporting low carbon ones,  long-term institutional investors – such as pension funds with 20 to 30-year  investment horizons – may find that if they continue to invest in unsustainable  areas they are left holding stranded assets with poor returns,” the letters  said.

While some institutional investors – such as the UK’s Environment Agency  pension fund, PGGM and APG of the Netherlands and US investors Calstrs and  Calpers – are well aware of the issues around climate change and the threat it  poses to their investments, “there is still some way to go when it comes to  integrating consideration of climate change into investment decisions”, says  Paul Simpson, CDP chief executive.

Howard Pearce, head of environmental finance and pension fund management at  the Environment Agency, agrees with this assessment. “We have not gone very far  down the road yet. We will probably invest in some infrastructure and forestry  assets next year but asset allocation decisions are long term and strategic, so  we have to take care and make sure the trustees are on board.

“We are not meeting resistance but they want to know this makes sense and  does not create unintended consequences.”

This chimes with the experience of investors in the insurance industry,  according to Andrew Voysey, head of the secretariat for ClimateWise, an industry  initiative on climate risk. Even though the sector is more aware than most  investors of the risks of climate change and one of ClimateWise’s founding  principles is to incorporate climate change into investment strategies, doing so  is not easy.

The group has had independent reviews of members’ performance against the  principles and “consistently, every year, the principle on investment strategy  has proven to be the most challenging for signatories”, Mr Voysey says. The  reasons for this include a lack of suitable low-carbon debt products, partly  because the industry has not been vocal enough in demanding them. “We need to  highlight the appetite for low-carbon infrastructure investment and take that  message to debt issuers.”

Trustees of the Environment Agency fund and insurers can be assumed to be  reasonably aware of climate risks, but in many pension funds, there is a gap  between managers and trustees – and not just because the latter are innately  risk-averse, says Paul Clements-Hunt, former head of the UN Environment  Programme’s Finance Initiative.

“From my involvement in the PRI, I know just how little knowledge trustees  have on climate change,” he says.

Because pension funds are run separately from the businesses they are  connected to, companies are often far ahead of the pension funds when it comes  to integrating these issues into their operations, says Mr Simpson.

The AODP has been testing its concept over the past three years in Australia  and Mr Poulter reports a certain amount of resistance to the scheme. “There is a  data challenge and it is human nature that if you ask someone to be more  transparent about their business activities they will resist. But I think it is  in funds’ interests to have this data and understand it.”

Bob Welsh, former chief executive of Australian pension fund Victoria Super,  says the group was one of a number that initially declined to participate  because the AODP was “a bit rough round the edges”. He also did not like the  rating aspect, as he thought participants would use it as a marketing exercise.

But greater disclosure is needed from asset owners, he says. Vic Super made  sustainability its core operating principle under Mr Welsh and is an example of  how funds could reduce their climate risks.

“We looked at where we were dependent on carbon for returns and tried to move  towards investing in climate solutions.”

Many in the market agree asset owners would benefit from increased disclosure  but Ms Bakshi offers a common view when she says: “These surveys are a process  of education.

“They should be about sharing experience and helping each other improve  rather than making comparisons and ranking them.”

The results of the AODP’s first survey should be available towards the  end of the year.