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.