A growing number of asset owners want to know how their assets are exposed to climate change related risks, and the role that they can play in an orderly transition to a lower carbon economy.

A strong case for asset owner action on climate change

Drivers for action range from protecting financial value and managing risk to social values. There is growing consensus that considering environmental, social and governance (ESG) topics, including climate change, is supportive of fiduciary duty.

Asset owners with diversified, long-term portfolios will be exposed to costs associated with climate change risks. With governments and companies increasingly taking action, asset owners have a positive and unique role to play in tackling climate change.

The key factors to consider when setting an emissions reduction goal

Response to climate change must be tailored to an asset owner’s investment approach and asset class mix. This could involve: measuring a portfolio carbon footprint; engaging with policy makers and companies on transitioning to a low-carbon economy; and accelerating newer forms of investment.

For some asset owners, divestment will be part of a risk management strategy or a way to align investment beliefs and values, while many organisations are finding that alternatives to divestment, such as engagement and reinvestment into low-carbon initiatives are effective.

How measuring a carbon footprint can assist in reducing emissions

Measuring a portfolio’s carbon footprint can help asset owners build an understanding of the emissions of companies owned in the portfolio. It is also a useful tool for engaging with portfolio managers and companies, and can help set priorities for addressing emissions.

Asset owners including Local Government Super, the Environment Agency Pension Fund, AP7 and PFZW, already measure portfolio carbon footprints to highlight focus areas for reducing emissions.

The PRI encourages asset owners to:

Understand their carbon risk exposure

  • by measuring their portfolio’s carbon footprint, analysing it and reviewing it with portfolio managers.

Mitigate their carbon risk exposure

  • by setting a goal to reduce emissions, as appropriate for their individual organisations. This may include considering joining the Portfolio Decarbonization Coalition.