Canny investors recognise the need to understand climate risk and protect investments.
Planning application ref. 16371 with Clare County Council, Ireland, makes for intriguing reading. Put forward by TIGL Ireland Enterprises Ltd, the application proposes a new wall as “coastal erosion management” to protect Trump International Golf Links and Hotel. For commercial reasons, the president-elect is developing long-term plans to adapt his investments to a changing climate. And just like him, canny institutional investors operate in the real world. A world driven by clients, the need to seek new opportunities, understand climate risk and protect investments.
Against this backdrop, COP22 was held in Marrakech in November 2016. The event was intended to build the foundations that would allow the pledges of the Paris Agreement to be put into action. Namely, the commitment to keep global warming well below 2 degrees Celsius above pre-industrial temperatures, as well as strengthening the ability of countries to better address the impacts of climate change. It was the first international meeting where participants could begin work on the policies that will put this into practice.
The PRI co-organised an investor side event during the conference in collaboration with IIGCC, Ceres, UNEP FI, Carbon Tracker Initiative, IGCC and AIGCC to manage climate risk and seize low-carbon opportunities. The PRI’s key takeaways of ‘Beyond Paris – investor actions to manage climate risk and seize low-carbon opportunities’ were:
- China publicly reaffirmed its commitment to both the 2015 US-China Agreement and to have its emissions peak by 2030. Its representatives urged the US to uphold its part of the agreement. The Chinese delegation hosted several high-profile events, one of which the PRI spoke at to launch the new publication, Green Equity Investing. China is racing to be a global clean energy superpower: 38% of issuance of green bonds in the first three quarters of 2016 were Chinese and 330,000 new energy vehicles were sold in China last year.
- Canada, Germany and Mexico announced climate change strategies up to 2050, while Australia and the UK ratified the Paris Agreement.
A rulebook for the Paris Agreement
- Those participating agreed they would write the rules of the Paris Agreement by 2018 to ensure that it can be put into action. These rules will cover finance, technology and capacity building to support the developing world, and transparency on emissions reduction. Added to that, progress was made on finance: countries pledged more than $81 million to the Adaptation Fund, $23million to a Climate Technology Centre and Network, and the Green Climate Fund approved $2.5 billion worth of projects.
Governments unlock green capital flows
- Currently, investors report to the PRI that many existing green investments are unsuitable. In 2016, the G20 Green Finance Study Group provided a good forum for the PRI to collaborate with finance ministry representatives on policy options to overcome this. In 2017, the PRI will support a new practical UN Global Compact initiative focused on how business and investors can support country climate change plans, with eight pilot countries.
Of note at the meeting, Morocco revealed that it will cover 42% of its electricity needs with renewable energy by 2020. The Morrocan Caisse de Depot e de Gestion Group, the African Caisses des Depots, the Nigerian National Pension Commission and PRI signatory, Caisse des Depots (France) launched a new African Investor Network, which will promote climate finance in Africa. The network will integrate climate change into funding decisions, use carbon footprinting, support African investment programmes and join the PRI.
Savvy investors are shifting capital
PRI signatories at COP22 highlighted actions they’ve taken since the Paris Agreement came into force:
- AXA Group announced a new 15-year research programme with the University of Cape Town on African Climate Risk, as well as progressing in tripling green investments and joining the Carbon Pricing Leadership Coalition.
- Allianz SE has increased direct and frontier market renewable energy investments, and is in the process of allocating $4 billion to renewable energy, while rolling out ESG scores across all equity and fixed income assets.
- Aviva Investors, following on from its climate change strategy that was announced in 2015 which covered carbon footprinting, engagement and infrastructure investment, published Seeing Beyond the Tragedy of the Horizons. This includes three suggested portfolio actions to manage transition risks relating to climate change, as well as suggested macroeconomic actions for investors and civil society. They include that asset owners should ask for information on how asset managers integrate climate risk into their investment process and ensure engagement with companies is forceful and covers voting. The macroeconomic suggestions include public league tables of corporate climate risk disclosure.
- Deutsche Asset Management announced they had become the first commercial bank accredited by the Green Climate Fund, an anchor investor with US$78.4 million in the bank fs new Universal Green Energy Access Program fund for Africa. Through this fund, Deutsche Asset Management will ultimately support up to US$3.5 billion of investment in Benin, Kenya, Namibia, Nigeria and Tanzania.
- LGIM launched a new Future World Fund incorporating carbon efficiency, fossil fuel reserves and green revenues. It has been selected as the equity default option worth US$2.3 billion for the HSBC Bank UK Pension Scheme.
- The New York State Comptroller’s Office has allocated US$5 billion to sustainable investing strategies, including a new lowcarbon index, which reduces the fund fs carbon footprint.
- Montreal Carbon Pledge: Investors with funds of US$10 trillion AUM are participating, with an independent review by Novethic finding the initiative had accelerated investor climate disclosure. Good practice includes CalPERS using footprinting to identify 100 companies it will prioritise for investor engagement on climate change.
- Portfolio Decarbonization Coalition: A total of $600 billion has been committed to decarbonisation. Examples include: ERAFP’s portfolio carbon intensity, which is 12% lower than the benchmark, and AP4’s global equity portfolio emissions, which is 12.7% lower than the reference global index.
What can we expect from investors in 2017?
Investor interest in understanding climate risk and opportunity is growing at a country, industry, company, issuer and project level.
- In the US, there could be significant green investment opportunities, particularly in infrastructure and property, offering real jobs, climate mitigation and resilience in the face of the physical impacts of climate change, such as hurricanes.
- China will continue building local green industries and attracting institutional investors to green bonds and equities, as well as implementing further new green policies.
- Company-investor dialogue will increase, including over the 2017 proxy-voting season, which will feature climate change resolutions at energy companies.
- Improvements will be made in the assessment of how wellpositioned companies are in terms of climate risk and opportunity. The FSB Task Force on Climaterelated Financial Disclosure’s final report is due at the G20 in Germany in July.
- Social issues such as inequality, employment, pollution and health will overlap with climate risks and opportunities, meaning that companies and investors will increasingly need to assess these together.
At PRI in Person in Berlin there will be a focus on supporting signatory action on climate risk and opportunity, following soon after the G20 in July and before November’s COP23 in Bonn.
It’s a long walk to below two degrees, but investors have set off. They may pause to assess country policy signals, but indications suggest they will ultimately put green money where governments and companies seek to attract capital flows.
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RI Quarterly vol. 10: The next frontier for responsible investment