The success of ‘green’ political parties at the recent European Parliament elections was another sign of the growing importance of environmental issues for electorates in the West. We can attribute this increased engagement, in part, to growing concerns about climate change. In particular, a perceived lack of commitment among governments to take the necessary steps to transition to a low-carbon economy. The 2015 Paris Agreement on climate change stated that nations should limit warming to well below 2°C. However, commentators expect current policies to take us to over 3°C. This dire outlook has led to calls for radical policy action, such as the proposed Green New Deal touted by politicians in the US.
Climate change also has ramifications for asset managers. They are seeing a warming planet and the transition to a low-carbon economy change the risk profile of many of the companies and economies in which they invest. This could have consequences for clients’ investments. As asset managers, it is our responsibility to understand every aspect of these consequences.
What is our approach to climate change?
Our goal is to help deliver positive outcomes for our clients and support the transition to a low-carbon economy. To achieve this, we have developed our Climate Change Approach for Investments. This provides us with high-quality data and insights on climate change trends, risks and opportunities. We then integrate these into our investment decision-making process. We have aligned our approach with the Principles for Responsible Investment Investor Agenda. This is an initiative for investors to demonstrate their contribution to transitioning the world’s financial capital to low-carbon opportunities. It encourages investors to demonstrate action across four areas:
- corporate engagement
- investor disclosure
- policy advocacy.
An important part of this will be the ability to demonstrate the climate impact of an investment portfolio. We currently provide a carbon footprint for a number of our funds. While this has its shortcomings, carbon footprinting is a good starting point for understanding our exposure to climate risks. It also demonstrates a company’s or a portfolio’s impact on the energy transition. Through this, for example, we can identify relatively carbon-intensive companies. Thereafter, we can engage with them on their approach to climate-risk management.
A world of opportunities
The energy transition also presents investors with considerable opportunities. Achieving the 2°C Paris target depends on whether the world is able to quickly deploy large amounts of private capital to construct renewable energy infrastructure, low-carbon transport and improve energy efficiency. A move away from coal, as well as rapid deployment and falling costs of clean energy technologies, are notable trends. According to the International Energy Agency, the cost of the transition will be around $3 trillion per year. The private sector is expected to finance the majority of this. The long-term opportunity will involve channelling capital flows from clients to projects and businesses that will drive the development of a low-carbon economy.
We currently provide capital to support the transition directly through our private infrastructure investments. We also do this indirectly, by investing in infrastructure funds and supplying equity and debt capital to companies that offer solutions such as renewable energy and energy efficient technology.
In 2018, greenhouse gas emissions hit a record high. With emissions continuing to increase in many regions, the scale of the climate-change challenge is immense.
In 2018, greenhouse gas emissions hit a record high. With emissions continuing to increase in many regions, the scale of the climate change challenge is immense. Unsurprisingly, more and more people are putting this challenge high on their list of priorities. The range of products available to clients who wish to see their concerns reflected in their investments is growing. Already, a number of products enable clients to transition away from carbon-intensive industries. This includes impact investing, which can focus on companies that provide clean energy and energy-efficient products and services. Other products screen companies based on climate-related criteria, such as power generation and revenue from fossil fuels.
As major investors and stewards of capital, we recognise the important role asset managers can play. We need to support the energy transition through our capital-allocation decisions and develop solutions that meet the demands of our clients. We are already making great strides in this area. We will continue to do so in order to help address this vital issue.