More big investors are taking action on climate risks
What a difference a year makes.
Just 12 months ago, BusinessGreen reported that more than half of the world's biggest asset owners were completely ignoring the climate risks related to their financial decisions, a figure that was, worryingly, on the rise.
Just shy of a year on, today's latest update of the Global 500 Index reveals a sizeable about-face from the financial industry, with 60 percent of the world's 500 largest asset owners taking steps to recognize the financial risks associated with climate change.
According to the index, compiled annually by the Asset Owners Disclosure Project (AODP), the number of firms ignoring climate risk fell 18 percent last year, resulting for the first time in a significant majority of asset owners scaling up action to protect their funds from climate risk.
"For many years we have been in the business of reporting a pretty sad position when it comes to the investment world and climate change, but certainly there's no doubt something has shifted this year," AODP chief executive Julian Poulter told BusinessGreen. "The numbers speak for themselves."
The report ranks institutions from "AAA" for those firms taking the most action to protect against climate risk and advance the low-carbon economy to X-rated "Laggards," ignoring risks altogether.
A total of 17 out of the 500 asset owners won an AAA rating, up just five from last year, while the number of "Challenger" firms rated B to BBB shot up by 36 percent to 34 percent, as many more asset owners take steps to consider issues such as the carbon footprint, stranded asset risk and climate impact risks associated with their financial decisions.
According to Poulter, the stark change from last year's report is down to the dual impact of the Paris Agreement and the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures, which in December published its recommendations for new voluntary disclosure guidelines for listed firms to report on climate-related risks.
"Paris has clearly got a lot to do with it — the policy signals will inevitably produce a response," Poulter said. "But we should always remember that the Paris Agreement has yet to really produce any sort of detailed policies that are actually going to hurt investors, which proves that the most important salient point is it's the anticipation of policy, and this inevitability towards a low-carbon economy, that investors are looking for."
He added that the FSB had also played a major role "in saying that this [the low carbon transition is] inevitable and this represents a systemic risk to economies and to the financial system."
"When you get such well-known lefties such as [former U.S. Treasury Secretary] Hank Paulson and [FSB chair] Mark Carney frequently preaching the rhythms of climate risk, then you know it's being taken seriously," he said.
Another major factor is the rapid pace of technological change happening across the low-carbon industries, Poulter explained. For example, batteries are expected to start transforming the energy system within the next five years, while in the next decade electric cars will become cost-competitive with traditional vehicles — "that's the end of both coal and oil when it comes to capital investment," Poulter argued.
However, a sizeable number of industry laggards remains resistant to taking any action on climate. Some 201 asset owners in the rankings received an "X" rating, with many of these clustered in the United States and China. Almost two-thirds of investors in the United States are doing nothing, the report claimed.
But Poulter is confident investors in the United States will be keen not to be left behind in the low-carbon transition. He argued that most firms are taking action there as an unstoppable momentum for change, despite the recent election of President Donald Trump.
"There's no doubt we are in for tough four years in the U.S.," he conceded. "But I don't think even Trump and any ideology that follows him can stop this anymore. We've got only 40 percent of the industry not taking any consideration at all and next year, when that becomes 30 percent or even 25 percent… if you are an investor and you realize that 75 percent of the competition are considering a risk and actively managing it and you're not, then you are the one in trouble."
The research also for the first time assessed the performance of asset managers against the AODP criteria. On the surface, asset managers are streets ahead of asset owners, with just three of the World's Top 50 funds found to be ignoring the issue of climate risk.
However, many asset managers are doing the "bare minimum" to satisfy the demands of their clients and should be kept under pressure to boost their performance, Poulter argued. Just one management institution was awarded a AAA rating this year, according to the report.
"At the very top there are many more leaders in the asset owners space," Poulter said. "There are some good ones in the asset manager space, but I wouldn't at all read in that the asset managers are responding out of the goodness of their heart. They are doing this through sheer pressure from their clients."
And in a finding that could provoke further concern over its pending acquisition of the U.K. Green Investment Bank, Australian bank Macquarie scored a "D" rating from AODP in the asset managers index, judged to be only taking the first steps to recognizee the financial risks posed by climate change to its portfolio. "Our findings are clearly that Macquarie has a long way to go," Poulter noted.
Macquarie strongly rejected the AODP's findings, insisting it is "fully committed" to ensuring environmental risks are identified and managed responsibly in all aspects of its business. It pointed out that it did not participate in the AODP survey, but said it does engage with the U.N. Principles for Responsible Investment and the CDP, as well as conducting its own ESG reporting.
"As one of the world's largest investors in renewable energy, having invested or arranged over [$10.5 billion] into renewable energy projects since 2010, Macquarie is particularly aware of the opportunities and responsibilities that will continue to accompany the transition to a low-carbon economy," the bank added in a statement.
The G20 will consider the FSB task force's guidelines later this summer and Poulter urged governments to endorse its findings and back the introduction of the guidelines, predicting a G20 stamp of approval would convince some laggards to finally take action.
"Paris was great, and it was all-inclusive," he said. "But really the big game here is in the G20. And so we need that disclosure. We know that it drives behavior and it drives capital."
Ideally, he said, this endorsement would be followed by the introduction of mandatory disclosure in every jurisdiction. It may sound like an ambitious dream today, but given the rapid change in the investment landscape in just one year, that wish may be looking a lot more like an inevitability in 12 months' time.