Investor action on climate change: A PRI-Novethic assessment of global investor practices

For long-term investors, safeguarding investments requires mitigation of climate change.

In 2017, nearly 400 investors representing US$22 trillion in assets under management stood by the Paris Agreement for this purpose. They asked governments to implement the Paris Agreement, drive investment into the low carbon transition and support climate-reporting frameworks such as the recommendations of the Financial Stability Board Task Force on Climate-related Financial Disclosures.

Countries and states are pressing ahead despite the US decision to withdraw from the Paris Agreement: France, through Article 173 of the Energy Transition Actcovering companies and investors, China through its rise “from zero to hero” in green bonds and US states such as California through America’s Pledge.

Looking ahead, bending the emissions curve by 2020 is the only way to limit global warming. This requires investment of at least US$800 billion private resources in climate action each year.

Global investors need to know where they are today to inform action towards 2020. The PRI therefore commissioned Novethic to assess:

the extent to which global investors see climate change as a long-term factor for investment;
progress and leadership practices, including tools and activities underway;
where greater attention is needed by investors and PRI in future.

PRI signatories from around the world have expressed interest in the impact of Article 173. This review therefore includes a special focus on the practices of investors from France, with the aim of sharing of good practice globally.

Where we are: Key findings

Overall, global investors are moving forwards in action on climate change in 2017. This is evident in higher asset owner awareness of relevance of climate change to investments, investor engagement with companies and strong leadership from France following on from Article 173 of the Energy Transition Act.

Nevertheless, more attention is needed to incorporate climate change within investment strategies and products. While portfolio footprinting is popular and helping investors in measuring emissions, scenario analysis may offer investors a more forward-looking tool for assessing climate-related risks and opportunities.

Positive findings include:

In 2017, 74% of asset owners state they are acting on climate change and see it as one of the most important long-term trends for investments. This is a +8% increase from 2016. In France, 83% of asset owners report that they are acting on climate change.
59% of asset owners that are taking action on climate change are engaging with companies to address on the topic, with North-American investors particularly favouring engagement with companies (78%).
100% of French asset owners taking action on climate change use portfolio carbon footprinting, with 60% having objectives to reduce emissions and 40% using scenario testing.

Areas for further improvement include:

54% of reporting asset owners encourage portfolio managers to monitor emissions, but only 8% have aligned manager contracts with climate change factors.
Only 17% of asset owners incorporate climate change into asset allocation, with new investment in clean energy standing at US$287.5 billion in 2016.

The PRI’s observation is that the PRI’s Reporting Framework could be enhanced further to promote investor good practice in climate change:

Indicators for governance, investment strategy and products and risk management could be aligned with the TCFD recommendations.
The PRI’s indicators could be modified in time to encourage investors to consider the impact of their activities in contribution to a transition to a low carbon economy.

The PRI’s response: What needs to happen next

The PRI plans to support investors in accelerating action on climate change. The PRI’s key focus areas will include:

enabling collaborative investor engagement with companies to adopt the FSB Task Force recommendations, manage transition risk and use scenario analysis;
advancing investment practices in assessment and management of climate-related risks and opportunities including sharing of good practice;
bringing the global investor voice to policymakers, including promotion of green finance, disclosure and carbon pricing, as well as collaboration and policymaker capacity-building;
supporting investor disclosure by aligning the PRI Reporting Framework with the TCFD guidance for asset owners and managers in 2018.

The PRI will collaborate closely on investor action on climate change including the areas above with UNEPFI, UNGC, the Portfolio Decarbonization Coalition and investor groups such as CDP, Ceres, IGCC and IIGCC.