Quarterly update: addressing the physical – and social – risks of climate change

The rulebook will enable implementation of the Paris Agreement and greater transparency, including agreement on how countries will measure and report on emissions.

It covers:

• a public registry of country pledges;
• market mechanisms;
• climate finance reporting, including a single set of rules around this;
• a global stocktake in 2023;
• loss and damage;
• and monitoring.

Establishing these rules will give investors greater confidence in the Paris Agreement process.

COP24 developments

Welcome developments from COP24 included the EU 2050 strategy, Silesia Declaration on a just transition (led by Poland and signed by 45 governments), and the Powering Past Coal Alliance of governments, businesses and organisations (80 members now including Sydney and Melbourne). The PRI had particularly pressed for the inclusion of social issues and the just transition in the negotiations (and 120 investors with US$5.6 trillion AUM have now signed the investor statement, which is still open).

Despite this momentum, the outcome from COP24 is insufficient. Investors are asking for more ambition; governments also need to step up their ambition as a matter of urgency.

Companies and investors also need to step up in phasing out fossil fuels and scaling-up low-carbon investment. The falling costs of renewable energy sources including wind and solar is making capital reallocation more palatable. Investors such as New York Common Retirement Fund are already signalling their intention to scale up, with US$3 billion allocated to sustainable investment in the lead up to COP24, while IFM Investors is applying science-based targets to infrastructure investments. Investors led by New York State and the Church of England are asking ExxonMobil to set targets to cut greenhouse gas emissions, with Shell recently having announced net carbon footprint targets.

A just transition

As already mentioned, in addition to addressing the physical risks of climate change at COP, delegates also addressed social issues, including a just transition.

Thirty-seven countries including Germany, France, Bangladesh and Nepal adopted the Solidarity and Just Transition Silesia Declaration. Governments must now put transition plans into action by developing and sharing specific just transition plans, in consultation with workers and employers and aligned with national climate strategies.

The PRI, in collaboration with the Grantham Institute on Climate Change and the Environment, the Harvard Kennedy School, the Initiative for Responsible Investment and the London School of Economics, formally launched Climate change and the just transition: a guide for investor action. Investors can take action on a number of priority next steps to bring the just transition to life. Key next steps include:

• Incorporating the just transition into policy on responsible investment and climate change.
• Integrating the just transition into procurement of investment services across all asset classes.
• Engaging with companies to include the just transition within climate strategies, covering critical workplace issues, as well as supply chain management and community relations.
• Participating in place-based initiatives to channel capital into community renewal and regional diversification through investments with positive social and environmental impacts.
• Promoting disclosure by companies, asset owners and asset managers using the framework of the Task Force on Climate-related Financial Disclosures (TCFD) and extending this to include the social dimension.

Business has stepped up and acted on the call for a just transition that protects all workers and communities. Enel, AGL and many others are making plans and commitments to manage impacts on workers and communities transitioning away from high-carbon sectors and ensuring new jobs in emerging, green sectors are decent and respect workers’ rights. Unilever, Autodesk, Orsted, Enel and Safaricom have taken the Pledge for a Just Transition to Decent Jobs, committing to a decent job-creating, rather than job-reducing, new net-zero economy.

Addressing inequality

Income inequality is another issue that investors need to address. Last autumn, the PRI released a report, Why and how investors can respond to income inequality. Institutional investors are increasingly realising that income inequality—the gap in income and wealth between the very affluent and the rest of society—has become one of the most noteworthy socioeconomic issues of our time. It has the potential to negatively impact institutional investors’ portfolios as a whole; increase financial and social system level instability, damage output and reduce economic growth, and contribute to the rise of populism, extremism, isolationism and protectionism.

The effects for investors of a massive income gap are potentially three-fold. It can:

• negatively impact long-term investment performance;
• change the risks and opportunities that affect the universe of investment opportunities;
• destabilise the financial and social systems within which investors operate.

All of these risks threaten portfolios and bottom lines, but what has been less clear is how institutional investors can manage these risks. Recognising this challenge, some investors are turning their attention to integrating considerations related to income inequality into their investment decision making.

Moving forward on climate

In 2019, the PRI will be focusing on The Investor Agenda, ClimateAction100+, just transition, TCFD recommendations and The Inevitable Policy Response to support investors in stepping up in climate action.

And in recognition of methane management as a key governance challenge for companies in the oil and gas sector, we released a report, Setting the bar: implementing the TCFD recommendations for oil and gas methane disclosure, in collaboration with Ceres and the Environmental Defense Fund, to provide investors and other stakeholders with the information required to assess the material climate risks and opportunities facing our global economy.

While addressing methane emissions is in many ways an operational issue, and thus largely the responsibility of management, there is an important role for the board to play in setting and overseeing the company’s long-term climate strategy. The board also has responsibility for evaluating management performance. In the case of methane, that includes ensuring that the right strategic direction is in place to encourage a rigorous approach to methane risk management, and sufficient information is provided to evaluate that progress over time and against peers.

Update on new signatory growth

During the last quarter of the year, we added 92 new signatories, ten of which were asset owners. We continued to see strong growth across Europe, with 51 new signatories, and also across the US, with 19 new signatories. Notable new signatories among asset owners included: Government Pension Fund of Thailand, Minnesota State Board of Investment – Combined Funds, City of London Corporation, BC&E, AP Pension, FONDAPI, GARANCE and La Fondation de l’Université de Sherbrooke while on the investment management side, the PRI welcomed Bosera Funds, Groupe Bruxelles Lambert SA, Nuveen a TIAA Company, China Life Asset Management Company

In order to better service our signatory base, we now have directors in place to oversee our key geographics: Chris Fowle, Director of the Americas; Matthew McAdam Director of AIPAC; Anastasia Guha, Director of Northern Europe and MEA; and Marie Luchet, Director of Continental Europe.

On the PRI Board, we were delighted to welcome Laetitia Tankwe, adviser to the president of Ircantec’s board of trustees, as the first representative of a French asset owner and Wendy Cromwell, director of sustainable investment, senior managing director and portfolio manager at Wellington Management. Both are excellent additions to the PRI Board and we look forward to working with them in the coming months.

A quick look ahead

In Q1 2019, we will be releasing guidance on how the SDGs can be incorporated in active ownership activities across asset classes, and part three of our series on credit rating agencies and ESG, which will examine possible solutions for more widespread ESG integration that started to emerge during the discussions between investors and the CRAs. Finally, we will be releasing a series of articles highlighting the practical moves that investors are taking on implementing the TCFD recommendations.

Going into Davos, we see considerable focus on environmental, political and macroeconomic issues as the world continues to grapple with a changing global dynamic. We look forward to another year of working closely with our members on this.