PRI signatories understand link between climate and financial risk, reporting data shows

Institutional investors’ support of a net zero economy has accelerated in the last year following COP26 in Glasgow. For example, the Net-Zero Asset Owner Alliance (AOA) now has 74 members with USD$10 trillion in collective AUM, and 44 AOA members have set 2025 targets to reduce portfolio-related carbon emissions. The Net Zero Asset Managers initiative has 273 members with over USD$61trn in collective AUM and is expected to release information on members’ targets and action plans before COP27. This is good news for the financial industry, and there are hopes this momentum can be maintained so the industry becomes a true force for good in the climate transition.

Our newly-released 2021 reporting data shows our signatories have a strong understanding of the link between climate, as a strategic issue, and financial risk – an understanding that has been building for some time. Most signatories now have governance processes to support strong climate action. However, far fewer signatories have taken the important step of adopting specific metrics and targets to measure progress in reducing climate risk.

85% asset owner signatories have top-level oversight on climate

The Task Force on Climate-Related Financial Disclosures (TCFD) has long emphasised the importance of top-level oversight of climate issues. That message is getting through: 85% of asset owner signatories have established board oversight of climate issues, along with 79% of asset managers. Nearly six out of 10 asset managers and 66% of asset owners incorporate climate considerations into their investment policies, while a majority of both groups (51% of asset managers and 61% of asset owners) address climate in other internal processes.

The good news continues at managerial level: oversight of climate has been established at 83% of asset owners and 82% of asset managers.

A majority of both groups (59% of asset owners and 51% of asset managers) report that managers identify climate-related risks and opportunities, while similar numbers have managerial staff monitoring and reporting on climate-related risks (59% of asset owners vs. 52% of investment managers).

Climate increasingly seen as a strategic issue

The data also show that over three-quarters of our signatories have identified climate-related risks and opportunities in their portfolios. Among the most common risks identified are stranded asset risk (noted by 56% of asset owners and 47% of investment managers) and direct physical risks (mentioned by 47% of asset owners and 46% of investment managers). Many investors also saw opportunities aligned with climate goals (46% of asset owners and 44% of investment managers).

Conducting scenario analysis to assess risk is also growing, with a majority (54%) of asset owners reporting the practice along with over a third (34%) of asset managers. The three most common scenario analyses are listed below:

• Limiting temperature rise to below 2 degrees (42% of asset owners and 27% of asset managers).
• A failure to transition, leading to a temperature rise of 4 degrees or more (28% of asset owners and 14% of investment managers).
• The PRI-commissioned Inevitable Policy Response scenarios, which envision an abrupt economic transition designed to avoid the worst effects of climate change, was considered by 20% of asset owners and 11% of investment managers.

Climate risk increasingly integrated into overall risk management systems

PRI signatories are increasingly identifying and integrating climate risk and opportunity in their internal processes. Over 90% have developed specific processes to identify climate-related risks, with the practice equally common among asset owners and asset managers. Moreover, more than 80% of each group has integrated climate risk into an overall risk management system, with this practice slightly more prevalent amongst asset managers (85% vs. 82%).

Metrics, targets, and strategic leadership are lacking

Most asset owners and asset managers reported that they were developing climate metrics and targets in 2021. However, far smaller proportions disclosed details on what those targets were or what they entailed. Setting targets and metrics is a crucial step for our signatories to demonstrate that they consider climate as a strategic issue.

We were able to categorise signatories based on the steps they had taken to identify and integrate climate risks: 

• Building capacity – signatories who have board and managerial oversight of climate, have begun to analyse climate risk and opportunity.
• Responsible – signatories that have done all of the above and also tested their strategy’s resilience using multiple scenarios relating to climate change and have incorporated climate into their general risk management systems.
• Strategic – signatories that have taken all of the above steps and have established and disclosed climate-related targets.

Signatories not satisfying the criteria for any of these categories, but responding to some of our climate indicators, were considered merely ‘aware’ of the topic.

Asset owners leading the way

As the chart below shows, asset owners led asset managers in their approach to climate risk, with a larger proportion of asset owners in the top two tiers. Yet less than one-tenth of each group had set climate-related targets.

Climate categories for respondents

Signatories in each category had TCFD-aligned responses to the certain indicators.¹

We also note that, like most ESG practices, efforts to address climate risk are most advanced amongst larger investors in more developed economies. It is crucial that smaller investors around the world are supported to develop a stronger approach to climate risk management, while taking account of the diversity of their regional perspectives.

In sum, this 2021 data reflects the growing trend of institutional investors taking climate risk seriously. Many of our signatories had established governance mechanisms and strategic thinking on climate, even before COP26. However, signatories’adoption of metrics and targets to manage climate risk is still nascent. This is an area where we will continue to support signatories, as we look to COP27 and beyond.

To view individual signatory responsible investment reports, visit our website

See our 2021 Investor Resource Guide to better understand how to address climate-related governance, strategy, risk management and metrics and targets