Climate change increasingly on investors’ radar

Climate change is considered to be a material risk or opportunity by a majority of investors according to a new report, though progress on the issue varies significantly between different regions.

The Institutional Investors Group on Climate Change (IIGCC), the Australia/New Zealand Investor Group on Climate Change (IGCC) and the North American Investor Network on Climate Risk have jointly published the report, based on survey responses from 44 asset owners and 46 asset managers with collective assets totalling more than USD $12 trillion.

Mercer conducted the study, which showed demand from pension funds is considered to be a key driver for changes in the investment practices of asset managers.

The study found that while 77 per cent of asset owners considered whether potential fund managers integrate climate change in their investment processes, only 18 per cent had developed a formal process to assess prospective managers’ climate efforts.

Ole Beier Sørensen, chairman of the IIGCC and head of research and strategy at Danish pension fund ATP said it is “encouraging” that climate change is becoming a more strategic issue for the majority of asset owners and asset managers.

“They increasingly view climate change as a material investment risk/opportunity. However, to address the risks and opportunities arising from climate change, investors must have the tools to take meaningful action,” Sørensen said.

While the results showed asset owners and asset managers understood the importance of addressing climate change through their investment practices, it revealed US investors continued to lag behind their counterparts in New Zealand, Europe and Australia.

The groups said stronger climate policy in the EU has resulted in a greater integration of climate change across European investors’ portfolios. In Australia the lack of a carbon pricing system and a less certain regulatory environment was considered to be a concern, though there was an increasing focus from investors on policy advocacy and addressing the physical impacts of climate change.

In the US, the lack of coherent climate policy meant investors were focused on engaging with companies, particularly with regards to improving disclosure, rather than integrating climate change into valuations or actively encouraging investment managers to do so.

“A number of countries and regions are moving in the right direction, but there is still a long way to go. Policy makers need to remove barriers to low carbon investment and they need to create a relatively predictable price on carbon,” Sørensen said.

Chairman of IGCC Australia/New Zealand Frank Pegan added that it is “extremely difficult” for investors to allocate to low-carbon assets while policy settings are fragmented or short term in nature.

“We will strive to make thematic allocations but reallocation of substantial investment to the low-carbon economy requires policy makers to step up with certain and long term investment signals.”

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