More and more investment experts are now accepting that robust engagement is the most effective way for investors to help manage climate-related systemic risk. To deepen this momentum, Preventable Surprises has published a new report (“Institutional Investors and Climate Related Systemic Risk”) proposing an innovative best practice standard for engagement, also updating its analysis which shows significant portfolio value at risk if warming is not capped at 2C.
Some proof points for this approach from just last week include:
– AXA’s Chairman and CEO, Henri de Castries, warned that insurance may not be possible at 4C warming.
– Christiana Figureres said we have 5-10 years to get back to a 2C path arguing that BAU now needs to stand for “Business as Urgent”.
– Martin Skancke, the chair of the PRI, stated that “The primary role of investors should be engagement, that’s where the effects are the strongest” but also that “We need a more coherent set of engagement policies to address the overall risk in the system.”
– Helena Morrissey, the chair of the Investment Association, said that climate risk is not a top 10 issue for the investment industry today.
The seven Forceful Stewardship Guidelines are a practical and low cost way to square this circle of urgent need for action with deep immunity to change. The primary Guideline focuses on voting at AGM resolutions for investee companies to publish 2C transition plans. This is a first step towards market decarbonization, which is the pre-requisite for meaningful portfolio decarbonization. Other Guidelines cover robust engagement on capex, remuneration and corporate political influence.
Raj Thamotheram, founder and CEO of Preventable Surprises, said: “Despite the best that governments have been able to do, COP21 won’t keep warming below 2 degrees. Investors are arguably one of the best ways to ratchet up the agreements that come out of Paris. And the most effective thing investors can do is take a simple policy decision to adopt the Guidelines. This cost efficient tool will put them on the right side of history.”
Forceful Stewardship was born from the recognition that current approaches – Divest-Invest (including green bonds, clean tech funds) and Portfolio Carbon Management (including portfolio decarbonization and changes in asset allocation) – are important for managing sector (e.g. carbon bubble or standard asset) risk. They are also very important in sending signals to governments and to those companies who are minded to listen. But the direct impact they have on climate-related systemic risk is limited. Forceful Stewardship is thus the essential third leg of investor action.
Co-inciding with the report is a call to action published today by the specialist investment journal IPE, co-authored by John Rogers, the former President and CEO of the CFA Institute. He says: “The top 1,000 retirement funds control over US$9 trillion – enough to buy all of Europe’s listed companies. These investors, which we call “super fiduciaries”, have the muscle to effect change in the companies whose shares and debt they own. They have long time horizons, and their beneficiaries will stretch across future generations. There is no excuse, and every incentive and duty, for institutional investors to pitch in and mitigate the dangerous path we are on.”
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