Point of No Returns – Climate Change

An assessment of asset managers’ approaches to our changing climate

The beginning of 2020 marks the end of the world’s hottest decade in recorded history. The harsh reality of the climate crisis can no longer be ignored. 

Global average temperatures have risen 1.1C on pre-industrial levels, resulting increasingly severe weather events and profound changes to our natural world. Yet despite scientific warnings about the grave consequences of global temperature rise exceeding 1.5C, the world is still on track to reach 3.2C of warming by 2100, even if national commitments under the Paris Agreement are met. 

Capital market assets are already losing their value as a result of climate change, while more and more people want to see companies take decisive action. Asset manager wield significant power through the capital they provide to companies. They have a unique opportunity to set a change in motion. 

The asset management sector is a long way from Paris Alignment

The lack of policy commitments on the part of asset managers translates into the quality of engagement with their investee companies. Company engagement still largely focuses on disclosure, with 75 per cent of asset managers declaring TCFD aligned disclosure to be a priority, and 69% citing general disclosure of climate-related risks. Asset managers are much less likely to prioritise engagement on concrete action, for example emissions reductions and climate-related targets. While disclosure is a vital step towards meaningful action, the urgency of the climate crisis demands concrete action be given a similar level of attention. 

Meanwhile investors’ tacit consent to corporate lobbying against climate policy further widens the gap between climate change rhetoric and action within the industry. Just 15 per cent of assessed asset managers consider company involvement in trade groups opposing climate policy to be an engagement priority. Still more alarmingly, large US asset managers such as BlackRock, J.P. Morgan Asset Management, Goldman Sachs Asset Management and Nuveen, while claiming to support a low-carbon transition, state in their policies that they will generally vote against proposals asking for the disclosure of lobbying expenditures.

Use of scenario analysis remains limited

One of the key TCFD recommendations is that corporate and financial institutions “describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios.” Yet only 35 per cent of asset managers stated they have carried out scenario analysis for at least some assets.

Of these managers, just four conduct analysis across all assets. Of these four asset managers, three received an A rating in our assessment, indicating that such analysis is an important component of an advanced responsible investment approach.  

 

Use of scenario analysis

The majority of managers that have conducted scenario analysis, have done so across a range of scenarios, including a 2C scenario. However, there is a tendency to focus on transition risks – 85 per cent mention transition scenarios, compared to 35 per cent who reference physical risk assessment. 

Meanwhile, asset managers are still early in the process of integrating this analysis into investment decisions – with just five giving evidence of the outputs of the analysis informing company-wide strategy. 

Asset managers identify the risks climate change poses to their portfolios, but thinking on impact is less developed

 

When asked to identify the top three materials climate risks to investment portfolios, manager generally focus on the risks associated with the transition to the low-carbon economy, over the physical risks of climate change (76 per cent vs. 60 per cent). Legal and policy risks are the most common risks identified, while 27 per cent mention stranded asset risks specifically – frequently in connection with potential regulatory changes, and market and technology shifts. 

Investments in renewable energy, meanwhile, were the most widely reported opportunity. 

Asset managers generally describe the risks to their portfolios in much more detail than the impacts of their investments – thinking about which is generally underdeveloped. Just 57 per cent of manager identified impacts of their investments, with most of these focused on positive impacts tied to ESG and responsible investment funds. Just 27 per cent give a balanced account of both negative and positive impacts

For more report findings and our full recommendations, download the full report