The Sustainable Markets Initiative (SMI) today (3 October) published a "pivotal" report to help asset owners integrate climate risks and opportunities into their investment decisions.
Developed by Impax Asset Management and State Street as members of the SMI’s Asset Manager and Asset Owner Task Force, the report titled ‘The climate has changed: How CIOs are investing in a climate-resilient economy’ distils findings from a series of interviews with CIOs from 11 leading asset owner organisations with cumulative assets of over $2.5trn with five recommendations emerging from those conversations.
The report recognises that asset owners are the stewards of trillions of dollars of capital, and as such they have a critical role in the transition to a low-carbon and climate-resilient economy. Their assets under management, estimated at $25.7 trillion for the world's 100 largest asset owners, put them in a powerful position to influence the finance sector’s actions in response to climate change.
However, the reality of implementing a climate aware portfolio is a complex and nuanced issue, and more communication is needed on how asset owners can manage this challenge. Compiled from interviews with Chief Investment Officers (CIOs) from asset owners, the report offers steps for those earlier in their journey to manage climate change risks and opportunities effectively.
Jennifer Jordan-Saifi, CEO of the Sustainable Markets Initiative, said: "Climate change is not merely an environmental issue, it is a fundamental investment factor, on a par with other long-term risks and disruptions. That is why in the face of the unprecedented global challenges we face today, it is imperative that those with the power to influence the flow of capital recognise the profound impact of climate change on our investment landscape.
"We need a world where investors, asset managers, and owners lead by example, demonstrating that profitability and sustainability can go hand in hand. By integrating climate considerations into our investment strategies, we and those managing our assets can not only achieve superior financial performance but also contribute positively to Nature, People, and Planet.”
Ian Simm, founder and CEO of Impax Asset Management, said: “It’s been clear from Impax’s discussions with major asset owners over more than 25 years that the experiences of those who have responded early to the challenges posed by climate change are not widely known. This report summarises what’s worked and what’s not worked for them in this area and aims to present insights that other investors can learn from. The results show that understanding and managing climate change’s impact on portfolios is core to delivering attractive investment returns and cannot be ignored.”
Ronald O'Hanley, chairman and CEO of State Street, added: “Asset owners are increasingly recognising that climate change, particularly over the long-term, represents an important risk that should be evaluated within their respective investment risk frameworks. This research draws on the experience of leading asset owners and managers and offers tangible and actionable principles for identifying, assessing, and addressing risks and generating investment returns in face of potential global climate stresses.”
The report provides five key recommendations for asset owners and their managers:
1. Recognise climate change as a core investment consideration: CIOs of leading asset owners consider the transition to a low-carbon economy as one of the major structural shifts they need to understand and manage within their portfolio to deliver long-term returns.
2. Develop and implement a dynamic framework: The evolving challenges created by climate change require a strong governance framework. Proactive and informed leadership is essential for successful management of emerging climate risks and opportunities.
3. Integrate climate change throughout the investment process: Asset owners are exploring how to integrate climate change at every step in the investment process, including asset allocation, manager selection and the choice of securities.
4. Build expertise through education and incentives: Investment teams need information, new analytical tools, and remuneration structures to manage the complex risks created by climate change effectively. In-house sustainability expertise can play a crucial role in embedding change.
5. Engage with policymakers and peers: To solve common challenges, CIOs highlight the importance of engaging in dialogue with policymakers and peers to improve climate-related data and expand investment opportunities.
