Institutional investors have much to do to mitigate and hedge climate change risk in their portfolios, according to nonprofit Asset Owners Disclosure Project (AODP).
From a study of more than 500 of the world’s largest investors, representing more than $40 trillion, AODP found 85% were lagging in executing and implementing what they deemed to be effective climate-risk management systems.
In addition, only 7% of surveyed asset owners were able to properly calculate their portfolios’ carbon emissions, the report said, and just 1.4% reduced their carbon intensity from last year.
“The laggard asset owners are driving their funds without climate insurance and one day they’ll be in a nasty market climate correction and probably end up in court,” AODP Founder Julian Poulter said.
Poulter described these lagging investors as “showing willful negligence” and even resisting change in their portfolios to account for climate change risk.
The advocacy group studied asset owners’ climate change performance from factors such as transparency, risk management, levels of low-carbon investments, and active ownership.
It identified just nine funds that successfully protected against climate change risk: Australia’s Local Government Super, Norway’s KLP, the California Public Employees Retirement System, the Netherlands’ ABP, the UK’s Environment Agency Pension Fund, the New York State Common Retirement Fund, AustraliaSuper, the Netherlands’ PFZW, and Sweden’s AP4.
However, AODP found pension funds were more accountable in their risk management systems than sovereign wealth funds, foundations, and endowments.
Pension plans were able to better recognize “the age of new member accountability and financial democracy,” the nonprofit group said, and also supported related movements such as 350.org and Share Action’s Greenlight campaign.
Despite this, most asset owners—including pension funds—still suffer from the fundamental problem of lacking “any systematic scenario analysis on climate risk,” the report claimed.
Investors tended to rely on their short-term managers to exit risky assets once climate risk accelerates, AODP said, instead of preemptively protecting their portfolios.
“This is of course a fallacy as when it comes to systemic risks such as climate change (or sub-prime mortgages) there will be no liquidity in markets for stranded assets and so it will be impossible to protect value,” Poulter said.
These asset owners are in desperate need for a “reality check” the group said, and are dangerously “gambling” on climate risk.
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