Advocacy Group: CIOs 'Showing Willful Negligence' with Climate Risk

Nearly 85% of the world’s largest investors have failed to implement climate-risk management systems, according to the nonprofit Asset Owners Disclosure Project (AODP).

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.

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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.

AODP Graph

CIO_Opinion_Liz_Story There are some roads you could drive with your eyes closed—or so the saying goes. For me, one of these is the A591 from Kendal to Windermere, which each year takes thousands of tourists to one of the United Kingdom’s favourite spots: the Lake District.

Locals (like myself) know that if you don’t set off before 9:00 am, nothing but lines of traffic await. Of course, despite this knowledge, this Easter Sunday saw our departure delayed until midday. After crawling along for about 15 minutes (albeit in some of England’s most glorious countryside) we decided to go “cross-country.” We knew where we needed to get to and had a fair idea that a certain turn taking us off the tourist trail would get us there. It might be a longer trip in miles—and on a road significantly more difficult to drive—but we would save ourselves time in the long run.

We took the turn and were rewarded with not just a more efficient route, but views of the national park that we had never seen before. Different perspectives on a familiar landscape were breathtaking and the terrain was not as tricky as we’d thought. After 30 years driving these roads, it was refreshing to see something new.

Why am I recounting my Easter break? Because I would secretly like to work for the Lake District tourist board, but also because this latest edition follows the same theme of trying something new after years of sticking to a well-trodden path.

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In our Interrogation, former ATP Co-CIO Anders Hjælmsø Svennesen tells us about his first few months facing a new challenge. After 15 years at the Danish national pension fund, he has taken the helm of Danica—and is renewing its investment strategy from the top down (and bottom up).

In a similar vein, Nick Reeve talks to investors who have taken a new approach to environmental, social, and governance-oriented investing. Instead of the usual screening or checklist, they are discarding the label and integrating the structure into their entire portfolios.

Our columnist Alan Brown wants us to look at defined contribution plans with new eyes. A lot of people’s futures are riding on it, he points out, so there is no time to delay.

Nick also looks to new ways to tackle inflation risk, and we consider whether investors prefer small or large managers—and if that shapes the system.

Finally, I journey to Amsterdam to meet one of the most influential women in finance. Angelien Kemna stood at the helm of one of the world’s largest pension investors and guided it through a major transformation—all while the financial crisis was raging. It might not have happened but for one pivotal decision when she faced a roadblock in her career.

Kemna, the first recipient of CIO Europe’s Lifetime Achievement Award, is not afraid of taking a new road to get to the required destination. Having spent some time with her directly before my Easter break, I am certain of one thing: She would have never stayed on the A591 waiting in line with the masses, either.