New asset owner carbon ranking calls for response

If we can ever look back and say that we stopped climate change just in time, one of the first medals parties will held in honour of the worlds asset owners, particularly leading pension funds. Sure, you would expect investors with an average investment time horizon of over twenty years to take a seriously long-term view of our most grievous and systemic risks, but nonetheless lead they have. It may have taken some extra-ordinary vision by a few key individuals to create the idea, but the Carbon Disclosure Project (CDP) launch in 2001 was quickly signed by trillions of dollars worth of asset owners creating the requisite authority to plug the first gap in climate change solutions: real data at corporate level about where the emissions are and what is being planned to reduce them. And then to the UN PRI in 2005; a framework for ESG and Investment to provide asset owners with the guiding principles they need to drive their own behaviour and actions. It now houses over $20 trillion of support and its signatories are passionate about their causes.
So is all this enough to drive solutions to climate change, the most materially clear of ESG risks? Not yet, and time is running out. For asset owners the job is difficult. The companies they invest in and the asset managers they give their money to have always been wed to the short term and, despite many words of intent, little seems to be changing in those parts of the investment chain. We all have short memories. After all it was only 18 months agothat the G20 Financial Stability Board’s statements backed up the leaders of the free world in announcing, literally, a new era of long-term investing. The silver bullet was simple….incentives. Align them to the long term and, bingo, all long-term systemic risk boxes ticked! Sadly not. The political will required to reshape capitalism to the long term will take more than a sub-prime crisis to drive it. With every leading market based economy having strong business interests that still believe the long term is a series of short terms, financial regulation is delayed and weak. Direct climate policy is not looking too hopeful in the short term either. No, we’ll have to find another way. What asset owners need for their hard work to turn into material results is another level of data. The Asset Owners Disclosure Project that launches today (October 22) in London has – if supported – the potential to provide three key elements in the climate information puzzle: independence to push the boundaries of progress, a focus on material risk management, and competition. The aim of the initiative, which has been running for Australian superannuation funds for a number of years, is to give funds their own global and national benchmark ranking amongst their peers about the carbon impact of their shareholdings. The information to be collected and published by this project represents a different but complementary data-set to the (unrelated) Carbon Disclosure Project – the world’s largest database of primary corporate climate

change information used to measure and disclose greenhouse gas emissions and climate change strategies. The first year of the Asset Owners Disclosure Project will survey the world’s largest 1,000 asset owners including pension funds, superannuation funds, insurance companies and sovereign wealth funds. The Project will send information requests to the funds from next week and will compile the data before public release next March. To give each fund a comparison of how they performed, each fund will receive their national and global rank in each area of their business. For all the great work that asset owners have achieved around integrating ESG into their policies and practices, what is needed is the test of materiality provided by climate change. If asset owners portfolios are left unprotected from future rapid rises in carbon prices then a whole world of ESG integration will have been wasted. The financial and social consequences of that risk manifesting itself will destroy any benefits built up through studious work over many years. For asset owners to go to the next level, they need their own emissions reduction strategies across their portfolio investments. They will also need to urgently start hedging climate risk of all types, perhaps in creative ways we haven’t even thought of yet. It is not the goal of theAsset Owners Disclosure Project to prescribe an optimal solution but to collect risk management ideas for all to learn from, to create a competitive market for climate change excellence and to ask difficult questions which may not be immediately be answerable but remain critical to eventual solutions. Asset owners live in a world where customer pressure is rare, competition is marginal at best and where it is easy to ignore systemic risks such as climate change whilst the comfortable short-term market mechanisms they support chugg along merrily. But there has to be a change and a potentially painful one at times. Modern portfolio theory based on efficient market hypothesis has and will fail the challenges of managing systemic risk. Thus new levels of transparency must be embraced not just tolerated. Investment strategies to manage climate risk must be pitched against one another in competition to stimulate innovation and thought. Ultimately, like the companies that many investors write to each year, emissions reductions must emerge as the primary protection against long-term climate risk. The CDP and PRI has facilitated it, lack of regulation makes it urgent, and pension scheme members deserve it. We hope the Asset Owners Disclosure Project is embraced by the very community that has got us this far: our leading asset owners.
Julian Poulter is executive director of the Asset Owners Disclosure Project