Investors to write to ECB chief Mario Draghi on carbon risk of indexed assets

European Systemic Risk Board urged to carry out an assessment on regulatory bind.

Institutions including Aviva Investors and Climate Change Capital are to write to Mario Draghi, President of the European Central Bank (ECB) in his capacity as Chair of the recently-created European Systemic Risk Board, urging him to investigate if the European Union’s exposure to high carbon investments could leave investors with “stranded assets and poor returns” because of regulatory investment requirements. The planned letter to the ECB chief comes just weeks after a widely reported letter on the same issue was sent to Sir Mervyn King, Governor of the Bank of England. King replied to the letter saying there was “clearly scope for further evaluation of these issues”. The latest letter, signed by Paul Abberley, Chief Executive of Aviva Investors in the UK, James Cameron, Founder and Vice-Chairman of Climate Change Capital and Peter Ainsworth, Founder and Chair, Conservative Environment Network and former MP and Shadow Secretary of State for Environment, Food and Rural Affairs, is being circulated among investors to gather support. In the letter, the investors note that the ESRB was created to contribute to the prevention or mitigation of systemic risks to financial stability. They say that the collective financial exposure of institutional investors to high carbon, extractive and environmentally unsustainable investments could become one such systemic major problem as policy changes and technology advance a transition to a low carbon economy. The investors say that the high levels of carbon intensive natural resources and power generation companies in indices such as theFTSE 100 in the UK and CAC 40 in France – where they represent as much as 20% of market capitalisation – mean that the large number of institutional index investors are locked into high carbon investment strategies. Long-term investors, they say, are at risk if regulators don’t consider how requirements such as Basel III and Solvency II can make it more difficult to deploy capital into assets such as low carbon infrastructure rather than investing in the higher carbon status quo.
The letter says: “At present regulators are not monitoring the concentration of high carbon investments in the financial system and have no view on what level would be too high. In such situations we believe that regulators have a role to play in protecting investors from systemic risk.”
The investors say that the problem requires an assessment of European financial exposure to high carbon, extractive and environmentally unsustainable investments, notably amongst less understood non-listed companies, bank loan books and institutional investor portfolios.
They say regulators should then examine how exposure high carbon and low carbon investments might change over time and how this might affect different parts of the financial system and the system as a whole.
The investors have set a deadline of February 22 for signing on to the Draghi letter, which is being co-ordinated by Ben Caldecott, Head of Policy, Advisory at Climate Change Capital.