In a recent speech, Janet Yellen, US Treasury Secretary and former chair of the US Federal Reserve, addressed a global audience of finance ministers, policymakers, and investors in Glasgow ahead of the UN Climate Conference of the Parties (COP26). Ms. Yellen said, “The flow of capital from carbon-intensive to carbon-neutral investments is the most dramatic and predictable economic shift in human history.” As investors and fiduciaries of our clients’ capital, we believe we must understand this shift in order to fulfill our primary mission: exceed our clients’ investment objectives.
Three years ago, we entered into a research partnership with Woodwell Climate Research Center to bridge the knowledge gap between climate science and finance. Our goal then, as now, is to integrate climate data and insights into our investment approach to produce better financial outcomes for our clients. While we continue to expand our climate investing offerings, our goal is not only to provide climate solutions for our clients, but also to incorporate our growing knowledge of climate change across our investment and operational platform.
Please see our 2022 Climate Investing Outlook for insights from our Climate Research and Investment teams.
Through our ongoing research with Woodwell, we have gained several key insights:
- First, physical climate risks like heat, drought, floods, wildfires, hurricanes, water scarcity, and sea-level rise are driving this historic economic shift toward a low-carbon future.
- Second, climate risks are not priced into capital markets. This is creating market inefficiency and broader potential risk.
- Third, society’s awareness of and, therefore, resilience to physical climate risks is low.
- And fourth, solutions that help society adapt to and mitigate the effects of climate change are essential to ensure a sustainable economy.
These lessons continue to influence our approach to climate change. In 2020, we published our Physical Risks of Climate Change (P-ROCC) framework designed to help companies identify, analyze, and disclose their exposure to physical climate risks. In 2021, we expanded this to P-ROCC 2.0, calling for companies to disclose physical location data, which helps investors better assess their risks and discuss building operational resilience.
We have also communicated with the US Securities and Exchange Commission (SEC) following its request for input on climate disclosures for US-listed issuers. In a public letter and subsequent meetings, we emphasized market inefficiencies resulting from a lack of corporate climate transparency and expressed the need for consistent, standardized disclosure of Scope 1, 2, and 3 greenhouse gas (GHG) emissions and physical location data. We expect the SEC to release a proposed rule early in 2022.
Through our efforts, we hope to help broaden awareness of physical climate risks and the need for markets to price those risks appropriately.
Need for climate change mitigation and adaptation
The world is well on the way to establishing a policy environment supportive of efforts to reduce emissions and stem global warming. While these mitigation measures may help limit the worst long-term effects of climate change, climate impact over the next 30 years is unavoidable, given the half-life of GHGs already in the atmosphere. Society simply has no choice but to adapt to a changing climate. Companies that recognize and address physical risks may see their costs of capital decline and valuations rise. Municipalities that do the same may see bond rates fall and tax bases expand. Companies and issuers that develop adaptation and mitigation solutions should see strong demand and growing markets. On the other hand, entities that prove slow to build resiliency may suffer the downside of those equations.
We believe the low-carbon economic shift will accelerate as more people demand action from companies and policymakers. As founding members of the Net Zero Asset Managers initiative (NZAMI), we are committed to helping our clients navigate the transition. Through our participation, we aim to further industry best practices for target setting and measurement to ensure real-world emissions reductions.
We have come to appreciate that while buying and selling securities based on emissions can change the reported carbon footprint of an investment portfolio, it does not necessarily reduce our clients’ exposure to climate risks. Only by helping companies we invest in adopt credible, achievable strategies for lowering their carbon footprint can we affect real emissions reductions. Moreover, by encouraging issuers to adopt transition plans with science-based targets, we believe we can decarbonize portfolios from the bottom up and more effectively insulate our clients’ assets from climate risks over time.
What you can do in 2022
To help your organization build climate preparedness, you may want to consider applying some of our lessons learned to your investment strategy:
- Learn about climate change investing
- Ask external portfolio managers how they are considering physical risks of climate change. What data do they use, and how do they engage with companies?
- If you have internal portfolio management, consider using P-ROCC or your own climate framework during engagements
- Communicate with policymakers
- Ask regulators to request that companies disclose emissions and location data
- Encourage regulators to align frameworks with others being developed around the world
- Establish climate-aware investment portfolios
- Options increasingly include a range of asset classes, including equities, fixed income, real estate, and alternatives
- Consider allocating assets to portfolios that fund climate solutions
- Set a net-zero goal and work with your investment managers to implement it
We look forward to building momentum in 2022 around climate investing and climate engagement. We continue to broaden our research with Woodwell and to engage with companies, clients, regulators, and industry groups on the many ways that we, as active investment managers, can reduce the real-world risks of climate change while strengthening capital markets. As an African proverb says, “If you want to go fast, go alone, if you want to go far, go together.” We hope by sharing our insights you will also feel inspired to take action on climate change to ensure a sustainable, low-carbon future.
Please see our full 2022 Sustainable Investing Outlook to learn about the opportunities and risks members of our climate, impact, thematic, and stewardship investing teams expect to navigate on behalf of our clients in 2022.
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.