Climate Change Investment Solutions: A Guide For Asset Owners

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Climate Change Investment Solutions: A Guide for Asset Owners by IIGCC


The aim of this guide is to provide asset owners with a range of investment strategies and solutions to address the risks and opportunities associated with climate change. The guide is targeted at asset owners and more specifically at trustee boards and investment committees, but also contains insights for asset managers.

This guide builds on the report Financial Institutions Taking Action on Climate Change (2014)2. That report presented a range of different leadership actions that financial institutions have taken in response to climate change. It concluded that there is a need for these actions to be more widely integrated into mainstream investment processes to ensure that investment portfolios are more resilient to the financial implications of climate change. This requires, in part, the development and adoption of new industry norms, tools and expertise that embed climate change into core investment processes, which this Climate Change Investment Solutions guide aims to contribute to. The guide also affirms that corporate and policy engagement are important complementary strategies which can address climate change risks across portfolios and facilitate new investment opportunities.

The guide is presented in 4 sections as depicted in Figure 1, each of which sets out a range of suggested actions that asset owners can take.

  • Section 1: Strategic review – Presents actions to integrate climate change into investment beliefs and investment policies that are actionable and transparent.
  • Section 2: Strategic asset allocation – Discusses actions for measuring and managing the risks and opportunities of climate change, both within the existing asset allocation structure and through evolving the asset mix over time.
  • Section 3: Mitigation investment actions – Presents actions for reducing the carbon intensity of existing assets, along with opportunities to invest in low carbon, clean energy and energy efficient assets.
  • Section 4: Adaptation investment actions – Discusses actions to reduce the vulnerability of existing assets to the physical impacts of climate change, as well as building exposure to adaptation opportunities.

Climate Change Investment Solutions

Section 1: Strategic review

Undertaking a strategic review will enable asset owners to better manage the risks and opportunities associated with climate change in a way that is consistent with the fiduciary duty to exercise due care, skill and diligence in the pursuit of the best interests of fund beneficiaries3. A comprehensive strategic review will involve, inter alia, the inclusion of climate change in the statement of investment beliefs, the investment policy and the setting of targets that are actionable and transparent. The strategic review will influence how an asset owner implements its response to climate change from a top down and bottom up perspective, and also how it communicates with its members and stakeholders. Some of the possible actions to take as part of this strategic review are presented and discussed below.

Climate Change Investment Solutions

Evaluate The Evidence

As with other investment considerations, there is some uncertainty about how future climate change scenarios could play out and their likely investment impact. This calls for a systematic approach, drawing on the latest evidence and analysis to support an informed and considered assessment of the possible scenarios. Asset owners can access information on climate change scenarios from various sources, for example Mercer (2011 and forthcoming)4 and the International Energy Agency (IEA) in its regular World Energy Outlook reports. Annex A presents the possible impact of the IEA’s New Policies and 450 Scenarios on a range of asset classes to illustrate how asset owners can consider the way that different scenarios might impact on investment portfolios.

Some of the key variables that asset owners might consider in evaluating the evidence include:

  • Physical impacts: The IPCC Fifth Assessment Report (2014) noted that without substantial efforts to curb greenhouse gas (GHG) emissions5, global temperatures by the end of the 21st century could be more than 4°C above what they were before the industrial revolution (see Annex B for further information). A change of that size would very likely lead to severe, widespread, and irreversible impacts on societies and the environment globally, increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems. This places some existing infrastructure, business models and assets at risk, and also produces new opportunities in adaptation solutions and resilient infrastructure.
  • Policy trajectory: World governments have agreed to limit the increase in global temperature to 2°C above pre-industrial levels to avoid the worst impacts of climate change. Asset owners need to understand how this agreement could play out and its potential investment impact. Some of the key policy levers include carbon pricing schemes, measures to support energy efficiency and renewable energy, research and development in the deployment of low carbon technologies, removing direct or indirect fossil fuel subsidies, and measures to facilitate private sector involvement in adaptation strategies. Climate policy creates new opportunities in asset classes and markets that asset owners may currently have little or no exposure to. It also increases the risk that existing assets might suffer declines in values and/or become more volatile. It is therefore essential for asset owners to understand, and engage with, the direction and likely impact of climatepolicy at the domestic and international level.
  • Carbon price: The trajectory for future carbon pricing levels and how this varies by region will have a direct financial impact on investment portfolios. An economically meaningful carbon price would increase the incentive for the public and private sector to manage and reduce their emissions, encouraging more long-term investment in lower carbon options. It could also penalise higher carbon emission companies and sectors of the economy that do not manage their exposure effectively. More investors are recognising the need to measure and reduce the carbon exposure of their investment portfolios in anticipation of a rising cost of carbon, with a range of industry initiatives emerging (Highlight 1: Carbon footprinting and portfolio decarbonisation). Asset owners need to participate in this debate and stay abreast of new developments that may impact on the future carbon price outcomes, particularly in the lead up to the UNFCCC COP 21 in Paris, December 2015.

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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