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How to reduce carbon in institutional portfolios
Fawzy Salarbux, global head of consultant relations, Candriam
There was a time when discussions about the environmental concerns of pension schemes were gently put to one side as secondary to the fiduciary obligation to secure the best financial outcome for scheme members. In 1998 for instance, the Department of Labor in the US “allowed” pension plans to consider ESG, so long as they did not negatively affect financial performance.
Fast forward to 2015, and those same fiduciaries of US pension plans were being told that they “should” integrate ESG factors where appropriate. Under article 173 of France’s Energy Transition Law, institutional investors (including
insurers) are required to disclose their exposure to climate risk on an ongoing basis. Justifying why an investor does not evaluate climate change in its outlook has become the exception rather than the rule.
What has shifted mindsets in the past 20 years has been the sheer evidence of the risks of climate change. Deep ice drawn from three kilometres beneath the North and South poles tell us that concen- trations of CO2
in the atmosphere are higher than they have been for millions of years. The trend began
with the Industrial Revolution, but the terrifying fact is its acceleration in recent times: since 1960, human activities have added one-quarter of the CO2
in the atmosphere.
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0 Geophysical events Meteorological events Hydrological events Climatological events Source: Munich Re
We are experiencing more extreme weather-related events globally. Last year saw more than 800 such events, more than three times than during the 80s. Reporting this kind of data is essential for insurers, reinsurers but also their investors to understand and evaluate the risks in providing capital to such busi- nesses. Equally, the reason why pension funds can give a fuller account of the climate-change risks in their portfolio is because most investee companies in those portfolios are obliged to report on carbon emissions too.
Optimise rather than exclude It does not take a great deal of analysis to work out that certain sectors, such as energy, are responsible for the biggest chunk of emissions. Just 20 companies, mostly oil producers, can be directly linked to a third of all greenhouse gas emissions in the modern era, according to recent research by the Climate Accountability Institute.
24 November 2019 portfolio institutional roundtable: Responsible investing
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