Asset owners’ climate-change advice

A comprehensive guide to climate change, written by asset owners for asset owners, gives practical steps for trustees and pension fund managers who are framing their activities on climate change.

The guide, Climate Change for Asset Owners, is a collaborative effort produced by an International Centre for Pension Management working group led by Jaap van Dam. It outlines 10 practical steps for asset owners to address climate change in their portfolios.

The 10 action points fall under five core sections – prepare, build, involve, implement and learn – and consider the roles of both the board and management.

The guide looked at giving investors support around: how to get the board, trustees and senior leadership driving the change; how to translate climate-change language into investment language; and how to start managing something that isn’t yet measurable.

The guide encourages asset owners to start by recognising where the organisation is placed for climate change risks and opportunities before implementation.

It also emphasises that it is essential to make sure the whole organisation is on the same page. The guide includes contributions from 10 asset owners, which also provide peer case studies of their climate change integration journey.

The guide draws on the experience of a number of funds that have been addressing these challenges for years; for example, the £60 billion Universities Superannuation Scheme in the UK has 10 years’ experience tackling climate change, and the €211 billion Dutch fund PGGM, where van Dam is head of strategy, has been at it for five years. The case study in the guide of the NZ$37 billion New Zealand Super is a good example of how to get the whole organisation co-ordinated around the issue, van Dam said.

“By bringing experience to the table, the guide can help others begin the journey,” van Dam said.

“What I want from this guide is that it helps funds move from talk to walk, and that is urgently needed.”

Van Dam said the aim was to provide a practical guide to funds to integrate the impact of climate risks and opportunities in investment portfolios.

“Because it is early days and climate change is a long-term issue, it’s very hard to tackle. This is an investment problem and needs to be addressed,” he said. “The objective of the guide is to give as practical tools as possible, and to translate this generic idea into a journey, get stakeholders involved and end up with a serious strategy.”

Patti Croft, a board member at the C$193 billion ($147 billion) Ontario Teachers’ Pension Plan, explains how the fund’s board considers climate change and governance around it.

“Climate change poses potentially significant risks to financial returns and the long-term sustainability of a pension plan, meaning that the board needs to treat it like any other material risk. At Ontario Teachers’, the investment committee of the board oversees responsible investing, which encompasses climate-change risks. Ultimately, accountability for climate changes lies with the board, [which] sets the tone for risk awareness.”

The World Economic Forum’s 2019 global risk report, released in January, identifies failure to mitigate, and adapt for, climate change as the biggest global risk in terms of impact.

Van Dam urged asset owners to focus on understanding where climate change translates into risks in their portfolios, both in the short term and the long term.

“For example, 40 per cent of assets in equities face serious challenges because of technological change and flooding risk,” he said. “If investors list climate change risk as one of the risks in their risk statement, then they probably can overcome the biggest risk hurdle, as from that time it exists and you can’t just ignore it.

When it comes to implementation, the guide emphasises integrating climate change in the existing risk-management processes to ensure it is considered in investment decisions.

Putting some money to work is an important step, the guide states.

It also mentions that investors should be sure to measure the progress made in integrating climate change in the investment process and achieving overall climate change goals. One way to do this is by setting key performance indicators for each action described in the guide. It gives examples of KPIs.

The guide emphasises the importance of communication, both internally and externally, around the fund’s approach to climate-change integration.