ESG-aligned remuneration

Asset owners must drive the fundamental changes needed to fight climate change in the next five to 10 years before time runs out, a $4 trillion investor alliance has warned.

The warning, made at the World Economic Forum event in Davos, comes from the UN-convened Net-Zero Asset Owner Alliance. The organisation’s members pledged to ensure their investment portfolios are carbon-neutral by 2050.

According to the alliance, while many countries are undertaking ambitious efforts to combat climate change in line with the Paris Agreement, the responsibility for climate protection falls on asset owners and business leaders.

“It is us who must act – as private individuals investing on our own behalf, as company leaders managing assets and portfolios, and as politicians responsible for households and stability in society,” said Günther Thallinger, member of the board of management at Allianz, which formed the investor alliance in 2019.

“It is no longer possible to just continue. Economic systems will be reshaped, as businesses commit to a sustainable future with a focus on climate protection. The making and meeting of human demand must change – and this will drive fundamental structural changes. We must make this happen in the next five to 10 years. Time is running out,” he added.

“Doing their bit”

Asset owners, such as pensions funds, insurance companies and foundations, must accept they must “do their bit” and become active investors, Thallinger said, and strive for net-zero emissions across their investments.

“Asset owners should communicate net-zero emission targets for their entire portfolios. This is relevant for corporates, too, who will get the message that their investors will support the long-term change that is required.”

The investor alliance is also urging asset owners to provide proposals for a reporting standard that expands on the foundations from the Task Force on Climate-related Financial Disclosures (TCFD).

“Expansion here would mean that, in addition to climate change-driven capital impacts, they should also focus on real-world impacts, for example, greenhouse gas emissions measured in gigatons,” Thallinger explained.

Formed last September under the aegis of the UN, the Net-Zero Asset Owner Alliance has grown to comprise 16 of the world’s leading asset owners and allocators, including PensionDanmark, SwissRe, CalPERS, Nordea Life and Pension, Zurich, Aviva and AXA.

Prior warning

In December, outgoing Bank of England governor told pension schemes some of their assets could become worthless if don’t cut their investments in fossil fuels.

Speaking to BBC Radio 4, he said: “A question for every company, every financial institution, every asset manager, pension fund or insurer is, what’s your plan?”

He argued that while around “$120 trillion worth of balance sheets of banks and asset managers” now want more fossil fuel investment disclosures, things weren’t moving fast enough.

Referring to pension fund data, Carney warned that the policies of the companies analysed were consistent with a warming of 3.7°C-3.8°C, well above the ‘safe’ 1.5°C target set by policymakers.

As these concerns come more to the fore, a number of asset managers and funds attending the World Economic Forum are exploring the idea of a “temperature score” to measure how investments contribute to climate change.

By translating the greenhouse gas emissions of a company into a single score, investors could get a snapshot of a company’s climate impact and how it is contributing to the rise in global temperature.

According to a Reuters report, only a handful of financial institutions are adopting this metric, although more firms are starting to consider applying the scores across their portfolios, including Standard Life Aberdeen, German reinsurer Munich Re, Swiss rival Swiss Re and Zurich Insurance.

However, asset managers admit there’s still a lot of work to be done to develop the scores due to the complex calculations required to make them workable, including measuring how companies contribute to global emissions and their planned reductions over time.

Last Updated: 24 January 2020
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