The PRI and COP26
- The next steps to delivering net-zero global emissions by 2050 are expected to be agreed at the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow from 1-12 November 2021. Investors increasingly recognise the threat posed by climate change to the global economy, and are looking to structure their action and develop consensus on best practice.
Inevitable Policy Response
- Markets today have not adequately priced in the likely near term policy response to climate change. This leaves portfolios exposed to significant risk and investors need to act now to protect and enhance value. That’s why PRI have launched this project, to provide investors with a realistic forecasting tool to help navigate this complex and evolving landscape.
Climate change for asset owners
This starter guide introduces the topic of climate change to asset owners. It aims to explain the importance and relevance of climate change in the context of the investment process and to outline how asset owners might incorporate this into responsible investment policies, investment processes and stewardship practices.
The guide is split into two parts:
- Part 1: The relevance of climate change, covering: why it matters to investors; the science; why government action matters to investors.
- Part 2: Approaches that asset owners should adapt in their (A) Investment process (B) Engagement (C) Disclosures, and: possible actions to be taken; available resources; introductory questions to ask investment managers.
The PRI is working to help investors protect their portfolios from climate-related risks, to identify new opportunities and outline processes to help asset owners engage on the topics. Selected further reading is provided throughout. For more information on anything in this guide, or climate change more broadly,
How We Help Our Customers
A. The investment process
Possible actions on climate change:
- Address ESG issues in investment policy statements.
- Support development of ESG-related tools, metrics, and analyses.
- Assess the capabilities of internal and external investment managers to incorporate ESG issues.
- Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or ratings companies) to integrate ESG factors into evolving research and analysis.
- Encourage academic and other research on this theme.
- Advocate ESG training for investment professionals
C. Disclosure
Asset owners can report on the implementation of material risk disclosures on climate change by:
- Aligning with TCFD recommendations
- Identifying and filling climate reporting gaps
- Implementing emerging best practice
B. Engagement
Asset owners can be active owners and engage on climate change specifically through:
- Corporate climate engagement: focusing on the direct and indirect influence4 that companies have on climaterelated public policy.
- Collaborative engagement: working with other investors to promote initiatives that are aligned to the Paris Agreement.
- Policy engagement: promoting policy and regulation that supports governments in meeting the aims and objectives of the Paris Agreement and encourages decisions for a sustainable economic recovery, following the COVID-19 pandemic.
- Liaising with investment consultants: to frame a more holistic response to climate change.
Introductory questions to ask investment managers
1. Organisation-wide support for the TCFD recommendations
Does your organisation support the TCFD recommendations?
If not, please explain the rationale behind this decision.
If yes, when do you anticipate implementing the recommendations?
2. Governance Has your organisation included the monitoring of climate-related impacts as part of the board’s and/or management group’s oversight responsibilities? How is progress reviewed, by whom and how often?
3. Strategy Is there a firm-wide strategy in place to identify the risks and opportunities related to climate change? Has the organisation considered the impact of climate-related scenarios on future outcomes in terms of expected risk and return, as well as the identification of new opportunities?
4. Risk management Has a process been established to assess and integrate climate-related investment risks (transition and physical impacts) into investment decisions? What is your process for monitoring these risks?
5. Metrics What climate-related metrics, if any, does your organisation use? Can you describe how these metrics have impacted investment decisions 6. Challenge, targets and next steps Has the organisation prepared disclosures on its climate commitments in line with the TCFD recommendations and ahead of the upcoming EU taxonomy regulation? Has the organisation introduced steps to transition investment portfolios to net-zero GHG emissions by 2050? Has the organisation prepared and modelled for scenarios such as the Inevitable Policy Response?
2. Governance Has your organisation included the monitoring of climate-related impacts as part of the board’s and/or management group’s oversight responsibilities? How is progress reviewed, by whom and how often?
3. Strategy Is there a firm-wide strategy in place to identify the risks and opportunities related to climate change? Has the organisation considered the impact of climate-related scenarios on future outcomes in terms of expected risk and return, as well as the identification of new opportunities?
4. Risk management Has a process been established to assess and integrate climate-related investment risks (transition and physical impacts) into investment decisions? What is your process for monitoring these risks?
5. Metrics What climate-related metrics, if any, does your organisation use? Can you describe how these metrics have impacted investment decisions 6. Challenge, targets and next steps Has the organisation prepared disclosures on its climate commitments in line with the TCFD recommendations and ahead of the upcoming EU taxonomy regulation? Has the organisation introduced steps to transition investment portfolios to net-zero GHG emissions by 2050? Has the organisation prepared and modelled for scenarios such as the Inevitable Policy Response?
Why does it matter to investors?
Utilities often rely on legacy software, legacy hardware, and a legacy approach to customer service, each of which requires proper infrastructure and modern technology to grow and sustain the business.
The physical changes of climate change have already had tangible financial implications for some sectors, such as insurance. Overall losses from world-wide natural catastrophes in 2019 totalled US$150 billion1.
Expected returns on others, such as energy, utilities, consumer staples and telecoms, will also be significantly impacted. According to some consultants and analysts, company or asset valuations will be affected by how corporations choose to respond to climate issues2.
The Earth’s temperature is now rising faster than any time in recent history – evident in more numerous and volatile weather events, rising sea levels and warming marine temperatures. Global temperature rises have been particularly marked since the industrial revolution and since the 1970s each subsequent decade has been successively warmer than the last.
A three-step approach to implementing a climate change response How asset owners will respond to this important challenge will vary, but actions could include:
introducing a standalone climate policy;
reviewing investment decisions;
challenging fund managers; and
engaging with companies and policymakers.