A new CAMRADATA whitepaper ‘Integrating Climate Change’ explores the challenges and opportunities of investing with climate in mind

As the UK prepares to host the COP26 UN Climate Change Summit in Glasgow in November, CAMRADATA’s latest whitepaper, Integrating Climate Change investigates the climate investment landscape and some of the key issues concerning investors.

The whitepaper includes insight from guests who attended a virtual roundtable hosted by CAMRADATA in March, including representatives from CPR Asset Management, Royal London Asset Management, Aon, Cartwright, Redington and WWF-UK.

Whereas climate change attracted little discussion 15 years ago, today climate investment feeds into almost every discussion with institutional investors and with policy makers who define the investment landscape. In line with this agenda, asset owners require tools to measure the climate impact of their investment strategies.

A 2020 survey[i] found that 46% of investors now evaluate the carbon emissions associated with their portfolios, a rise of 13% from three years ago. 36% of pension funds now map their portfolio impact against UN Sustainable Development Goals, with a further 38% ‘actively considering’ this step.

Sean Thompson, Managing Director, CAMRADATA said, “While this survey illustrates positive momentum, it infers that a sizeable cohort of institutional investors are still not measuring the carbon-impact of their investment on an active basis. But beyond this, climate investing implies more than applying environmental screening to asset and collateral portfolios.

“It requires actively investing in companies and projects that deliver positive climate outcomes, whether through reducing CO2 emissions, improving access to clean water, or promoting renewable energy and resource use. Our panel discussed some of the issues including challenges investors face in gathering consistent data to measure climate impact and what steps the industry is taking to support data standardisation and data integrity, as well as the impact Covid-19 has had on the industry’s commitment to climate goals.”

The roundtable began by asking panellists which policy they would implement if they were president or prime minister for a day with some interesting suggestions put forward. The discussion then turned from wishes to reality in 2021.

The panel were asked what pension fund trustees had to do legally to integrate climate change into their duties, with a distinction made between obligations under law and mere initiatives.

The session ended with a discussion around asset owners’ appetite for integrating climate change into their portfolios, and how climate change sits within Buy & Maintain credit portfolios, very popular with pension schemes seeking steady income.

Key takeaway points were:

One panellist said their dream policy would be a carbon tax and carbon dividend that removes/ reduces the social friction from the energy transition; another highlighted that climate change was an opportunity for humanity to realise “we are all on the planet together, and not to be selfish”.

When asked what pension fund trustees had to do legally to integrate climate change into their duties, one panellist began with the modelling of carbon emissions to discover the weighted average carbon intensity of investment portfolios. They qualified that these requirements must be fit-for-purpose, holistic and proportionate.

There was an appeal to trustees of smaller schemes to undertake their fiduciary duty and take account of climate risk now: its impact (both threats and opportunities) won’t wait for regulations to arrive.

It was pointed out that DC and DB schemes have to work to engage with their asset managers and ensure they are transparent about how they are managing material risks, including climate change.

As a territory, the UK is responsible for about 1% of global emissions. But in terms of financing emissions, the UK is responsible for about 10-15%.

While progress on carbon reductions is important, other stakeholder considerations, such as working conditions or environmental degradation, also need more attention.

The panel were reminded that only half of the investable universe are disclosing carbon emissions and Scope 3 emissions reporting was scant. Improving disclosures is therefore still an important part of the solution.

It was noted that wrong type of disclosure is a major blind spot in the investment industry. One remedy was for ESG reporting to be standardised at the corporate or asset level.

Investors are confused not merely by the number of regulations and initiatives, but by the different approaches of regulators.

There is a major problem integrating climate change into reporting that ultimately leaves a lot of portfolio managers with fewer choices, said one panellist. Another agreed it is very complicated and pension funds are being asked to report before they have all the data from corporates.

The roundtable ended with two panellists reiterating the need for all to take responsibility, beginning at the top with governments and policy makers.

The whitepaper also features two articles from the sponsors offering valuable additional insight. These are: