This is the third annual report on the results of the Global Investor Survey on Climate Change. This year it was commissioned by the Global Investor Coalition on Climate Change (GIC), comprised of the four regional investor networks – the Institutional Investors Group on Climate Change (Europe), the Investor Network on Climate Risk (North America), the Investor Group on Climate Change (Australia and New Zealand) and the Asia Group on Climate Change (Asia) – whose members include many of the world’s largest Asset Managers and Asset Owners.
The report provides an overview of climate-related investment practice by members of the GIC networks, focusing on the integration of climate change considerations into investment processes and actions taken during 2012. This report presents the key findings from the annual survey and provides an overview of emerging best practices. It is based on the survey responses from 37 Asset Owners and 47 Asset Managers that participated, and is focused on actions taken during 2012. In aggregate the 84 participating investors have assets in excess of USD14 trillion and are based in ten countries.
The GIC networks would sincerely like to thank the participating members for the time they committed to completing the survey and also those that contributed to the audit and case-study follow-up calls.
The memberships of the four GIC investor networks represent global leadership on climate and investment behaviour. The activities they are undertaking showcase what a leading subset of investors are doing to better understand, plan for and, most importantly, manage the risks and opportunities that result from climate change and climate policy.
KEY FINDINGS
This year’s report shows that during 2012, members of the GIC networks have retained and, in many cases, advanced their practices to address climate change in their investment activities. This is despite the ongoing economic challenges and continuing policy uncertainty and reflects increasing awareness among investors that climate risks continue to worsen.
There is a clear trend in the results showing that climate risk analysis is performed within asset classes and for specific investments rather than at the portfolio level. Climate risk analysis in equity portfolios for example is performed by almost 100% of respondents and real estate and infrastructure portfolios are receiving increasing levels of attention with respect to physical climate and policy or regulatory impacts. Around half of asset owners undertook a climate risk assessment at the portfolio level, and around half of these made changes to their investment activities as a result.
This year’s report highlights allocations to ‘low carbon investments’ and the way investors think about risk analysis, particularly in relation to ‘emissions intensive investments’. A number of respondents are either divesting or electing not to invest, based on climate change concerns, although the extent to which these practices apply across portfolios will require further examination in future years. Seeking better information on low carbon and emissions intensive investments within portfolios appears to be one of the major areas of opportunity arising from this year’s survey.
Engagement by Asset Owners and Asset Managers with policy makers and companies remain core tools for addressing climate change risks with high levels of activity in these areas. This reflects the fact that institutional investors in large diverse markets continue to face challenges to diversifying away from emissions exposures when policy signals do not sufficiently support changes.
Key results are provided below with the more detailed analysis outlined in the corresponding chapters.
Chapter 3 Investor risk perceptions – strategy and policy responses
This chapter provides an overview of investors’ perceptions of climate change and the firm-wide and portfolio wide commitment demonstrated by investors.
The majority of respondents continue to view climate change as a material risk across their total portfolio and make reference to this in their investment policy. • 56% of Asset Owners conducted formal or informal climate risk assessments of their portfolios.
25% of Asset Owners have made changes to their investment strategy or decision-making process in 2012 as a result of climate risk assessments (45% of Asset Owners who undertook a risk assessment).
There has been a meaningful improvement in the adequacy of consulting advice on climate change (71% providing a favourable response compared to last year’s 26%).
Responses indicate some improvement on reporting last year with only 14% of Asset Owners and 21% of Asset Managers not providing any reporting and the vast majority of those Asset Owners planning to do so during 2013. Levels of public reporting have remained the same, with the majority of Asset Owners (56%) and Asset Managers (55%) reporting publicly on climate activities. It is a similar response on reporting specifically to trustees/management (60% of Asset Owners and 49% of Asset Managers), with a lower response to reporting specifically to beneficiaries.
Chapter 4 Assessing and analyzing carbon risk
This chapter describes how Asset Managers, including internal managers of Asset Owners, implement carbon evaluation processes within asset classes.
Almost 100% of respondents with direct responsibility for managing assets continue to conduct climate risk assessments within asset classes, considering factors such as regulations, corporate governance and physical impacts.
Of the nine risks proposed for assessment in investment analysis, the combined results for Asset Owners and Asset Managers indicate that the top four factors were regulatory changes, government support schemes, physical impacts and corporate governance.
83% of respondents are utilising a combination of qualitative and quantitative data, with 17% solely using qualitative inputs. Quantitative data is being used by most respondents for investment analysis on valuations and for engagement purposes.
79% of Asset Managers and 40% of Asset Owners with internal teams thought that wider verification of climate change data (reported scope 1 and 2 emissions) would encourage greater use in investment analysis.
Chapter 5 Investment allocations – low and high carbon
This chapter explores the drivers and challenges related to low carbon investment opportunities, including renewables, and the extent to which Asset Managers and Asset Owners allocate funds to these investments. It also reviews exposures to highly emissions intensive assets.
There has been some progress on detailed analysis of portfolio exposure to both ‘low carbon’ investments and emissions, but further work is needed.
70% of Asset Owners and 60% of Asset Managers reported low carbon investments, based on this year’s new definitions.
50% of Asset Owners and 52% of Asset Managers reported that they had exposure to low carbon assets via developed market equity investments, making this the asset class with the highest level of reported low carbon exposure. Few respondents were able to quantify the value of low carbon exposure via equity investments with confidence.
Real estate was the asset class for which respondents were best able to quantify the value of their exposure and this had the highest dollar amount exposure. It is also the asset class that is most advanced as regards tracking and monitoring frameworks, but there is not yet consistency in minimum standards for ‘low carbon’ properties across the industry.
26% of Asset Owners and 30% of Asset Managers have conducted formal assessments of their exposure to emissions intensive investments, with the qualitative responses suggesting higher rates of informal activity in this area.
Chapter 6 Public policy and company engagement
This chapter highlights how investors are engaging to raise corporate standards and individually and collaboratively encouraging policymakers to provide a policy framework that is supportive of longterm investment decision-making and the move to a low carbon economy.
The GIC networks continue to facilitate high-level public policy engagement activities on behalf of their members in each region that the groups operate, despite challenging political environments.
Direct corporate engagement by Asset Owners has increased by 20% on last year’s results, reflecting the importance placed on the activity and the value attributed to active ownership.
53% of Asset Managers have made a decision to divest or not to invest in listed equities based on climate change concerns. Examples given for these decisions typically referenced emissions intensity.
Chapter 7 Investment manager selection and monitoring
This chapter provides an overview of whether and how Asset Owners include climate change considerations in the selection and monitoring of external Asset Managers.
Most Asset Owners in this year’s survey (83%) consider the extent to which managers integrate climate change into their investment process and ownership activities and 69% indicated that it influenced their selection decision (up from 43% last year).
Climate change issues are included in due diligence processes, interviews and criteria in Requests for Proposals (RfPs) but not yet half of the respondents (43%) included this in new Investment Management Agreements (IMAs).
In 2012, 63% of Asset Owners (up on last year’s 53%) monitored their existing Asset Managers on climate change integration. Only 23% of Asset Owners have set clear expectations of their existing managers on climate change in their IMAs.
Chapter 8 Asset class responses and examples
This chapter provides an overview of how Asset Managers and the internal managers of Asset Owners integrate climate change considerations into investment analysis or due diligence processes across asset classes, including Real Estate, Infrastructure and Commodities.
In 2012 there was a substantial amount of climate related activity by real estate Asset Managers in particular in relation to on-site building improvements. They covered a wide variety of activities, but the key focus was on energy efficiency, and then waste and water management. There was also a strong indication that this activity was expected to continue or increase in 2013.
Responses on asset classes outside real estate were more limited, but more than 50% of internally managed infrastructure assets were monitored for climate change risks.
Just over a third of Asset Managers responding to the infrastructure questions elected not to invest or divested from an infrastructure investment due to climate change concerns.