Key insights for asset owners developing investor climate action plans

Climate risk, manifested in hundreds of billions of dollars in extreme weather damage in recent years and in market disruptions as the economy decarbonizes, is financial risk. As these disruptions escalate and the economic transition to net zero gains pace, investors are getting granular about turning commitments into action to achieve their climate goals. 

Five key insights from 25 asset owners, who recently gathered virtually for eight weeks to work on their investor climate action plans (ICAPs) for managing climate risk and opportunity can help other investors as they develop their own plans.  

1. Taking action to respond to climate risk is part of an investor’s fiduciary duty. Climate risk is a financial risk. Taking action to respond to climate risk is part of an asset owner’s fiduciary duty to assess and manage all risks to the portfolio to the legal standard of a prudent investor. The ICAPs Expectations Ladder, developed by Ceres and its global partners, provides a helpful framework for assessing and managing these investment risks as investors construct and manage portfolios, engage with portfolio companies, annually disclose financial risks, and engage with regulators and policy makers to minimize the systemic risks that affect entire capital markets. 

2. Good governance is essential to guide decision-making and action on climate risks. An investor’s climate strategy must be overseen and managed by its boards and senior management, who have insight into the processes and data that underpin portfolio management decisions. Directors and senior executives also need to monitor and evaluate progress on a climate risk management strategy over time. Effective climate governance does not require investors to develop new governance structures. Investors should be thinking about climate risk the same way they think about other investment risks. 

3. Investors can develop ICAPs in stages, rather than all at once. The ICAPs Expectations Ladder provides guidance to help investors continually self-assess their progress on corporate engagement, climate risk financial disclosure, investment policies and strategies, and policy advocacy.  Over time, investors can take more robust actions to strengthen their approach in each focus area of the framework. The tiers outlined in the Expectations Ladder support investors as they align their climate action plans with a science-based emissions reduction timeframe and build on existing systems and processes already in place.  At the highest tier of action, investors will make net zero commitments that cover their entire portfolios and agree to align their long-, medium- and short-term goals with the goals of other actors in the finance sector and the goals of net zero companies, cities, national and international policy makers. This science-based approach will best prepare investors for the net zero economy. But getting ICAPs started does not require that an investor make a net zero commitment or even have all aspects of their plans worked out.  

4. Asset owners should engage with asset managers and align their engagements with portfolio companies. It is crucial that owners understand how climate risks and opportunities are being managed within each investment strategy or asset class. Alignment between owners and managers is key to successfully implementing decarbonization goals, net zero commitments, and interim targets consistent with the scientifically required decarbonization trajectory. As asset owners and managers share plans to engage with portfolio companies to address climate risks, they can align around the Taskforce on Climate-related Financial Disclosures (TCFD) framework, support the Securites and Exchange Commission’s climate disclosure rulemaking, and engage companies on the Climate Action 100+ Net Zero Benchmark indicators, which outline investor expectations for how high-emitting companies need to tackle climate risk. 

5. ICAPs can help investors navigate the alphabet soup of net zero guidance. Investors are looking to implement credible rigorous approaches to assessing, managing, and disclosing climate risks.  The ICAPs Expectations Ladder draws from and is aligned with excellent guidance from the Net Zero Investment Framework, TCFD, Net Zero Asset Owners Alliance Target Setting Protocol, GFANZ Net Zero Transition Plan Guidance, and PRI and CDPs annual reporting cycles. While some recent methodologies focus exclusively on net zero target setting, the ICAPs Expectations Ladder offers the investor a framework to articulate their own multi-faceted approach that will include TCFD disclosures, policy engagement, investment in climate solutions, stewardship activities across asset classes, and a focus on forward-looking activities like target setting and climate scenario planning.  As more markets require asset managers and owners to articulate their climate transition plans through regulation, the ICAPs Expectations Ladder supports investors as they articulate their climate transition plans to meet these requirements.  

A key cross-cutting theme from the asset owners in the course was that developing investor climate action plans using the ICAPS Expectations Ladder as a framework helps to guide and internally align the investor’s approach to managing climate risks and opportunities across their climate activities. We call on investors to develop and update their investor climate action plans using the ICAPs Expectations Ladder by COP28. 

* About the 8-week Ceres ICAPs Course for asset owners:  

The recent eight-week Ceres course entitled “Develop Your Investor Climate Action Plans (ICAPs)” organized with support from Chronos Sustainability and Meketa Investment Group drew a cohort of asset owners working on comprehensive transition plans, using the ICAPs Expectations Ladder. Twenty-five North American asset owners representing a total of over $1 trillion in assets under management participated including insurers, public pensions, foundations, university endowments and state treasurers. Each sought ways to begin or enhance their investor climate action plans while operating within their unique contexts in terms of governance structures, asset size, regulation, resource capacity, asset allocation and investment strategies, and interests of beneficiaries. We will continue to refine the ICAPs Expectations Ladder based on investor feedback and support our members to develop and update their ICAPs in time for COP28.