These case studies offer a snapshot of how the profiled funds and institutions currently address climate risk. The approaches these funds and their peers employ are rapidly evolving as investors learn from both individual and collective experience. We encourage investors at earlier stages of their climate risk-management journeys to review these case studies and consider which of these approaches could help guide their responses to climate risk.
As the climate crisis, its physical impacts and the transition to a net-zero emissions economy all accelerate, global investors increasingly recognize the material and financial risks to their portfolios. Large institutional investors know they must assess and manage climate-related risks if they are to meet their fiduciary duties to clients and beneficiaries.
Recognizing the economic materiality of climate change as investment risks, some leading global asset owners have become early movers in taking comprehensive action to identify, evaluate and manage climate-related risks in their portfolios. In steps that align with The Investor Agenda, an initiative to accelerate and scale up the actions that are critical to keeping global warming to no more than 1.5 degrees Celsius, some have developed climate action plans involving low-carbon investment strategies, corporate engagement, disclosure and policy advocacy. The case studies presented here show a range of evolving best practices used by some of the largest global asset owners and financial institutions. Ceres developed these case studies in collaboration with global investor networks - Asia Investor Group on Climate Change (AIGCC), Investor Group on Climate Change (IGCC), and Institutional Investors Group on Climate Change (IIGCC) - and with funding from Ceres Investor Network member, Impax Asset Management.
Ten asset owners are profiled in these case studies—AP2, the Second Swedish National Pension Fund; the Brunel Pension Partnership; Cathay Financial Holding Co. Ltd.; Caisse des Depots et Placement du Québec; New Zealand Superannuation Fund; OPTrust; the Ontario Teachers’ Pension Plan; PFA Pension of Denmark; PGGM Investment Management, and Wespath Investments and Benefits. These ten institutions, which collectively manage hundreds of billions of dollars, were kind enough to share information on their methodologies and answer questions about their climate risk-management and investment strategies.
Each has developed a range of approaches to assess and manage two fundamental risks from climate change: physical risk (e.g., the impacts of heat waves, droughts, wildfires, sea level rise, floods and stronger storms) and transition risk (e.g., the impacts of government climate policies like carbon pricing and the technology transition to renewable energy, electric vehicles, and energy and resource-efficient technologies). They are also collaborating in global initiatives, including Climate Action 100+, and in climate policy advocacy as encouraged by The Investor Agenda, to mitigate the systemic economic and social impacts of climate change.
The investors profiled use both qualitative and quantitative strategies to assess and manage climate-related risks. Their approaches range from carbon footprinting of different asset classes to developing scenario analyses of how their portfolios may fare under various climate policy and transition scenarios. Employing such methods allows these investors to assess and disclose their climate-related risks. Some funds work with service providers to develop quantitative models to estimate the impacts of transition risk, physical risk, or both. Most funds also use corporate engagement as a risk management tool, and some have reduced holdings in high greenhouse gas emitting companies that have not developed robust transition strategies. All of the funds in these case studies are pursuing low-carbon investment strategies, seeking to invest in “climate solutions” opportunities across various asset classes.
A common strategy for most of the investors profiled in these case studies is to “decarbonize” their portfolios by reducing the carbon intensity of entire portfolios or of particular asset classes. Another common strategy is to align their portfolios with the “well-below 2 degrees Celsius” Paris Agreement goal. Some have set time-bound targets for emission reductions with a few aiming for net zero emissions by 2050. Others have set quantitative goals to scale up their low carbon, climate positive investments, and many are reporting their strategies and progress in line with the Task Force for Climate-Related Financial Disclosure (TCFD) framework.
These case studies offer a snapshot of how the profiled funds and institutions currently address climate risk. The approaches these funds and their peers employ are rapidly evolving as investors learn from both individual and collective experience. We encourage investors at earlier stages of their climate risk-management journeys to review these case studies and consider which of these approaches could help guide their responses to climate risk. As practices around managing climate risks continue to evolve, Ceres will support investors in tackling these risks through The Investor Agenda and the Ceres Accelerator for Sustainable Capital Markets: Achieving Paris-Aligned Portfolio initiative.
For more information, please contact Peter Ellsworth ([email protected]).