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Analysis

The greening of green investments

by Frédéric Samama

The greening of green investments

Until recently, large institutional investors did not pay much attention to climate change. Environmentally friendly financial products were something of a niche market, and only a few investors seriously considered climate change issues within their broader risk management frameworks. But there is now growing awareness of the potential impact of such issues on the value of financial assets.

As part of their fiduciary responsibilities, long-term institutional investors are increasingly seeking to reduce transition risks stemming from an effective international response to climate change, and to take advantage of investment opportunities using new financial products. One result has been that low-carbon indices have enjoyed rapid growth. Investors are seeking products that can help reduce climate change risks over the long term without affecting short-term returns.

Many investors are seeking opportunities to directly invest in companies and projects that can help reduce climate change. Increasing interest from investors in green bonds and recent initiatives in China and India to mobilise private capital could have profound implications for this development.

Moving towards a low-carbon world

To motivate investors and send a clear message to policy-makers, the Portfolio Decarbonization Coalition was established in September 2014 with the UN’s support. The organisation aims to gather investor pioneers in decarbonisation strategies.

The PDC has had high-level support from the outset, as well as ambitious targets. UN Secretary General Ban Ki-moon said, ‘Some of the biggest – and potentially transformational – announcements at my climate summit came from the private sector. A coalition of institutional investors has committed to decarbonise $100bn in institutional equity investments.’

One of the direct consequences of decarbonisation is that asset owners start adjusting their investment strategies. They do so by withdrawing capital from carbon-intensive companies, projects and technologies, and re-investing in more carbon-efficient areas of the economy.

The PDC understands that, when large institutional investors begin to re-allocate capital on the basis of companies’ carbon impact, this provides those companies with a strong incentive to change the focus of their investments to low-carbon activities, assets and technologies.

Investors in the spotlight

The PDC set out to assemble a coalition of institutional investors committed to decarbonising substantial investments across asset classes before December’s climate change conference in Paris.

The initial $100bn target was surpassed within 15 months, finally reaching $600bn. This sends a strong signal that institutional investors are committed to tackling climate change risks on a significant scale.

This level and speed of commitment shows how mainstream investors are taking climate change more seriously. For example, the most recent asset managers to join the PDC — Caisse des Dépôts et Consignations in France, Stichting Pensioenfonds ABP in the Netherlands and Allianz in Germany — have committed to moving investments out of coal-intensive industries and into clean energy to ‘decarbonise’ large equity portfolios.

In Paris, the PDC was recognised as one of the key initiatives for addressing climate change in the private investment community. Following the conference, it published its first annual report setting out members’ decarbonisation strategies.

Spreading a clear message

The Paris conference sent a clear message to investors. By coming together to adopt the most ambitious climate change agreement in history, countries showed investors that the global economy is moving towards a low-carbon future. But targeted regulations can further strengthen their mobilisation.

For example, the mandatory disclosure of climate change-related risk exposures for all asset managers, including state-owned vehicles such as pension funds and sovereign wealth funds, should be straightforward to implement, and support the emergence of a consensus on ways to reduce carbon emissions.

Institutional investors

France took the lead with the Energy and Green Growth Law in 2015, which included a provision concerning institutional investors.

The law extends the voluntary arrangement of the Montreal carbon pledge – under which investors commit to measure and publicly disclose the carbon footprint of their investment portfolios annually.

French President François Hollande said, ‘In France, as well as in other European countries, we ask investors to report on the climate risk exposure of their portfolios.’

To maintain momentum, in 2016 the PDC intends to promote best practice across the investment community by engaging new investors. It will also engage governments and other stakeholders on how and where policy and regulations can support the adoption of best practice by institutional investors.

It is supported by other initiatives, such as the UN Environment Programme’s inquiry into the design of a sustainable financial system. This acts as a secretariat for the green finance track, which China has established as part of this year’s G20 presidency.

With the new G20 green finance track, the Financial Stability Board’s task force on climate-related financial disclosures and national initiatives to mobilise investors in London, Paris, Beijing and Delhi, 2016 is set to be a pivotal year for investors.

This is an opportunity to take the PDC’s proposals forward, and scale market and policy innovation to make the Paris agreements a reality.

Frédéric Samama is Deputy Global Head of Institutional & Sovereign Clients at Amundi Asset Management. For more information on low-carbon indices see Andersson, Bolton, Samama (2016), Hedging Climate Risk.

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