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IPE Views: Seeing climate change ‘actions’ for what they are

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These days, with climate change an ever more prominent issue for institutional investors, it is easy to get excited about the different initiatives and announcements that hit our screens on a regular basis. 

It’s important to see them for what they are, and to not conflate managing the risks and opportunities of climate change with action to mitigate it.

The press release that landed in my inbox on Friday is a perfect example. It had all the ingredients of a classic “ESG” news story. There were the big, powerful investors – six named sovereign wealth funds, including Europe’s largest, Norges Bank Investment Management – and the buzzwords: climate change, long-termism, value creation, sustainability, transition risk, physical risk…

The six-strong group of major sovereign wealth funds has produced a framework on climate change to promote the integration of climate change analysis into the management of large, long-term and diversified asset pools, as I wrote on Monday.

The question in my mind was – as it often is when presented with such initiatives – was this going to be about managing the investment impacts or implications of climate change, or addressing climate change itself? As objectives or motivations, the two are quite distinct.

I found very little in the framework to indicate this was about the sovereign wealth funds seeking to actively contribute to the fight against climate change.

There are some parts of the framework that come close to this, such as the section on “ownership”, where the document sets out the sovereign wealth funds’ expectations of companies.

Pollution

But again, read the text and it is clearly about understanding, managing and reporting on the financial implications of climate change, which the framework depicts as a development or phenomenon the investors are powerless to affect.

Engaging with companies is mentioned, but there is no commitment to do so – “SWFs may wish to engage” – and the objective is not to effect any change, but “to understand” aspects such as “the risk and opportunities associated with the climate change issues that the Paris Agreement is seeking to address”.

A contact at a climate finance think tank tells me: “Implicit perhaps in the framework is the idea that climate risk management frameworks contribute to shifting capital allocation, but this is indeed not a given. Managing risks and having an impact in the real economy are indeed not the same thing.”

Getting a group of major sovereign wealth funds with very different perspectives and political backgrounds to back such an initiative is no mean feat and could have an important signalling effect.

Also, the communication about the framework does not pretend to be about trying to change the course of man-made climate change. The language is quite clearly about risk management and analysis – and, yes, opportunities.

More powerful investors using their influence to push for more and better data and showing climate change is on their radar is a good thing. 

The “ESG space” is a broad church, harbouring investors that want to manage change as well as those who want to effect change. Given the types of issues dealt with in this field – from human rights to climate change – asset owners, asset managers and advocacy groups should be clear about their objectives.

The framework can be found here.

Readers' comments (1)

  • Susanna Rust is quite right. Managing any risk is not the same as doing something about it. Most risks are actually a given. They don't go away. You can just shove them in someone else's lap, sell them or do what you can to mitigate the risk. In the case of ESG something can be done about the risk. However, while that is a good, positive by-product of management, it is emphatically not the job of pension funds to protect or even change the environment. Their job is to make pensions. At best, there is an investment case for acting on bad governance or it least divesting from badly led enterprises.

    The only scenario I can think of (but it is realistic and compelling) that would spur a pension fund into ESG action without a financial reward is one where its beneficiaries want their pension fund to be active with their money on their behalf. Acting on their wishes will reinforce trust. Trust is what any financial institution needs to survive.

    Since pension funds' beneficiaries are not a random population, their interests will vary wildly. Doctors and nurses will hate tobacco and motorcycles but like medicine and children. The religiously motivated will like the environment at large, but not alcohol and guns. Soldiers will like landmines, guns and anything that keeps the peace.

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