Those hoping to engage investors with the risk of climate change must appeal to the self-interest of fiduciaries, the managing director of AP4 has suggested.
In a paper published in the Financial Analysts Journal on how to hedge the risk associated with climate change, Mats Andersson said basing investments around a decarbonised index strategy would help “mobilise financial markets in support of the common good”.
The paper, written with Patrick Bolton of Columbia University in the US and Amundi’s deputy global head of institutional and sovereign clients Frédéric Samama, suggested the uptake of decarbonised indices would trigger a virtuous circle resulting in pressure to reduce carbon output and building support for climate change mitigation policies.
“Governments, businesses, technology innovators and society, in turn, will thus be encouraged to implement changes that accelerate the transition to a renewable energy economy,” the paper said.
“Our basic premise and working assumption has been that, to engage financial markets with climate change, it is advisable to appeal to investor rationality and self-interest.
“Our argument is simply that, even if some investors happen to be climate-change sceptics, the uncertainty with respect to climate change and climate change mitigation policies cannot be waved off as a zero-probability risk.”
Low-carbon indices are not without their critics.
Anne Simpson, global head of governance at the $288bn (€257.4bn) California Public Employees’ Retirement System, recently warned that investors could end up measuring themselves “against going to hell in a handcart” if they focused too heavily on carbon index underperformance.
In the paper, Andersson also detailed how AP4 had gradually begun decarbonising parts of its equity portfolio – starting with its US holdings, and then expanding to emerging markets and Pacific ex Japan holdings.
AP4 last year also announced that it had been working with Amundi on a low-carbon index ahead of fulfilling its ambition to decarbonise its entire equity portfolio.
The Swedish buffer fund has also stepped up its activities in other areas of sustainable investment, recently tendering a water scarcity mandate.