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Special Report

ESG: The metrics jigsaw


Implementing the impossible

The boxer, Muhammad Ali, once said: “Impossible is just a big word thrown around by small men who find it easier to live in the world they’ve been given than to explore the power they have to change it.”

Maybe this is the reason why, according to the Asset Owners Disclosure Project, many asset owners still behave like ostriches over climate risk – they may not have the time, resources or desire to address the issue in their investment portfolios, they may deem it an impossible task.

The assessment of the risks of climate change in investment portfolios is no mean feat but as several pension funds demonstrate, it can be done.

Various data providers can undertake environmental or carbon audits that provide a starting point for asset owners to climate change-proof their portfolios. Scenario analyses can also highlight blind strategic blind spots.

Based on that, pension funds may draw conclusions as to what asset classes, sectors or regions they would like to under or overweight but also how they want to engage from an industry point of view. They may want to question companies on how well they are positioned for the transition to a low-carbon, climate resilient economy. Passive investors have the option of carbon-tilted indexes.

Engagement by investors on a policy-level is important as climate and energy policies are needed to ensure the right price and market signals to support investment in low carbon assets.

The physical risks from climate change will financially impact sectors such as fisheries, forestry, healthcare and insurance, while companies are also under threat from regulatory risks due to a price on carbon and other greenhouse gas emissions or the introduction of new regulation. Company-specific risks include competitive, litigation and reputational risk.

The Thai floods of 2011 or US drought of 2012 are just two examples of weather events crippling certain industries.

But as the risk assessment of climate change is new territory, obstacles still need to be overcome.

Data is insufficient and investors need guidance. Applying a climate change strategy to asset classes besides equities and corporate bonds is not straightforward, while low-carbon opportunities such as renewables are often too small or competitive.

But pension funds should not despair – after all, where there is a will, there is a way. And then, nothing no longer seems impossible.

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