UK institutional investors hold more than £1trn (€1.2trn) in assets exposed to “significant” climate risk, the latest research by consultancy LCP showed. According to the comprehensive climate risk profiling of more than 300 UK institutional investors, some 50% face major climate threats to the value of their portfolios, it disclosed.
The study, published in LCP’s report The tip of the iceberg, analysed the exposure of UK institutional investors to climate risks based on their allocation across asset classes and, therefore, their estimated exposure to the five types of climate risk it has identified – equity, credit, data availability, transparency and asset transition risks.
The analysis demonstrates the pervasive nature of climate risk with just one in ten asset owners’ portfolios containing low levels of climate risk, it said.
According to the report, some of the largest risks come from investments from corporate bonds, multi-asset and private markets, also showing that four in five (82%) UK asset owners today hold more in corporate bonds and gilts than they do in equities, averaging 54% of their investments.
Meanwhile, two thirds of UK institutional investors hold more than a tenth of their assets in private markets or multi-asset mandates.
Dan Mikulskis, partner at LCP, said: “These types of investments can present serious climate risks. With spread levels reaching their lowest point for more than a decade, there is a question mark over whether any climate transition risks are realistically priced within corporate bonds.”
He said that because of the rising allocation to this asset class and the under-the-radar nature of this risk he believed this would potentially be the most significant class of climate risk faced by investors.
“At the same time, in private markets there simply isn’t the data to make any accurate judgements around carbon intensity or climate alignment, making climate risks difficult to quantify and address,” he added.
Despite these risks, LCP’s analysis revealed that 90% of UK institutional investors could significantly reduce their climate risk exposure over the next decade through changes to their investment decisions.
UK asset owners hold around 75% of their assets in listed equities, investment grade corporate bonds and government bonds – all of which have realistic pathways to net zero emissions and lower climate risks. Furthermore, this overall percentage is likely to remain relatively stable over the next 10 years, LCP said.
“The good news is that the bulk of investments are in asset classes where climate risk can be addressed with the information we have available today, for example by investing in companies that have forward looking plans that are consistent with the Paris Agreement. Such measures would radically decrease the climate risks associated with these portfolios,” Mikulskis said.
New investor group formed to step up climate focus on chemicals
Responsible investment campaign group ShareAction has convened a group of investors to increase shareholder engagement with a view to accelerating decarbonisation in the chemicals sector.
It said the sector was responsible for some 5.8% of global greenhouse gas emissions (GHG), but “largely untouched by shareholder engagement”.
The NGO claimed that one reason for this was that the sector had typically been seen as difficult to decarbonise, but that it had found it was both technically and economically feasible to fully decarbonise the production of chemicals by 2050.
ShareAction has convened a working group of investors to take up its recommendations and disseminate the findings into investor engagement practices more broadly.
The group includes EOS at at Federated Hermes, Barrow Cadbury Trust, EdenTree Investment Management, Jesuits in Britain, NN Investment Partners, and Sarasin & Partners.
Joanne Beatty, engager and chemicals sector lead, EOS at Federated Hermes, said: “In our view 2021 will be seen as a tipping point for investor engagement on climate action, with greater focus shifting towards neglected sectors such as chemicals, which is vital to accelerate company progress on the climate transition.”