While the Covid-19 crisis this year has had a devastating effect on society and global economies, it has had a positive impact on carbon emissions and has shown us all that it is possible to reduce our carbon emissions drastically. The goal now is to find a happy balance as we reignite global economies. Governments cannot drive progress on their own. So how can the investment industry play its part?

The central role of asset management
As recently as four years ago, environmental, social and governance (ESG) investing was considered niche. Since then, the incorporation of ESG data in investment decisions has almost doubled, reaching just over $40trn (€34trn), or almost 45% of all assets under management (see figure 1). 

Much of this growth stems from investor demand and, increasingly, from the requirements of regulators around the world, in the form either of local schemes or regional initiatives such as the EU action plan.

Growing use of ESG data in investment

Is climate truly an inVestment topic?
Climate change has become a key topic for investors around the world. Being closely associated with asset-specific risks it is a key element of investment risk management. Identifying these risks and accounting for them in the investment process will lead to better long-term investment decisions (see box: Climate-associated risks).

The investment opportunities arising from the energy transition could outweigh climate-related risks in the long term. Climate investments have shown some promise in terms of their risk-return ratio: An analysis of MSCI climate indices over the past five years shows that across all time periods and geographies, the climate version of the index has shown consistent outperformance compared to the parent index (see figure 2).

Climate-associated risks
l Transition risk: assets at risk of being negatively impacted by incoming climate regulation or low carbon technologies, eg, coal mines
l Physical risks: assets at risk of being negatively impacted by the increasingly severe weather related events

 A further reason for climate to be an important consideration for investors is the evolving regulatory landscape. In 2015, the French Energy Transition for Green Growth Act set a global precedent by requiring investors to be transparent about the climate impacts of their investments. In other countries where there is no equivalent regulation, local industry bodies are stepping in with recommendations. For example, the Swiss industry association of asset managers SFAMA together with the Swiss Sustainable Finance organisation for sustainable investment recently published recommendations for the implementation of ESG concepts, and in the UK, the FCA’s Climate Financial Risk Forum has now published a guide to help the investment industry address climate-related risks.

Positive climate index performance

The practicalities of considering climate in investments
Historically, investors incorporating climate in their portfolios have focused on impact investing strategies or active investment solutions, mainly because of the inability of index approaches to stock pick or under/overweight companies. While impact or active approaches are good for some investors for certain aspects of their investment strategy, they are not always the answer. 

Index approaches to climate investing do exist, and have done for some time; in fact, Amundi was at the forefront of low carbon index innovation when it co-developed the MSCI Low Carbon Leaders index series with Fonds de Réserve pour les Retraites (FRR) and Swedish buffer fund AP4 in 2014. Since then, improvements in data quality and availability have opened the door to a new generation of climate indices that can consider indirect emissions and forward-looking climate commitments alongside historical data. With the further addition of comprehensive climate index labels from the EU, investors are able to use index investing to incorporate climate goals in their portfolios more effectively.

The EU benchmark labels
In 2018 the EU assembled the Technical Expert Group, a panel of experts from the investment industry, academia and sustainability practitioners to develop climate index labelling – resulting in the EU Climate Transition Benchmark (CTB) and Paris-Aligned Benchmark (PAB)1 labels, the first pan-European labels for sustainable investment indices. In doing so, the EU has provided investors with a clear and transparent framework for sustainable investing and highlighted the important role of index management in the transition to a low carbon economy.

1 European Commission Delegated Regulation of 17 July 2020 supplementing regulation (EU) 2016/1011 as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. This regulation sets out minimum technical requirements for EU Climate Benchmarks, as well as a number of ESG disclosure requirements.

The CTB and PAB benchmark labels offer a structure for index providers and asset managers to facilitate widespread, cost-effective climate investing. And, the wider climate investing reaches, the greater the impact it will have.

Amundi’s Climate ETF FUND Range
Amundi has a long history of managing low-carbon index strategies. Its range of ETFs is managed to the new EU climate indices and covers investors’ core geographies with PAB-labelled funds alongside a series of climate change ETFs that are expected to meet the criteria of the CTB label.2 This enables investors to incorporate climate at the heart of their portfolios simply, cost-effectively and in a way that matches their objectives. 

Amundi’s climate ETF fund range

EU climate benchmark methodology

The Amundi ETF climate solutions use indices that follow comprehensive positive and negative screening, reweighting and scoring methodologies to deliver on their carbon reduction objectives. Additionally, they use historical data on emissions Scope 1 (direct), Scope 2 (purchased electricity) and Scope 3 (all other indirect emissions) of greenhouse gas emissions to allocate explicitly to the most climate-positive companies. This backwards-looking analysis is combined with forward-looking approaches that consider company strategy and the transition risks associated with carbon emissions (see figure 4).

Driving impact with climate index investing
When selecting an index approach to climate investing, the first step for investors is to choose a suitable climate index. Equally important is the selection of an asset manager with a robust engagement and voting strategy aligned with the goals of the index, which can play a key role in achieving climate investment goals. 

Engagement or divestment?

According to the PRI in 2015, one of the key reasons investors use active approaches to address climate concerns is the inability of index funds to exclude securities.

While divestment sends a clear signal that a company or sector is not doing enough on ESG issues, it ends engagement by that investor and means the loss of a responsible shareholder applying pressure on the company.

For example, a negative consequence of divesting from the oil and gas sector, is that it ends engagement with firms large enough to pour resources into renewables projects.

Investors might prefer to continue to have exposure to controversial sectors so that, through their asset manager, they can engages with these holdings to drive sustainable change.

A wide range of ESG equity and fixed income ETFs

Amundi has a comprehensive engagement strategy comprising continuous engagement, an active voting policy (which saw Amundi vote against management in 55% of shareholder meetings in 2019) and targeted impact engagement on core themes such as environmental strategy, energy use and biodiversity. It is with this foundation that Amundi launched the Euro iStoxx Climate Ambition ETF which was designed to encourage impact through engagement. By systematically overweighting securities with science-based targets, the index was designed to incentivise companies to commit to the Science Based Target initiative3 and disclose their plans to reduce their carbon footprint. 

“With the further addition of comprehensive climate index labels from the EU, investors are able to use index investing to incorporate climate goals in their portfolios more effectively”

Recently, asset manager engagement has resulted in tangible change across a range of sectors: container shipping companies have committed to net-zero targets; food and beverage manufacturers are reporting on Scope-3 emissions; oil and gas companies have committed to link executive pay to climate targets, according to the Climate Action 100+ 2019 Progress Report.4 

Exclusions, divestment and engagement can all be achieved in passive investment strategies. 

Responsible Investing at Amundi ETF, Indexing and Smart Beta
Amundi was one of the founding signatories of the UN Principles for Responsible Investment5 and this year scored A+ across all categories in the PRI assessment; it offers a broad range of ESG investment solutions and has an extensive engagement and voting policy, applied equally across both active and index.  

Amundi was awarded a BB rating and ranked 15 in the 2020 Shareaction UK report, which analysed the world’s largest asset managers on their approaches to responsible investing.  This was the best score awarded to a top-10 asset manager by AUM.   

3 For more information visit sciencebasedtargets.org.
4 Amundi is a signatory of Climate Action 100+, an initiative bringing together over 450 investors with over $40 trillion in AUM to tackle climate changes by influencing the behaviour of 161 of the world’s largest greenhouse gas emitters. Visit climateaction100.wordpress.com for more information.
5 The PRI was founded in 2005 with Credit Agricole Asset Management as a founding signatory. Amundi was borne of the merger of Credit Agricole Asset Management with Société Générale Asset Management in 2010.