Summary

There are positive signs of change and evidence of a groundswell of support for more action on climate change. Chris Newton examines how the investment management industry are in a unique position to join the fight against climate change by exerting pressure on companies to lower their emissions.

The challenge of solving climate change begins with disclosing and tracking emissions in order to identify ways to reduce them. Several financial institutions are now working to address this challenge by pressuring companies to open up about the impact of their businesses on climate change, and vice versa. For example, in May 2017, CalPERS (California Public Employees’ Retirement System) and other big institutional investors like the Church of England and the New York State Common Retirement Fund succeeded in passing a shareholder proposal that would require Exxon Mobil Corp. to report on how climate change could impact its business. The eventual report, published in February 2018, included an analysis of 2 degree Celsius (3.6 degree Fahrenheit) scenarios and information on how changing energy needs will impact Exxon’s bottom line. In January 2018, in his annual letter to CEOs, BlackRock CEO Larry Fink called for executives to “understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect your potential for growth.”

These powerful public statements are backed by a larger trend in capital flows, with an ongoing surge in global assets that follow ESG (environmental, social and governance) or responsible investment principles. According to the 2016 Global Sustainable Investment Alliance (GSIA) report, there were $22.89 trillion in global assets being professionally managed via responsible investment strategies at the end of 2016, representing 26 percent of all global AUM (assets under management) and an increase of 25 percent in assets since 2014.

This growth is only expected to continue, with multiple studies showing growing demand for responsible investment-focused investment strategies, particularly among women and younger generations.

These are positive signs of change and evidence of a groundswell of support for more action on climate change. But often lost in the discussion of disclosures is the investment management industry. With few exceptions, the majority of the fund management industry does not publicly report how climate change could impact its investments or measure how many emissions its assets generate. This needs to change.

Every investment decision we make is with our investors in mind. That means as market forces change, so too must our investments

Chris Newton

Investment managers are in a unique position to join the fight against climate change by demanding transparency into the emissions of every company or financial asset in their portfolio, and thereby exert pressure on companies to lower their emissions. But this is only possible if managers have a mechanism for tracking and reporting the amount and source of emissions in their portfolio. Once armed with this information, asset managers can help influence policy discussions and ensure that assets held in responsible investment strategies are actually managed responsibly.

We at IFM Investors—with an investment portfolio that largely consists of infrastructure assets such as airport, roads, bridges and ports—have been among the leading proponents of behaving and investing responsibly. As part of our commitment to responsible investment, we have developed a methodology for tracking emissions in our portfolio, allowing us to simultaneously position our investments for the long term while also mitigating climate risk. While every methodology will have its strengths and weaknesses, we hope our approach can serve as a useful model for other investment managers.