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The Task Force on Climate-Related Disclosures (TCFD) process has articulated the view from global financial regulators that climate change does indeed pose a material risk to the financial system. Since the TCFD's initial report was released in June 2017 the phrase "climate risk" as the public narrative has evolved to the "climate crisis" or "emergency" with accompanying physical manifestations and resulting economic/social costs clearly apparent.
The IPCC's Global Warming of 1.5C (2018) provides clear guidance from the world's scientific community on the need for urgent policy action from governments to facilitate a transition from fossil fuel combustion to renewable and zero-emission transport technologies. The lack of meaningful policy progress globally means there is ever-increasing pressure on the financial system to drive more ambition in this energy transition.
The asset management sector plays a pivotal role in the financial system given the vast portfolios the leading players manage, their interactions with companies in the real economy and power in shaping government policy as a key economic sector in its own right. FinanceMap's analysis shows the sector as a whole is not demonstrating the kind of leadership at present, through any of these levers, that the recent escalation in the urgency of climate change would apparently warrant.
The portfolios held by the 15 largest asset management groups remain significantly misaligned with the targets of the Paris Agreement even under the fairly conservative IEA ‘Beyond 2 Degrees’ Scenario (B2DS) within the key auto, electric power and fossil fuel production sectors, (with aggregate market values of at least US $8 Tn in widely held listed companies). This misalignment is reflective of the fact that the majority of companies in these sectors are very far from aligning their business models to meet the goals of Paris and that the 15 leading players all hold diversified global portfolios of equities often using index driven strategies.
The extent of delay in the introduction of the "green" technologies may be seen in the automotive sector. In 2018 the world's automakers produced 96 million vehicles across all platforms, of which 1.4% were electric (EVs). The FinanceMap/PACTA analysis suggests this will evolve by 2024 to 101 million vehicles in total, of which 4.2m (4.2%) will be electric. However, the IEA's B2DS scenario for achieving warming of 1.75C or less requires at least 9.2M EVs by 2024, pointing to the sector's very significant misalignment with this recognized Paris climate scenario. This sector wide lag in EV uptake by the automakers and their lobbying to delay EV regulations illustrates the difficulties investors will have in using portfolio allocation alone to drive climate goals in finance - hence the focus on changing company behavior by engagement.
If global investors wish to remain active in these sectors and at the same time show Paris alignment in their portfolios, then more robust engagement with the relevant companies should be a priority. This engagement should likely focus on the twin goals of accelerating the individual corporate transitions to low carbon technologies and getting the companies to align their policy lobbying in line with Paris.
At present only a portion of the leading asset managers are showing evidence of engaging with companies on these two goals. Of the largest groups, leadership is being shown by the asset management arms of Legal & General, UBS, AXA, Allianz and Credit Agricole. These players are all participants of the Climate Action 100+ process, around which this forceful climate stewardship on business models and lobbying appears to be coalescing. The collaborative approach appears to show signs of working, especially on driving the issue of climate lobbying governance through the corporate sector.
US-based giants with significant pools of actively managed funds like the asset management operations of BlackRock, Goldman Sachs, and JPMorgan Chase appear absent from this shift in company engagement on climate from the sector, based on publicly available information. Given their huge clout over markets/companies and risk management resources they command, a swift ramp-up in the ambition of this engagement is likely necessary to achieve the changes in sectors and companies most impacting the global emissions pathway.
Certainly, participation in global collaborations on engagement and more public disclosure of their expectations of companies on their business models and lobbying alignment with Paris would be a hugely welcome starting point and one which is not apparent at present from the sector in the US. The idea that climate issues are not part of mainstream financial risk is now rapidly being debunked as the extent and speed of climate impact on the real economy becomes clear.
Such forceful stewardship on climate is being shown by several smaller but pivotal US players such as Walden Asset Management, Trillium Asset Management, and Zevin Asset Management, all of whom have clearly disclosed corporate climate engagement strategies. They also appear ready and willing to file meaningful shareholder resolutions in conjunction with these strategies. Their giant US peers appear not only unwilling to do this but maintain a poor record on voting positively on such resolutions.
Outside of the top 15 global asset managers, FinanceMap also assessed the asset management arms of European players BNP Paribas and Aviva. Both exhibited robust stewardship practices with companies on climate change and achieve the same leadership scoring on engagement as their larger peers Legal & General and UBS. Of particular note is the focus shown by both Legal & General and BNP Paribas on engaging with companies on the key issue of corporate lobbying for much-needed binding climate policy.
Another part of the financial system that is providing clear signals of concern on climate and the need for the corporate sector to reform radically are asset owners such as giant pension funds Calpers, NY State Common and large northern European players like the Swedish AP system. Collectively this group owns over US $28 Tn of assets globally (OECD, 2018). In terms of listed equities this group of asset owners is generally invested in the entire market and is concerned with long term risks to the economy and portfolio as 'universal owners'. Thus climate change is an increasing priority and pensions providers are likely to require their own asset manager service providers to demonstrate recognition of this priority. A key function of FinanceMap will be to provide asset owners with a tool to measure their investment service providers through a climate lens.
Note: This report has been updated on Nov 29th, 2019 to include analysis of the asset management operations of Aviva plc and BNP Paribas.