Investors' climate change 'gamble' exposed

Nearly half of the world's biggest investors have been accused of failing to protect their portfolios from climate change and of "gambling" on companies heavily exposed to environmental risks.

The Asset Owners Disclosure Project (AODP), a non-profit group that collects information about institutional investors' exposure to environmental risk, said investors are demonstrating an "extraordinary" level of complacency.

For the third year running, AODP has compiled an index of the world's 500 largest investors and ranked them according to the level of effort they put towards mitigating climate change risk. These efforts could include engaging with the companies they own, divestment of heavily carbon-exposed assets such as coal companies, or deploying hedging strategies.

The investors were given a score ranging from AAA to D based on the feedback they provided and publicly available information. The 232 investors that made no effort to recognise or address climate risk received a score of Z.

Among the Z-rated investors are some of the world's largest sovereign wealth funds, including the Abu Dhabi Investment Authority, the Government Pension Investment Fund of Japan and the China Investment Corporation.

Several large corporate pension schemes also received a Z rating, from sectors including energy (ExxonMobil, Duke Energy), banking (Deutsche Bank, Citigroup, HSBC, Lloyds); aviation (Boeing, Delta Air Lines, Rolls-Royce); automotive (Toyota, General Motors, Ford, Daimler); insurance (Legal & General, Old Mutual, Swiss Life) and retail (Tesco, Migros, Walmart).

Julian Poulter, the founder of AODP, described investors with a D rating or lower as "laggards" that have failed to take account of an important financial risk. He added that these investors' clients or members would be "horrified" to learn that such risks were not being taken seriously.

He said: "The laggard asset owners are driving their funds without climate insurance and one day they will be in a nasty climate [related] market correction. The Z-rated funds are showing wilful negligence, given the number of their peers discussing it at the highest levels."

Nine investors received a AAA rating, up from five in 2014. They were the Local Government Super (Australia); KLP (Norway); Calpers (US), ABP (The Netherlands); Environment Agency Pension Fund (UK); New York State Common Retirement Fund (US); Australian Super; PZW (The Netherlands) and AP4 (Sweden).

Most investors have been slow to assess climate risks, according to George Serafeim, associate professor of business administration at Harvard Business School. "This inertia is dangerous and it will cost their beneficiaries a whole lot of money," he said.

Ben Caldecott, director of the Stranded Assets Programme at Oxford university's Smith School of Enterprise, added: "Climate change and risks associated with other environmental factors are financially material. The evidence base we have for this is large and growing constantly.

"The vast majority of asset owners are only at the start of understanding some of these issues, let alone acting on them. Their consultants need to up their game and so do trustees. There is a real lack of knowledge and expertise among many of the key fiduciaries allocating capital."

AP1, the Swedish government pension scheme that received a D rating, said the fund is a member of the Institutional Investors Group on Climate Change and has endorsed both the Carbon Disclosure Project and the Montreal Carbon Pledge. It added that, in 2014, the fund measured the carbon footprint of its equity portfolio and found that it was 16 per cent lower than equivalent markets. AP1 has also contributed to a report by Mercer, the consultancy, examining the asset-allocation implications of climate change.

Mr Poulter was sceptical about what these efforts mean in practice. He said: "A lot of funds think that participating in industry events, being members of associations or signing their name to a research report is the same as doing a lot - it isn't."

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