Institutional Investors Progress on Climate Action Plans
Most of North America’s largest investors have made net zero pledges and are able to demonstrate headway.
Thirty-seven of North America’s 48 largest investors have made net zero commitments leveraging elements of Investor Climate Action Plans (ICAPs), a survey by sustainability nonprofit Ceres has shown.
Ceres’ analysis was based on submissions made against the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) by institutional investors managing a combined US$60 trillion in assets – representing more than half of the global GDP.
The assessment looked at how investors plan to address the financial risk caused by climate change and are translating those commitments into actions, across all focus areas of ICAPs: investment, corporate engagement, policy advocacy, investor disclosure, and governance.
“These action plans serve as a blueprint for investors defining their approach to navigating climate risks in portfolios and investment opportunities in the shift to a low-carbon economy,” said Reverend Kirsten Snow Spalding, Vice President of the Ceres Investor Network. “As our analysis shows, transition planning is not just possible but already in progress among most of the largest North American investors.”
Investors included in the study included the likes of Alliance Bernstein, BlackRock, KKR, Manulife Investment Management, California Public Employees’ Retirement System (CalPERS), Fidelity Investments, Federated Hermes, Franklin Templeton, Mercer, Nuveen, PGIM and Vanguard.
CalPERS, which manages US$503 billion in assets, unveiled a US$100 billion climate action plan last year – whereby it aims to capitalise on the opportunities created by the move to a low-carbon economy.
“This report highlights improving climate-related actions and disclosures taken by many of the largest North American investors,” said Travis Antoniono, Investment Director in CalPERS’ sustainable investments team. “[We are] demonstrating leadership across the board on climate-related investment, engagement, policy advocacy, disclosure and governance – which the report considered.”
Across the board
Ceres stressed that institutional investors have been accelerating progress on all five areas of the ICAPs. Per the findings, 77% of assessed investors have made a net zero commitment, consistent with their fiduciary duties, by supporting the goal of zero greenhouse gas emissions by 2050.
While many investors articulate their commitments in their own words, a third of them are signatories to one of the Glasgow Financial Alliance for Net Zero (GFANZ) sector-specific alliances – including Net Zero Asset Managers, Paris Aligned Asset Owners, and the Net Zero Asset Owners Alliance.
“We knew that many of these large investors had made net zero commitments – some of them in the context of collaborative initiatives, and others independently,” said Snow Spalding. “While that finding was not surprising, what’s encouraging is that 90% of them have begun to work on their plans or have elements in place, and publicly disclose them – which seems like an important accountability mechanism.”
The survey showed that 15 of assessed investors have publicly disclosed a standalone transition plan, while 18 others have articulated elements of a plan consistent with the ICAPs expectations ladder. The expectations ladder comprises four tiers – from investors who are beginning to think about climate change (tier 4), to those have made net zero commitments and are advanced in setting and implementing science-based targets (tier 1).
“This report focused on the largest and most influential North American investors, but what we’re seeing with our partners is that all investors are working on ICAPs,” said Snow Spalding. “For those who had not made net zero commitments, we still were pleased to see that many of them had elements of the plans in place – suggesting that they’re working on climate risk and opportunity and, we hope, are moving towards those pledges.”
While the ladder was designed to help investors measure progress on their transition journey, building up the data and expertise and integrating those into a risk management programme takes time.
“Those who are just starting the journey are going to move over time, but what we see in the top investors in North America is that more than half of them are on the way – which is good news,” Snow Spalding added.
The report was published against a backdrop of continued anti-ESG sentiment in the US and signs of apparent weakening of investor commitment to climate action – both in terms of support for shareholder resolutions, and participation in collaborative initiatives.
“In spite of all the political noise about work on climate, the evidence is that at least the largest, most influential [players] are doing the work,” she said. “So it’s not something that they don’t take seriously, which seems like an important point to make.”
Keeping up the momentum
Other findings from the report showed that 85% of assessed investors have either established a baseline carbon footprint for their portfolio, or are assessing portfolio-level carbon exposure. Around 63% are also using advanced risk assessment-scenario analysis.
“Transitioning portfolios to net zero requires managing systemic climate risks in investor portfolios and enabling the transition by shifting capital to value-creating businesses,” the report mentioned. “To accomplish this, investors should consider setting short- and long-term emissions reduction targets, conducting a detailed climate risk assessment, setting a climate strategy, and building a climate-friendly asset allocation across sectors and geographies.”
About half of investors also mentioned climate solutions and some sort of investments in green bonds and assets, or transition assets. “Others may be looking for climate solutions or other climate investment opportunities, but have not articulated this strategy or investment targets in their TCFD reports or standalone climate action plans,” Ceres said.
In addition, investors’ plans showed that 81% of them conduct climate-related bilateral engagements with the companies they are invested in. Nearly half (44%) engage collaboratively, sharing public information, benchmarks, and industry analysis with peer investors by participating in initiatives such as Climate Action 100+ or other collaborative engagement efforts.
All 37 investors with a net zero commitment also have board-level oversight over their climate strategy and plans – “a good sign”, according to Snow Spalding – who pointed to concerns around greenwashing and accountability in recent years. Of the other 11 investors, however, only two have board-level governance of their climate strategy and plans.
“We are still looking at those who have not made a net zero commitment, and they have a long way to go,” the reverend added. “Climate risk doesn’t disappear because you don’t have a plan for it.”
Lagging behind
One area that needs significant improvement is policy advocacy. Per Ceres’ survey, only a handful of investors use climate scenarios as part of strategic investment decision-making, while just 50% mention plans or strategies to invest in climate solutions.
Since policy shifts will determine real-economy progress on climate change, investors should consider including plans to engage with policymakers both at the national and international levels to combat the crisis, Ceres suggested.
“This is one area where there’s still a lot of work to do,” said Snow Spalding. “We don’t know why that is. We don’t know whether [investors] aren’t engaged in policy advocacy, or whether they’re just not articulating it as part of their climate action plans.”
She highlighted this, as well as the mismatch between there being 85% of investors with an established a carbon footprint but only 63% using a scenario analysis as part of their risk assessment, as “trends to watch” and areas where more robust action is expected.
With the ICAPs expectations ladder evolving as “practice changes”, further changes should also be expected over time.
“In the last update, there was much deeper focus on nature and deforestation, and we began to see some pieces on biodiversity as signals that those things are related to climate change and should be articulated in the plans,” said Snow Spalding.
“There will be new guidance coming out to support the ICAPs ladder, which will be updated in the fall. This won’t be not a significant shift in what we expect investors to do, but there will be continuing updates to support them in that work.”
The post Institutional Investors Progress on Climate Action Plans appeared first on ESG Investor.