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In 2006 a leading group of investors established the UN-backed Principles for Responsible Investment (PRI). At the time of writing, the PRI has nearly 1,200 signatories representing over $70trn. The PRI works:
Leading organisations are starting to take a strategic response to ESG and sustainability, and are considering changes needed to products and market positioning, as well as to processes, operations and supply chains. Read more about ESG investing.
From 2020, PRI signatories must report how they have considered specific climate-change risks in their portfolios.
The financial risk of climate change has emerged as one of the primary issues that the PRI seeks to address. The Inevitable Policy Response (IPR) work involves PRI, Vivid Economics and Energy Transition Advisors. They are building a Forecast Policy Scenario (FPS) which lays out the policies that are likely to be implemented in the 2020s and quantifies the impact of this response on the real economy and financial markets. Much climate scenario work seeks to avoid specific forecasts so the FPS is particularly helpful in this regard.
In Europe the Institutional Investors Group on Climate Change (IIGCC) is a membership organisation of investors focusing on climate change. The Net Zero Investment Framework for Consultation is the first publication of the IIGCC’s Paris AliIGCgned Investment Initiative. Equivalent organisations to IIGCC are Ceres in North America, and C and AIGCC in Asia.
Leading asset owners are seeking to manage the strategic financial risks of climate change. This can lead to designing investment mandates (as a client) or products (as an investment manager) to meet that goal. Early pension fund movers include HSBC Bank (UK) Pension Scheme (TCFD Statement), NEST (Note to members and climate change policy), and the Environment Agency Pension Fund (EAPF).
Outside the UK examples include:
As well as strategic risk, strategic asset allocation and portfolio construction, investors are increasingly using their voting power to influence companies. Climate Action 100+ is a global investor initiative that seeks to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
The Net-Zero Asset Owner Alliance is a growing group of international institutional investors delivering on a commitment to transition their investment portfolios to net-zero greenhouse gas emissions by 2050. Launched in September 2019 with no UK asset owners as m embers, Aviva and the Church Commissioners have since joined the Alliance.
The Investment Integration Project (TIIP) addresses system issues for investors. They continue to publish helpful reports. For example, Assessing System Level Investments is a guide to help asset owners assess their managers’ effectiveness in addressing systemic social and environmental risks and rewards.
The Transition Pathway Initiative (TPI) is a global, asset-owner led initiative that assesses companies' preparedness for the transition to a low carbon economy.
All Swans are Black in the Dark is a piece of research that helpfully illustrates how the short-term focus of financial analysis does not shed light on long-term risks.
The 2° Investing Initiative (2DII) is an international, non-profit think tank working to align financial markets and regulations with the Paris Agreement goals.
Understanding Physical Climate Risks and Opportunities, published by the IIGCC and lead-authored by Acclimatise, seeks to help investors understand physical climate risks and how they are measured. This guidance provides an overview of the physical climate science and illustrates how physical risks are manifesting and causing financial consequences. It provides investors with practical guidance on how they can begin to analyse, assess and manage the risks and opportunities presented by physical climate hazards, both acute and chronic.
Stranded assets are assets that have suffered a premature write-down in value and this may be caused by environment-related risks. You can see a paper that explores stranded assets On the IADB website.