Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Climate change pushes investors to take their temperature

Stock MarketsJan 20, 2020 04:57AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. People are silhouetted against the setting sun at "El Mirador de la Alemana" in Malaga

By Simon Jessop and Matthew Green

LONDON (Reuters) - Move over revenue growth and dividend payouts: it's time to take your portfolio's temperature.

Policymakers are pushing investors to do more to ensure their portfolio choices help to meet the 2015 Paris Agreement to combat climate change by limiting planetary warming to well below 2 degrees Celsius, and preferably to 1.5C.

A vanguard of insurers and pension funds, many of whom will be in Davos this week for the annual meeting of the World Economic Forum, say part of the answer is a new "temperature score" that gives a snapshot of how their investments are contributing to climate change.

A single score, they say, can help them navigate the reallocation of capital from heavily polluting sectors of the global economy likely to take a financial hit to greener companies poised to profit.

So far, the temperature metric has been adopted by only a handful of the thousands of financial institutions worldwide but the buzz it has generated shows how investors' concerns about climate risk are finally moving into the mainstream.

"There's still a massive amount of work to be done on this but it's very encouraging that we as an industry are being forced to answer this temperature score question," said Mark Lewis, head of sustainability research at BNP Paribas (PA:BNPP) Asset Management.

"If you thought you could ignore climate change before, you just can't anymore."

France is leading the way with 18 firms, including insurer AXA and reinsurer Scor, disclosing the temperature score of all or part of their portfolios in 2018.

British regulators have flagged that they could require some banks and insurers to report temperature scores from 2021 in annual portfolio stress tests.

Asset manager Standard Life (LON:SLA) Aberdeen, German reinsurer Munich Re, Swiss rival Swiss Re and Zurich Insurance all told Reuters they were considering assigning temperature scores to their portfolios.

INCREMENTAL INDICATOR

Temperature scores are one of several investor-led initiatives to spring up in the last few years as policymakers crank up the pressure on the financial industry to accelerate change.

The Institutional Investors Group on Climate Change, a European body of mainly pension funds and asset managers with 30 trillion euros ($33 trillion) of combined assets under management, launched an initiative in May to work out how members can use their financial clout to back the Paris goals.

That was followed by the launch of the "Net-Zero Asset Owner Alliance" at a U.N. climate summit in September. The group, which has so far signed up 16 insurers and pension funds with combined assets of almost $4 trillion, has pledged to align investments with the most ambitious Paris temperature targets.

The world's biggest asset manager, BlackRock (NYSE:BLK), last week announced an overhaul of the way it approaches climate risk. Chief Executive Larry Fink told the thousands of companies it holds stakes in that sustainable investing was the "strongest foundation" for client portfolios.

Generation Investment Management, a fund co-founded by former U.S. Vice President Al Gore with $25 billion of assets invested according to environmental and sustainability criteria, says temperature scores are an important development.

"This is an incremental indicator dial to help the stakeholder community engage in the urgency of the transition," David Blood, co-founder and senior partner, told Reuters.

TRICKY CALCULATION

Despite the growing enthusiasm for temperature scores, a dearth of standardized data, methodologies and disclosure makes it extremely hard to calculate a single meaningful number.

Andrew Howard, head of sustainable research at British asset manager Schroders (LON:SDR), said his company was actively looking at adopting temperature scores but warned any approach must be "robust and logical".

"There are a bunch of challenges here that you've got to work," he said.

Investors have already been struggling with a comparatively simpler metric: the amount of greenhouse gases a company produces. Increasingly firms are estimating their "carbon intensity" based on the ratio of emissions to revenue.

A portfolio temperature score, though, requires more complex calculations, including how companies contribute to global emissions and their planned reductions over time.

Those numbers are then crunched with assumptions about the relationship between emissions and temperatures. The calculation gets even more complicated when factoring in uncertainty about how the world might conceivably achieve net zero emissions by 2050 - the target scientists say is needed to cap global temperature rises at 1.5C.

"The biggest question mark is what exactly that pathway is going to look like," said Mara Childress at the Task Force on Climate-related Financial Disclosures (TCFD), a global initiative launched by Bank of England Governor Mark Carney.

The TCFD said it was considering its position on the possible utility of temperature scores.

The challenge becomes harder when investors look beyond stocks and corporate bonds to real estate and infrastructure, where there is less transparency over emissions, or to sovereign debt, where investors have less scope to engage with borrowers.

Nevertheless, advisory firms say that as data improves, the differences between companies poised to benefit from the transition to a low carbon world, and those that will suffer, will become clearer.

"A warming potential metric really helps you to understand which constituents of a portfolio ... are really the climate culprits," said David Lunsford, co-founder of Carbon Delta, part of data analytics and index company MSCI.

"You could be exposed to a lot of risk if you pick companies that are not aligned with a sustainable future."

STRANDED ASSETS

Scientists have been sounding the alarm over global warming for decades but investors have only begun to pay real attention in the last few years.

The TCFD, which is backed by the G20, is encouraging companies and banks to reveal more about the climate risks they face, as a precursor to making disclosures mandatory.

Regulators are issuing increasingly strident warnings over the dangers extreme weather poses to economies and the risk that oil and gas infrastructure could be left stranded by a rapid transition to clean energy.

Scientists warn that rises of several degrees could push global food systems to collapse, create many millions of refugees and wipe out coastal cities.

Speaking at a U.N. summit in December, Carney said temperature scores - also known as "warming potentials" - were one of the most promising options for addressing the lack of clarity over climate risk and helping companies cut emissions.

"Such a forward-looking measure can help asset owners and asset managers understand the transition pathways of their investments and develop strategies to align financial flows with the necessary transition to net zero," said Carney, who starts a new role as U.N. climate envoy next month.

The temperature scores published to date show how far away the companies in most portfolios are from meeting the Paris goals. Most of the scores assigned by companies such as German insurer Allianz (DE:ALVG) British rival Aviva (LON:AV) and Japan's Government Pension Investment Fund, hover between 2.8C and 3.8C.

AXA Chief Executive Thomas Buberl said its temperature score was now down to 3.1C.

"The question is for us: How do we get down from 3.1 to lower?" he said. "We've been very clear - and again it'll be over time that we'll have to do it - that we want to take actions and go down."

Climate change pushes investors to take their temperature
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
rob finch
rob finch Jan 20, 2020 5:44AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
does the use of Chinese steel contribute to climate change?
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email