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Just 5% Of European Pension Schemes Consider Climate Risk In Investment

Posted on June 27, 2017 at 6:55 AM

Startling figures? Just 5% of 1,241 European Pensions schemes have considered the investment risk posed by climate change. T

A report by Mercer, the consultancy gathers information from 1,241 institutional investors across 13 countries, reflecting total assets of around €1.1 trillion. As well as investment strategy information, it tracks the drivers behind Environmental, Social and Corporate Governance (ESG) integration and two key areas within responsible investment: investor stewardship and active ownership rights and, secondly, the investment risks and opportunities posed by climate change.

According to last year's European Asset Allication Report, 4% of respondents had considered the investment risks posed by climate change. The rise in consideration in a critical year in climate change awareness is so minimal it's tragic.

“The report findings highlight the need for the industry as a whole to do more; it’s ironic that the pace of response to this enormous issue is best described as glacial, outside a small group of leading funds. The Paris Agreement, which came into force in November 2016, has set an ambitious target to keep global warming well below 2˚C above pre-industrial levels, with a stretch target of 1.5˚C. It provided a strong signal as to the long-term direction of climate related policy; investors must therefore consider the potential financial impacts of climate change on their portfolios. Inactivity by pension schemes brings risks from stranded assets and physical climate risks, as well as reputational concerns. A proactive approach can open up investment opportunities in the green fields of the low carbon economy” said Phil Edwards, Mercer’s Global Director of Strategic Research.

Mercer’s report finds that there has been a gradual increase in the number of European pension schemes factoring ESG issues into their investment process. Financial materiality is the main driver behind this trend, cited by 28% of respondents in 2017 compared to 20% in 2016, it says. This is followed by reputational risk, cited by 20% in 2017 compared to 16% in 2016. The report also finds that around 20% of asset owners integrate ESG risks into their investment beliefs and policy with 22% of those surveyed having a standalone responsible investment (RI) policy.

The report asked participants how they act as active owners (exercising voting rights in pursuit of good corporate governance) to meet their stewardship obligations. Some 28% of asset owners consider ESG and stewardship as part of the manager selection and monitoring process, up  from 22% in 2016. Furthermore, 29% of asset owners request that their advisor monitors stewardship issues on their behalf, up from 20% from 2016. There has also been an increase in expectations for disclosure, with 9% of asset owners reporting on their stewardship activities publicly (up from 6% last year).

“The increase in asset owners citing financial materiality as the driver behind considering ESG risks is a positive development for the market - asset owners simply cannot afford to dismiss ESG risks as non-financial. Regulators are increasingly clear that asset owners should be considering all risks that may be financially material, including ESG related risks and longer-term risks such as climate change – proactive consideration of these issues is absolutely consistent with fiduciary duty" said Kate Brett, senior RI specialist.

In early June the Institute and Faculty of Actuaries (IFoA) published the second edition of Delta, its new thought leadership platform - and I had a piece in it - as ever, most easily accessible via Twitter.

Delta, Edition 2 IFOA copyright

So it is time to put the message in capital letters. Over to the Financial Stability Board.

Its Task Force on Climate Related Financial Disclosures (FSB TCFD) was covered by my on Forbes at its launch, and mentioned in a piece in March on responsible investment.

The FSB will release the final version of its Recommendations of the Task Force on Climate-related Financial Disclosures report on Thursday, June 29th - and I will be covering it. Its recommendations are intended to provide companies with a framework to consistently disclose climate-related risks and opportunities in their annual financial filings.

As such, it should help drive further focus on climate risk management by asset owners.

Categories: Governance, Investors, Risk