Asset Managers & Climate Change, a study with InfluenceMap

The Task Force on Climate-Related Disclosures (TCFD) process has articulated the view from global financial regulators that climate change does indeed pose a material risk to the financial system. Since the TCFD's initial report was released in June 2017 the phrase "climate risk" as the public narrative has evolved to the "climate crisis" or "emergency" with accompanying physical manifestations and resulting economic/social costs clearly apparent.

The IPCC's Global Warming of 1.5C (2018) provides clear guidance from the world's scientific community on the need for urgent policy action from governments to facilitate a transition from fossil fuel combustion to renewable and zero-emission transport technologies. The lack of meaningful policy progress globally means there is ever-increasing pressure on the financial system to drive more ambition in this energy transition.

The asset management sector plays a pivotal role in the financial system given the vast portfolios the leading players manage, their interactions with companies in the real economy and power in shaping government policy as a key economic sector in its own right. FinanceMap's analysis shows the sector as a whole is not demonstrating the kind of leadership at present, through any of these levers, that the recent escalation in the urgency of climate change would apparently warrant.

The portfolios held by the 15 largest asset management groups remain significantly misaligned with the targets of the Paris Agreement even under the fairly conservative IEA ‘Beyond 2 Degrees’ Scenario (B2DS) within the key auto, electric power and fossil fuel production sectors, (with aggregate market values of at least US $8 Tn in widely held listed companies). This misalignment is reflective of the fact that the majority of companies in these sectors are very far from aligning their business models to meet the goals of Paris and that the 15 leading players all hold diversified global portfolios of equities often using index driven strategies.

The extent of delay in the introduction of the "green" technologies may be seen in the automotive sector. In 2018 the world's automakers produced 96 million vehicles across all platforms, of which 1.4% were electric (EVs). The FinanceMap/PACTA analysis suggests this will evolve by 2024 to 101 million vehicles in total, of which 4.2m (4.2%) will be electric. However, the IEA's B2DS scenario for achieving warming of 1.75C or less requires at least 9.2M EVs by 2024, pointing to the sector's very significant misalignment with this recognized Paris climate scenario. This sector wide lag in EV uptake by the automakers and their lobbying to delay EV regulations illustrates the difficulties investors will have in using portfolio allocation alone to drive climate goals in finance - hence the focus on changing company behavior by engagement.

If global investors wish to remain active in these sectors and at the same time show Paris alignment in their portfolios, then more robust engagement with the relevant companies should be a priority. This engagement should likely focus on the twin goals of accelerating the individual corporate transitions to low carbon technologies and getting the companies to align their policy lobbying in line with Paris.