The Financial Sector Can Do More To Tackle Climate Change. It's Time To Step Up

As the eastern seaboard of the U.S. prepares for Hurricane Florence, whose intensity was likely strengthened by climate change, the importance of tackling the problem could not be more starkly illustrated.

In the fight against climate change, the focus is mostly – and rightly – on heavy emitters of greenhouse gases, such as power generators, makers of products such as steel, cement and glass, and transportation.

But none of these sectors can operate without financial backing, and investors and other parts of the financial services sector are taking action, too – with consequences that are starting to be felt in high-carbon sectors and companies.

The global fossil fuel divestment movement has this year reached more than $6 trillion, 120 times as much as four years ago, a new report says, with campaigners hoping to reach $10 trillion by 2020. Companies like Shell are starting to take notice companies and declaring divestment a material threat to their business. Firms such as BP, Total and Eni have stepped up their investments in renewable energy and electric vehicle infrastructure.

The movement, which encourages investors to sell their shares in fossil fuel companies, is driven as much by simple risk assessment as by a desire to tackle climate change. “Divestment is increasingly being driven by large asset owners like insurance companies and pension funds that are moving their money out of an industry increasingly beset by financial and regulatory challenges,” says Divestinvest, which published the report. “When coupled with the new wave of climate lawsuits targeting the industry around the world, the pressure on fiduciaries to divest continues to mount.”

Another emerging trend is that insurance companies are not only divesting their investment portfolios from fossil fuels, but also taking steps to stop insuring fossil fuel projects.

But some observers think that the industry could do a lot better. The Insure Our Future campaign is pressuring the insurance industry to stop insuring and investing in coal and tar sands projects and companies.

Insurers were among the earliest voices warning about the risks of climate change, and since 2015, 17 large international insurers have divested about $30 billion from coal companies. Five, including Allianz, Axa, Zurich and Swiss Re have stopped or limited insuring the coal industry.

But the U.S. industry is lagging behind – the 40 largest U.S. insurers hold over $450 billion in coal, oil, gas and electric utility stocks and bonds, a higher proportion than average index funds, Insure Our Future points out. “Insurance companies are supposed to protect us from catastrophic risks. Yet when it comes to the largest threat to humanity – climate change – insurers are fuelling dangerous global warming by perpetuating our dependence on dirty fossil fuels,” the campaign says.

Meanwhile, the Asset Owners Disclosure Project, which rates and ranks the world’s largest institutional investors and assesses their response to climate-related risks and opportunities – and crucially, makes those ratings public, providing transparency for beneficiaries, clients, investors and stakeholders, has just released its latest report, looking at the performance of public pension funds on tackling climate risks.

The report shows that more than 60% of the world’s largest public pension funds have little or no strategy on climate change, which could put them in danger of breaching their legal duties. Fewer than 1% of assets of the world’s largest 100 pension funds are invested in low-carbon solutions, and only 10% of assessed pension funds have a policy to exclude coal from their investment portfolio, it adds.

“A handful of public pension funds, mostly based in Europe, are showing true leadership on climate change, demonstrating robust approaches to aligning their investments with the low-carbon transition,” the report says. Five funds in each of Sweden and the Netherlands achieved a leading rating, with California- and New York-based funds leading U.S. pension funds, in spite of weak national climate regulation.

The top-ranked pension funds were Sweden’s AP4, Fonds de Réserve pour les Retraites (FRR) of France, the New York State Common Retirement Fund (NYSCRF), and the Dutch fund ABP. The three largest UK funds lag relative to the rest of Europe.

AODP says that pension funds, which accounts for one third of all asset owners’ investments globally, need to drive the transition to a low-carbon economy by moving away from fossil fuel investments and stepping up investment in low-carbon fields such as renewable energy and electric vehicle technology.

However, the group calculates that the world’s 100 largest public pension funds are investing just $90 billion in low-carbon technology, representing less than 1% of their combined assets and dramatically shy of the IPCC’s recommended annual investment of $1.1trillion per year. These lacklustre investment figures are exacerbated by the fact that only 10% of assessed pension funds have introduced policies to exclude coal from their investment portfolio, despite it being the most polluting fossil fuel.

Felix Nagrawala, AODP Analyst, said: “AODP is turning up the heat on public pension funds who fail to address climate change in their investments. Our comprehensive review of the climate-competence of the industry exposes those funds who are all talk and no action, and those showing real climate innovation. Pension funds have a duty to serve the long-term interest of their members, which isn’t being met if the money they invest is depleted along with the health of the planet. It’s high time the industry takes action."

New York State Comptroller Thomas P. DiNapoli, trustee of the New York State Common Retirement Fund, said: “Climate risk poses a major threat to long-term value, but mitigating that risk presents investment opportunities and is key to our decision-making and our engagement with portfolio companies.”

Chris Fox, Senior Director, International Investor Engagement at Ceres, says: “AODP’s research clearly highlights the need for deeper action towards aligning pension investments with the <2C goal. We hope the ranking will be a wake-up call, alerting funds not just to the risks associated with climate change but also the far-reaching opportunities associated with the low-carbon economy.”