A risk question investors should be
asking your board
Climate risk is not only about fossil fuel companies
Mike Clark, Director, Responsible Investment
11 NOVEMBER 2015
So, let’s start with the question
› “Please explain how your company’s business model is aligned to 2-degree
climate resilience”
p.2
Four key players - Who owns the money?
Plus the umpires
p.3
He thinks there’s a risk issue…
“The majority of proven coal, oil
and gas reserves may be
considered unburnable if global
temperature increases are to be
limited to 2 deg Celsius”
Mark Carney,
Governor, Bank of England,
Autumn 2014
p.4
So does this Pension Fund…
› …the objective is to ensure that our Fund’s investment portfolio
and processes are compatible with keeping the global
average temperature increase to remain below 2°C relative
to pre-industrial levels, in-line with international government
agreements.
› We have set ourselves three targets for 2020:
› Invest 15 per cent of the fund in low carbon, energy efficient and
other climate mitigation opportunities.
› Decarbonise the equity portfolio, reducing our exposure to “future
emissions” by 90 per cent for coal and 50 per cent for oil and gas by
2020 compared to…as at 31 March 2015.
› Support progress towards an orderly transition to a low carbon
economy through actively working with asset owners, fund
managers, companies, academia, policy makers and others.
Source: Environment Agency Pension Fund (2015, abbreviated)
p.5
Climate asset risk is a financial risk
Value vs values
ESG integration
 Sustainable financial value
 Mainstream, it took a while
Socially Responsible
Investment (SRI)
 End-investor has values
beyond only financial goals
 Aligns with fiduciary role
 Often leads to security
exclusion
 Internalise economic
externalities
 Pooled fund challenges
UN Principles for Responsible Investment (UNPRI)
6
ESG integration: Two main investor decisions
› Asset owners (e.g. pension fund trustees)
› Climate risk can become an investment belief
› So it is incorporated in overall investment strategy
› Not just pension funds, e.g. insurance company investment
› Investment managers
› Awarded mandates by asset owner clients
› Low carbon mandates are being awarded
› Ownership responsibilities are being exercised, often collectively, on systemic issues such as
carbon risk
p.7
So what’s happening where I live?
COP21
Late 2015
p.8
And where you live?
Shareholder
Resolutions:
p.9
Some other influencers
p.10
How about the Pension Fund’s Scheme Actuary?
Here’s how one scheme did it
“Our pension fund has had a responsible investment policy in place for several
years.
We believe our portfolio is more resilient to some future risks (especially
environmental) than the average UK pension fund.
So, how might your actuarial valuation of our pension fund reflect that, and give
us a financial benefit?”
p.11
And now for something completely different
Carbon price estimates ($/tCO2)
Year
Price ($)
Range ($)
2020
24
10-50
2025
43
20-75
2030
79
40-120
2035
116
50-200
2040
179
60-300
2045
239
75-400
Source: Stranded Assets Forum participants (Clark)
p.12
Conclusions
› The investment chain is starting to manage climate risk
› Climate asset risk is real
› Some “unjustifiable” capex will be challenged by investors
› Financial regulators are stirring
› How well can you answer the question?
p.13