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The existential threat posed by climate change has far-reaching implications for society, the global economy and, by extension, the fund and asset management industry.
At present, portfolio risk mitigation tops the industry's climate change agenda, with fund managers primarily focused on quantifying the potential future impact on company operations and the resultant implications on cash flows and valuations.
However, fund manager inaction around broader climate change issues will put more investor capital at risk, while potentially jeopardising their relevance, amid shifts in client expectations and regulatory changes. As such, fund managers will increasingly face the dual imperative of mitigating the potential impact of climate change on investor returns, while directly addressing the global climate crisis to ensure their long-term sustainability.
Levers at our disposal
As an industry poised to control US$145.4 trillion in Assets Under Management (AUM) globally, by 2025, according to the PwC ‘Asset & Wealth Management Revolution: Embracing Exponential Change’ report, fund managers are uniquely positioned to tackle climate change on multiple fronts.
The levers at our disposal to drive meaningful change include strategic asset allocations, investing in companies whose products or services make a difference in terms of climate mitigation or adaptation, as well as ensuring good corporate governance and other forms of investor activism.
In this regard, driving meaningful change starts with improved corporate disclosures. Through intentional collaborative engagement, fund managers can encourage companies to proactively demonstrate their commitment to tackling climate-related risks, through verifiable Carbon Disclosure Project (CDP) or Task Force on Climate-related Financial Disclosures (TCFD) reporting.
The resultant ranking that companies receive informs investment decisions, by helping investors understand how these organisations manage environmental risks and determine how serious company leadership is about tackling climate change.
Moreover, focused investor activism around business disclosure and transparency serves as a prudent risk mitigation measure. For example, encouraging businesses to enrol in programmes such as the Science Based Targets initiative (SBTi) enables technical experts to independently validate emission reduction targets.
This process can quantify the costs associated with decarbonisation to ensure company targets are realistic and achievable. Independent validation also roots out the practice of greenwashing a company's environmental sustainability credentials.
Similarly, the global, asset-owner-led Transition Pathway Initiative (TPI) is becoming a vital corporate climate action framework, used to assess a company's preparedness for the transition to net-zero.
From a fund manager perspective, becoming signatories to the UN-supported Principles of Responsible Investment (PRI) investor network can promote sustainable and socially responsible investing, by incorporating Environmental, Social and Governance (ESG) issues into everyday investment practices.
PRI membership helps to guide strategic fund allocations, based on six key principles, which may better align investors with broader objectives that benefit the environment and society at large.
These principles have helped to reframe the impact that asset managers and asset owners have in achieving climate change objectives. For example, what initially began as an en-mass divestment from the fossil fuel industry is now deemed irresponsible. Rather than selling off stakes at any price and potentially giving control to those willing to exploit assets to maximise profits at any cost to the environment, investors now understand the need to maintain their positions to support a just transition to a low-carbon future.
By remaining invested, institutional investors can drive meaningful change from the inside, while managing down exposure responsibly to support economic and developmental agendas.
Asset managers can also direct fund flows to accelerate decarbonisation through purpose-driven investments.
These strategies can include greater portfolio allocations towards a growing basket of thematic funds, which channel capital into key industries or companies focused on finding solutions that mitigate climate change through carbon capture, renewable energy, and smart metering, among others.
These strategies also create potential opportunities for fund managers to meet their dual mandate of generating alpha for clients, by investing in potential high growth sectors or scalable climate tech innovation, while doing good for the environment.
First appeared on FAnews