Following the release of an eye-opening UN report on climate, the time is ripe for investors to act with their own money.
For your body, just 2°C separate normal life from raging fever. The planet is on course to heat up much more than that, by over 3°C or even 4°C compared to the pre-industrial period, with potentially extreme consequences: floods, fires, droughts that lead to food shortages and mass migration. The latest report from the Intergovernmental Panel on Climate Change (IPCC), the assembly of the world’s foremost climate scientists convened by the UN, reveals that even a 2°C rise is a scary prospect we must avoid and that humanity should do its upmost to keep the temperature increase to 1.5 °C.
This gives us a very short window in which to act, because the planet has already warmed by approximately 1°C. The good news is that we have not yet passed the tipping point at which ‘hothouse Earth’ becomes inevitable. Swift and decisive actions to reduce greenhouse gas emissions could reduce the number of people ‘both exposed to climate-related risks and susceptible to poverty by up to several hundred million’ compared to 2°C.
The key to unlocking this sliver of a chance afforded to us is, of course, money. Your money and the money of those you are responsible for. Making the transition to 1.5°C would require an estimated $2.4 trillion of energy investment over the next two decades. This seems a daunting number, but let’s put it into perspective. The world is already investing collectively around $1.7 trillion in energy globally – most likely your money is already contributing to that sum. So the challenge is redirecting some of the existing capital flows, as well as channelling new investments towards solutions.
In the face of such challenges and opportunities, we are acutely aware that the trustees of pension schemes and the boards of asset owner organisations want to understand more about the financial impacts of addressing or not addressing climate change in their investments, within the boundary of their fiduciary responsibility.
This is why we've co-authored a guide for pension scheme trustees and boards of asset owner organisations, published by the Institutional Investors Group on Climate Change. The guide offers practical suggestions, from getting climate change onto the board agenda to developing an investment strategy, managing risk and setting targets. It includes, among other things, discussion of:
- The link between climate change and fiduciary duty
- How climate risk relates to asset allocation
- Carbon footprinting and climate scenario analysis
Action begins with better governance of climate risks and opportunities. This can break the vicious circle where asset owners do not feel the need to raise the issue, assuming their designated managers are on the case, while some asset managers assume their clients are simply not interested.
Climate change is one of the defining trials of our era. But many people who can effect real change, including trustees and board members, are unsure as to how they can address it. We know much can be done and it has to be now – the guide outlines key steps through which we can all work towards a prosperous, low-carbon future.
Access the new guide: Addressing climate risks and opportunities in the investment process.