Do asset managers have a duty to reduce their climate risks?
Source:climatechangenews.com
By Ed King
Aviva has become the latest major investor to tell the coal sector to clean up its act and invest in technology to capture greenhouse gases.
The company – which holds £300 billion in assets – said it has holdings in 40 companies it wants to see take significant strides to a lower carbon economy.
Risks to the fossil fuel sector are “likely to grow” it said, unless post-combustion technologies to suck up climate-warming gases are built.
“Not all companies will successfully make the transition… but we wish to support those companies that are willing and able to play a positive and active role,” the company said in a statement.
The 40 companies would face a “well-resourced and focused initial engagement over the next 12 months” it added. Only if that failed would Aviva withdraw its capital.
Engagement not divestment
That last point will disappoint many in the divestment movement, a fast growing campaign that started on US university campuses in 2012 and has spread worldwide.
In its short life it has scored some high profile victories, signing up over 200 institutions, cities, regions and pension funds to its goal of cutting funding for fossil fuels.
But Steve Waygood, chief responsible investment officer at Aviva, is unapologetic.
“Divestment represents a failed engagement,” he told an audience at the company’s HQ last Friday. “It is not a badge of honour we would wear.”
Instead, said Waygood, the company would seek to be a force for good exercising its considerable institutional power on the boards of companies where it has a stake.
“We all have a fiduciary duty to do something,” he added, referring to the obligation of asset managers to act in the best interests of their beneficiaries.
Short term outlook
On a day-to-day basis this means they need to assess the risk and offer the best returns for clients possible.
The problem (or excuse) for fund managers is that for many investments their time frame for delivering a return could be months, encouraging them to seek quick and easy wins.
For instance, the average holding period for a mutual fund is less than seven months.
There are wider issues too. According to the Asset Owners Disclsoure Project, only 1.4% of asset owners have a goal to reduce the carbon footprint of their portfolios.
Fossil fuel companies have historically offered strong, guaranteed returns, so the logic goes they should be backed.
Yet a report released last week by the Economist Intelligence Unit highlighted the ticking time bomb this short-term mentality is contributing to.
By 2100 it said climate change could cause losses totalling $4.2 trillion, roughly equal to the value of Japan’s GDP or all of the world’s oil and gas companies.
These impacts will not simply be restricted to certain countries or sectors,” it said.
“Indirect damage is a particularly important portion of the overall risk in the more extreme scenarios (5-6C of warming).”
Climate change will likely affect the “entire portfolio” of assets, it said, adding that future pensioners could see the security of retirement hit by investments being made today.
Shifting sands
There are moves afoot to change the way fund managers think about risk, 10 years after a seminal report from Freshfields into what fiduciary duty means.
That’s vital because industry insiders tell RTCC this ‘duty’ has been cited in the past as a reason for focusing solely on financial returns rather than wider environmental and social impacts.
In July 2014 UN climate chief Christiana Figueres said investment decisions that ignored scientific advice on global warming could be breaking the law.
A report the same month from the UK Law Commission agreed. Fund managers had a duty to take long term environmental and social risks to their investments into account, it said.
That clarification was helpful, said George Latham, managing partner at WHEB Asset Management, and would make it easier for pension funds to look longer term.
New research from the UNEP Finance Initiative based on research in the US, Canada, UK, Germany, Japan, Australia, South Africa and Brazil suggests fiduciary duty should not stop wider assessments into portfolio risk being carried out.
Due out in September the study – based on extensive interviews with top fund managers – is likely to recommend long term climate risks are incorporated into all investments.
“The next stage we have got to take this is to say ‘it must include that’,” said David Pitt Watson, a former fund manager who now advises UNEP FI.
“Fiduciary duty means I need to put myself in your shoes, and put ourselves in the shoes of citizens of the world knowing what environmental pressures we are under.”
Sleepwalking to disaster?
Failure of regulators and governments to take steps to address this loophole in the lead up to Paris could lead to the world “sleepwalking into a climate crisis” the EIU study concluded.
It cited a new law recently passed by France’s National Assembly requiring French investors to explain how they take climate risk into account and measure the greenhouse gas emissions from their assets.
“Financial institutions… have an obligation to manage their tail risks, and institutional investors must specifically manage funds with the long term benefit of beneficiaries in mind,” it said.
“For this to be possible, regulators should issue guidance explicitly recognising climate risks as material.”