This report is critical as institutional financial investors’ behaviours will substantively shape the speed and nature of the economy and society’s transition to cleaner energy sources and global financial systems’ parallel transition to a low- or zero-carbon world.

Subjectivity: Thinking about risk imperfectly and individually

The report found that investors consider these issues subjectively and are primarily concerned with short-term investment horizons. There are various organisational models for getting information about climate risk into decision making and thus asset prices. Every single investment institution interviewed had one or more individuals dedicated to sustainable investments, responsible investment, or Environmental, Social, and Governance (ESG) issues. These individuals are primarily responsible for thinking about climate and other environmental risk matters. Most ESG personnel represent advisory bodies and have no direct involvement in investment decisions; they usually have non-investing backgrounds and are advisers. Despite these findings, the report highlighted that ESG is still an underdeveloped task in the finance industry.

Economism: Profitability, value, and investment

Climate has now become a significant consideration in ESG considerations, and investors consider climate change in terms of profitability, value and investment. One of the significant theoretical pillars of the current regulatory consensus that enhanced disclosure of climate risks will enable an orderly transition of financial markets to a low–fossil fuel world is the premise that institutional investors are “rational” and thus price assets accordingly. However, the report finds that this isn’t always the case, and institutional investors think about the long-term when considering climate-related risks.

Temporality: Investment horizons and climate change

Over what time frames do institutional investors actually think about financial risk and estimate prospective yield? The report suggests that investors view risk over the long term, and while they integrate climate change into their thinking, it may not always be satisfactorily done. Investors’ approach to climate risk, especially regarding its temporal dimensions, can be understood in terms of Keynes’s enterprise–speculation dualism.

Convention: Investment models and corporate culture

The report highlights that investment behaviour of institutional investors will shape the speed and nature of the financial system’s own parallel transition to a low- or zero-carbon world. There are many imponderables relating to this transition, including the role of the principle owners of the fossil fuel companies that are primarily responsible for global greenhouse gas emissions. Investment in fossil fuel companies is a specific concern of the report, and little is known about how investors think about climate change and fossil fuel risk. The report suggests that environmental and other interest groups need to understand investors’ perspectives to influence their decision-making regarding fossil fuel company investments.

This report provides insight into how institutional investors think about climate change and fossil fuel risk. Improved mechanisms, whether market-based or otherwise, need to be comprehended to limit greenhouse gas emissions and to minimise the likelihood of climate change-related financial instability.