Principles for Responsible Investment (PRI) commissioned Novethic to gain a better understanding of investor behaviour when it comes to the topic of climate change. The report aims to assess: the extent to which global investors see climate change as a long term factor for investment; the progress; leadership practices; and, where greater attention is needed by investors and PRI in the future.

Novethic’s methodology involved analysing the 1,248 responses provided by the PRI signatory asset owners and asset managers to the 2017 PRI reporting framework. The analysis has a specific focus on French-speaking signatories from France, Belgium, Canada, Luxembourg and Switzerland.

An investor seeks to ensure that their long term investments are safeguarded and yield a return however, this cannot be done without taking into consideration climate change. With the relevance of climate change impacts toward investments in mind, in 2017, nearly 400 investors representing US$22 trillion in assets, stood by the Paris Agreement which aims to drive investments that facilitate the transition to a low carbon economy.

The research found that asset owners see climate change as one the most important long term trends for investment. 74% of asset owners responding to the PRI’s indicators on key long-term trends state that they are taking action on climate change. However, investment managers see technological developments and changing demographics as more important trends, ranking climate as 3rd in its importance with only 63%, compared with 71% for the first two factors. While it is positive that climate change is being taken into account, there is room for improvement.

Geographical differences were found, with 88% of Oceanian asset owners considering climate change in their investments. In France, 83% of asset owners report that they see climate change as a long-term risk or opportunity, attributed to France’s strong regulatory framework with the adoption of Article 173 of the 2015 Energy Transition Act requiring investors to publish detailed ESG reports (environmental, social and governance).

Another key finding was that investors have a range of activities underway to assess and manage climate related risks and opportunities. Activities including factoring climate change into the asset mix, active ownership, portfolio carbon foot printing, scenario testing, and manager engagement and contracts. This indicates that investors have a large arsenal of tools to encourage positive social and environmental themed investing. Socially and environmentally themed fund areas primarily consist of clean technology including: renewable energy, green buildings, sustainable forestry and sustainable agriculture.

Results show that scenario analysis for future environmental trends is applied by one third of signatories reporting on ESG issues, in asset allocation use scenario analysis and/or modelling. One quarter of all respondents say that they run scenarios including future environmental trends.

Although these finding shed a positive light on investors and highlight the increasing importance they give to climate change, asset owners may need to reconsider how they can encourage asset managers to innovate, so that climate-related risks and opportunities are aligned within investment strategy and products.

1. Increasingly asset owners see climate change as one of the most important long-term trends for investment decisions.
2. To asses and manage climate related risks portfolio carbon footprinting remains a popular tool among investors acting on climate change; it is used by 59% of asset owners and 55% of asset managers.
3. Innovation is needed to align investment strategy and products with a low carbon economy, for this reason, there is still work that needs to be done for the development of informed climate and environmental investment decision making.
4. 59% of asset owners that are taking action on climate change are engaging with companies to address on the topic, with 78% of North-American investors particularly favouring engagement with companies.
5. 100% of French asset owners taking action on climate change use portfolio carbon footprinting, with 60% having objectives to reduce emissions and 40% using scenario testing.
6. Investor feedback to the PRI on the recommendations of the FSB Task Force on Climate-related Financial Disclosures (TCFD) indicates that presently, there is low investor use of scenario analysis specifically with respect to climate change, mainly as company disclosures are inadequate. The TCFD has published technical guidance on scenario analysis in relation to climate change; if this is implemented the quality of disclosures and investor use of these will likely improve across geographic markets.
7. In the context of France, the PRI is aware of good practice developments in investment strategy and products by investors who made early commitments towards COP21 and implementation of the Paris Agreement. France’s 2016 International Award on Investor Climate-related Disclosures also highlights good practice.