Climate change is inevitable, but asset owners have not fully prepared their portfolios to turn it from a problem into a lucrative opportunity for growth. This report informs asset owners and other investors on how they can prepare their portfolios for the inevitable effects of climate change. It presents the best practices of 22 leading asset-owners (within Europe, US, UK, and Australia) and summarises the frameworks and barriers to implementing their strategies. The report examines a range of organisations from large and small pension funds, charities, sovereign wealth funds, and foundations. It centres on how leading asset owners have implemented the Task Force on Climate-related Financial Disclosures (TCFD) framework.

Current best practices landscape

Currently, leading asset owners are endeavouring to respond creatively and proactively to the TCFD recommendations for sustainable investment practices, with senior leadership undertaking climate-related education and training. This has occurred across a variety of asset owners of all sizes, industries, and geographies. Leaders are also innovating in their low-carbon asset allocation, developing low-carbon indexes, and increasing investments in low-carbon illiquid assets. Some are prioritising the improvement of low-carbon regulation and policy engagement in their climate strategies. However, the report notes that there is still scope for improvement with best practice respondents needing to continually reassess and review the effectiveness of their strategies.

Common barriers

There are some common barriers faced by asset owners in implementing climate-sensitive practices. These include data quality concerns, a perceived lack of low-carbon investments, a lack of supportive climate-related policy, and a general lack of confidence in the asset manager community. Leading asset owners are taking a proactive approach to address some of these challenges. This includes improving climate-related disclosures, prioritising climate-related regulatory and policy lobbying, and actively pursuing low-carbon opportunities.

Ten key building blocks for asset owners

• Embracing senior education and leadership within their climate governance
• Building an organisational culture that supports responses towards climate-related risks
• Using methods beyond traditional reporting avenues to build meaningful relationships with key stakeholders (members, beneficiaries, and savers) around climate-related issues
• Publishing TCFD framework-aligned reports
• Pursuing a systematic and holistic (“whole-of-fund”) approach with their climate strategies
• Innovating in their low-carbon asset allocation
• Driving commitments from asset managers on climate-related issues
• Prioritising climate-related issues in their risk and investment analysis
• Refining and escalating their engagement with investee companies by targeting core issues and sectors
• Engaging in climate-related regulation and policy

This report recommends a framework – ten practical and cost-effective building blocks relevant for all types of asset owners who are in the earlier stages of planning their climate strategies. The framework recognises how the process of integrating climate related issues into investment approaches is a continuous journey. Thus, it would be most effective to undertake this in a partnership with key stakeholders. This report stresses how achieving a financial system aligned with the goals of the Paris Agreement is beyond the scope of a single actor and will require collective and harmonised efforts.

1. Nearly all 22 leading asset owners stressed the importance of leadership from senior management and the Board in their climate strategy journeys. Australia’s Aware Super (formerly First State Super) pension fund found its 6-month process of developing a board-level climate policy valuable towards gaining support from the board.
2. Concerns around data quality emerged as the most dominant barrier encountered by leading asset owners such as poor data quality. There are also difficulties in engaging in scenario analysis for climate strategies and translating ESG data into financial metrics.
3. Leading asset owners are innovating their traditional reporting methods to build positive reputation around tackling climate change. Some new approaches include undertaking member delegate programmes, transparency in their communications, climate-related events, and exploring more engaging narrative styles.
4. Nearly all respondents raised concerns about climate-related data quality on a variety of levels. The topic of scenario analysis was also commonly raised due to concerns around a lack of clarity and expectations for asset owners and the investment-relevance of currently available scenarios.
5. Another dominant barrier raised by asset owners related to climate-related regulation and policy concerns, mostly at national levels. Some leading asset owners have responded by prioritising policy engagement in their climate strategies.
6. Becoming informed around the investment risks of climate change is the first fundamental step in developing an effective climate strategy. Seeking assistance from external professionals helps to develop an internal knowledge-base and gain commitment. Sharing climate-related knowledge throughout the organisation also helps clear misconceptions and gain internal “buy-in” from the corporate board.
7. Vision Super has set up an ESG Action Team, including the CEO, CIO, head of ESG and a fourth member who specialises in politics (the team is also seeking a new member from the environmental activism space). Vision notes the initiative also reflects the ‘buy-in’ from the fund’s senior level. The trustee is also working towards a detailed plan to becoming carbon neutral by 2050, which includes divesting from companies involved in mining and extraction, transportation, consumption of coal, oil, and gas.