By Gerrit Ledderhof, Responsible Investment & Public Affairs Manager
- Climate change is a major global challenge that presents material risks to our society, the economy and investment portfolios. Many investors around the world agree that urgent action is needed to combat climate change.
- Asset owners and asset managers can support the transition to a climate-resistant economy by focusing on low-carbon investments and forming alliances to encourage companies and governments to take action.
- Improved disclosures are instrumental to support climate mitigation efforts and help facilitate the flow of capital towards climate-friendly companies.
Climate change represents one of the biggest systemic risks for society, the economy and private institutions. The catastrophic effects of climate change are already visible, with extreme weather around the world damaging property, disrupting economic activity and harming human life. Mitigating climate change and reducing greenhouse gas (GHG) emissions are major global challenges. According to the Intergovernmental Panel on Climate Change (IPCC), in order to avoid catastrophic damage from climate change, the world must invest $2.4 trillion in clean energy every year through 2035 and reduce the use of coal-based power to almost nothing by 20501 – or by 2030 in countries designated as Organization for Economic Cooperation and Development (OECD).2 Moreover, climate change can have major implications for investors. A 2018 US National Climate Assessment projects that the economic effects from climate change could reach hundreds of billions of dollars by the end of the century.3
The role of asset owners and asset managers
Rising global temperatures are now a mainstream risk recognized by asset owners and asset managers alike. However, as of 2018, 63 of the world's largest public pension funds have "little or no approach" to managing climate change risk.4 Further, 93% of investors represented in a recent BNY Mellon study considered climate change a risk while opinions differed on whether markets are pricing in climate risks.5
Policy measures from the UN's 2015 Paris Agreement to the EU's long-term climate strategy and the 2019 Dutch Climate Agreement ('Klimaatakkoord') are setting global objectives and encouraging urgent action. Unfortunately, it has become clear that existing levels of investment are insufficient to meet these ambitions. For example, the European Commission has estimated that a further €180 billion, or around $197 billion USD, of annual investments in energy efficiency, renewable energy and other mitigation measures will be required in order to achieve the EU's 2030 climate target of a 40% reduction in GHG emissions.6
While government policy measures can help spur action, it's not enough to close the gap. The private sector is increasingly under pressure from stakeholders to facilitate the transition to a claimate-resilient economy. Mobilizing capital to fund sustainable investment is essential. Asset owners and asset managers can help facilitate the flow of capital toward climate-friendly companies through their investment choices. However, the first step is building an awareness of climate impacts and improving transparency through enhanced company disclosures.
The importance of carbon disclosures
Disclosure of climate information can help investors and governments redirect capital away from areas of negative environmental impact to those activities which support climate mitigation such as energy efficiency and renewable energy projects, development of low carbon products and services, and companies that are measuring, managing and reducing their GHG emissions. Voluntary initiatives like CDP, formerly the Carbon Disclosure Project, and the Task Force on Climate-related Financial Disclosures (TCFD) provide useful frameworks for companies to follow when assessing and disclosing climate-related impact and risk.
CDP runs a global disclosure system to support companies in measuring and reporting their climate impacts. Through an annual reporting request, CDP encourages over 7,000 of the world's largest companies to report their GHG emissions as well as their approach to climate strategy, governance and risk management. This data is then analyzed and shared with investors and decision makers to support climate action.
The TCFD was established by the G20's Financial Stability Board to develop recommendations for voluntary climate-related financial disclosures that would provide information to investors to facilitate their decision-making. Companies are encouraged to follow recommendations made in four thematic areas – governance, strategy, risk management, metrics and targets – when preparing their own annual sustainability reporting for publication.
Our contribution to combating climate change
At Aegon Asset Management, we believe that governments, companies and investors have a responsibility to mitigate the impacts of a changing climate and facilitate a transition to a climate-resilient economy. Further, as investors, we believe the effects of climate change could transpire into systematic risks within our portfolios. To improve transparency, we encourage climate disclosures in support of broader actions. That is why our parent company, Aegon NV, has responded to the CDP questionnaire annually since 2010 and follows TCFD recommendations in company reporting.
However, we recognize that disclosures alone won't solve the climate crisis. Urgent action is needed. To encourage change, collaboration is key. Along with 514 other institutional investors, we are urging world governments to increase efforts to combat climate change and achieve the Paris Agreement's goals.7 Additionally, as an active signatory to Climate Action 100+, we are working together with more than 360 investors globally to engage with the companies in which we invest to encourage greater disclosure of greenhouse gas emissions, climate risk and company strategies aligned with a low carbon future.8
Additional information on our disclosure and collaboration activities can be found our 2018 Responsible Investment report.
1IPCC. "Summary for Policymakers." Global warming of 1.5°C. World Meteorological Organization, Geneva, Switzerland. October 2018. (https://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf)
2Climate Analytics. "Coal Phase-out." Implications of the Paris Agreement for Coal Use in the Power Sector. Berlin, Germany. 2016. (https://climateanalytics.org/briefings/coal-phase-out/)
3US Global Change Research Program. Impacts, Risks, and Adaptation in the United States: Fourth National Climate Change Assessment, Vol. II. Washington, D.C., 2018. (https://nca2018.globalchange.gov/#sf-1)
4ShareAction and the Asset Owners Disclosure Project (AODP). Pensions in a Changing Climate. London, UK. November, 2018. (https://shareaction.org/wp-content/uploads/2018/12/AODP-PensionsChangingClimate.pdf)
5BNY Mellon Investment Management and CREATE-Research. Future 2024: Future proofing your asset allocation in the age of mega trends. New York, New York. 2019. (https://im.bnymellon.com/us/en/documents/manual/brochures/future-2024-abridged-us-final.pdf)
6European Commission. "Sustainable finance: Making the financial sector a powerful actor in fighting climate change." Brussels, Belgium. May 2018. (https://europa.eu/rapid/press-release_IP-18-3729_en.htm)
7Aegon NV is a signatory to the Global Investor on Climate Change (http://theinvestoragenda.org/wp-content/uploads/2019/09/190916-GISGCC-for-UNCAS.pdf)
8Aegon Asset Management is a signatory to the Climate Action 100 (http://www.climateaction100.org/)
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