Asset owners should take the initiative on reducing their carbon exposure
With scientific concerns about the effects of carbon emissions settled, asset owners are increasingly interested in understanding their carbon exposure and learning what role they can play to achieve a safe environment for future generations.
A new discussion paper from the PRI, Reducing emissions across the portfolio, finds that there is a strong case for asset owners to play an effective role in reducing emissions, alongside government and business, which is fully consistent with fiduciary duty. Any response to climate change must be tailored to an asset owner’s investment approach and asset class mix.
Asset owners are encouraged to:
- understand their carbon risk exposure by measuring their portfolio carbon footprint, and analysing and reviewing it with portfolio managers;
- mitigate this by setting a goal to reduce emissions, as appropriate for their organisation;
- engage directly with policy makers and companies on transitioning to a low carbon environment;
- increase investments in clean energy and other carbon alternatives.
The paper looks at the asset classes for which carbon footprinting can be done, including listed equities, fixed income, private equity, property and infrastructure, with commodities presenting more of a challenge due to the lack of clear guidelines available for investors.
Governments are working towards COP21 in Paris in December through bilateral agreements, high-level discussions and other lead-up gatherings. However, even if governments fail to reach an agreement at COP21 in Paris in December, the potential impacts of climate change on the economy and the global carbon budget mean that asset owners will still need to consider their carbon risk exposure and the full range of possible actions to reduce emissions.
Asset owners are already taking concrete actions. Examples include the Aiming for A Coalition shareholder resolutions on climate change, as well as the growth in green bonds, whereby proceeds are earmarked for projects with environmental and/or climate benefits. A new investor platform, investorsonclimatechange.org indicates a range of possible actions in measurement, engagement and reallocation to low carbon investments. Investors have also been engaging directly with companies on reducing their carbon emissions and in some cases, divesting fossil fuels from their portfolios.
The next stage of the project will assist asset owners in setting a goal that is challenging and attainable. This will be through a pilot framework, developed by the project participants, taking into account the key factors for establishing a goal outlined in this paper and the experience of asset owners participating in the project. The PRI encourages input from all asset owners, particularly on the following questions:
- What would be a meaningful goal on emissions reduction?
- What hurdles would you need to overcome to implement such a goal?
- What experience and case studies do you have that could assist the PRI?
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