The success of ‘green’ political parties at the recent European parliament elections was another sign of the growing importance of environmental issues for Western electorates.
The increase in engagement can be attributed, in part, to growing concerns about climate change and a perceived lack of commitment among governments to take the necessary steps to transition to a low-carbon economy.
While the 2015 Paris Agreement on climate change stated that warming should be limited to well below 2 degrees centigrade, current policies are expected to take us to more than 3C.
This dire outlook has led to calls for radical policy action, such as the proposed ‘Green New Deal’ being touted by politicians in the US.
Climate change also has ramifications for asset managers, who are seeing a warming planet and the transition to a low-carbon economy change the risk profile of many of the companies and economies in which they invest.
This could have consequences for clients’ investments and, as an investor, we believe we have a responsibility to make sure we understand how and to what extent.
To help us deliver positive outcomes for our clients and support the transition to a low-carbon economy, we have developed a climate change approach for investments. The purpose of this is to provide us with high-quality data and insights on climate change trends, risks and opportunities, which can be integrated into our investment decision-making process.
Our approach is closely aligned with the Principles for Responsible Investment investor agenda – an initiative for investors to demonstrate their contribution to transitioning the world’s financial capital to low-carbon opportunities. This encourages investors to demonstrate action across four areas: investments, corporate engagement, investor disclosure and policy advocacy.
An important part of this will be the ability to demonstrate the climate impact of an investment portfolio.
We currently provide a carbon footprint for a number of our portfolios. While it has its shortcomings, carbon footprinting is a good starting point for understanding our exposure to climate risks and the impact of a company or a portfolio on the energy transition.
It can also help identify carbon-intensive companies, which we can then engage with on their approach to climate risk management.
However, the energy transition also presents investors with a considerable opportunity. Whether or not we achieve the Paris target of warming below 2C depends on whether the world is able to quickly deploy large amounts of private capital to construct renewable energy infrastructure, low-carbon transport and to improve energy efficiency.
A move away from coal, as well as rapid deployment and falling costs of clean energy technologies, are clearly visible trends.
The International Energy Agency estimates the cost of the transition to be $3tn (£2.3tn) a year, with the private sector expected to finance the majority.
This long-term opportunity will involve channelling capital flows from clients to projects and businesses that will drive the development of a low-carbon economy.
We currently provide capital to support the transition directly through our private infrastructure investments. We also provide it indirectly, through investments in infrastructure funds and provision of equity and debt capital to companies that provide solutions such as renewable energy and energy-efficient technology.
Already, a number of products enable clients to transition away from carbon-intensive industries. This includes impact investing that focuses on companies that provide clean energy and energy-efficient products and services, or products that screen companies based on climate-related criteria, such as power generation and revenue from fossil fuels.
As major investors and stewards of capital, we recognise the important role asset managers have in supporting the energy transition through capital allocation decisions and developing solutions that meet the demands of our clients.
Eva Cairns is an ESG investment analyst at Aberdeen Standard Investments
