While a sense of urgency infused climate action talks at the recent 21st Conference of the Parties (COP21) in Paris coupled with relief over the significant pledges by individual countries to curb greenhouse gas (GHGs) emissions and over research showing that CO2 emissions might actually have fallen in 20151, doubts linger over the extent to which the widely accepted COP21 accord can be implemented – and enforced – in practical terms, even if only through a ‘name and shame’ approach. That does not mean that one cannot find areas where an acute appreciation of the risks from climate change has already been translated into concrete action.
Climate action: money talks
In the financial industry, systemic risk from global warming is being assessed more and more, including the impact on (re)insurance companies, asset owners and financiers2. Increasingly, investors are taking a stance, both those investors investing in assets for themselves and investors managing money on behalf of others including asset managers and pension funds.
The momentum picked up in the run-up to COP21, according to research by Novethic. Investors are gauging the impact of their investments on climate change – measuring the carbon footprint of their portfolios – and taking action. More than 130 investors with assets worth almost EUR 9.5 trillion have committed to determining this footprint3 and a growing number has attracted notable media exposure by announcing that they are divesting from fossil fuels, a major source of CO2. Among them, pension funds have featured, with announcements of pull-outs of millions of euros of investments in fossil fuels, notably coal, or of a deadline for their withdrawal.
Taking steps to make a difference
Divestment is one form of action, but not the only one (exhibit 1, below, shows the different steps being taken by investors to improve their carbon footprint). Often, investors opt for a combination of measures and some even implement all four forms of action: divestment, shareholder engagement, green investments and portfolio decarbonisation. A growing number have committed to publishing, or started to report, carbon footprints. Some scepticism about the value of such disclosures might be justified as long as the methodologies have not been standardised and comparisons are hard to make. On an upbeat note, despite the lack of harmonisation, there is at least more transparency.
Exhibit 1: The change in the number of investors taking measures (divestment, shareholder engagement, decarbonisation or green investments) aimed at contributing to the fight against climate change. The data reflects changes between July and October 2015
Source: Based on data published in the report ‘Climate: investors take actions’ by Novethic, November 2015 update
Alternatives to fossil fuels can include investments in the low-carbon indices by providers ranging from big-name companies MSCI, S&P DJI and FTSE to specialists such as Solactive and Edhec Risk. Next to those options in passive investment management, investors can put their money in (mutual funds investing in) energy efficiency or adaptation projects, renewable energy, sustainable food, paper and pulp production, ‘human development’, green bonds and green infrastructure.
Increasingly, financial industry players are ‘voting with their feet’, acting in the belief that actions speak louder than words. The need for concrete steps is beyond doubt, even if emissions were now to plateau or taper off amid slower economic growth. Levels of long-lasting CO2 in the atmosphere are already high and global warming is here: seven of the warmest months ever occurred in 2015 and half of the ‘controllable’ 2⁰C increase in global temperatures has already been realised4. The warning lights are flashing, witness the first-ever red smog alert in Beijing during COP21.
Sustainable and responsible investments (SRI) is one of the nine themes which we think reflect investors’ key priorities this year. Linked to those themes we have chosen funds which we believe represent the most relevant solutions to the challenges of the current market environment as well as the evolving needs of our clients.
BNP Paribas Investment Partners’ offering includes a broad range of SRI products to meet the needs of clients who are keen to combine return potential and making a positive impact on the environment and society.