Investors criticised over “action gap” in tackling climate change

Climate change protest

A new study by PGIM and Greenwich Associates has revealed a significant gap between investors’ beliefs and their actions when it comes to climate change risks.

Global investors are almost unanimous in acknowledging the escalating climate change risks. According to the study, a full 89 per cent of global investors believe that climate change is an important issue for their organisation, but only 58 per cent had taken steps to formally incorporate it into investment processes. 

Asset managers have been vocal about the need to mitigate the growing risks from climate change. In April, GBP366 billion asset manager Aviva Investors wrote to global finance ministers and the heads of central banks urging them to confront climate risk, saying: “We believe the mitigation of, and adaptation to, climate change is essential for the safeguarding of our investments.” 

The world’s largest asset manager, BlackRock, has also sounded the alarm in the past about the financial risks from climate change.

“For the vast majority of large investors who acknowledge climate is a long-term consideration, but are yet to incorporate it into their portfolios, the time for contemplation has passed,” says Taimur Hyat, chief operating officer for PGIM. 

“If we are to mitigate the most devastating effects of climate change, it is vital the private sector plays its part. This will require investors to not only protect against the downside risks from a changing climate but equally to embrace the breadth of opportunities available from actively supporting the transition to a greener planet.” 

PGIM, the USD1.5 trillion global investment management business of Prudential Financial, partnered with Greenwich Associates to poll 101 major allocators throughout Europe, North America and Asia-Pacific each with more than USD3 billion in assets under management. 

The results highlight a clear regional gap in relation to investor climate change thinking and action, with Europe leading the way. Some 85 per cent of European investors said climate change was a significant factor in asset allocation decision-making, against 57 per cent in Asia-Pacific and only 25 per cent in the US.  

Investors have been encouraged to adopt climate considerations into their portfolios by action from regulators in the UK, Europe, and Asia. Large UK pension schemes with more than GBP5 billion in assets will soon be required to report on the financial risks of climate change within their portfolios, and countries in Asia have also pushed forward on climate legislation. 

Meanwhile, policymakers in the US have pushed back against investors’ attempts to consider climate change in their investing. In October, the US Department of Labor imposed new rules on pension funds that banned them from investing according to non-financial factors, making it harder for pensions to invest in ESG funds.

A recent survey by Breckinridge Capital Advisors found that only one third of US institutional investors have adopted EGS into their portfolios. However, two thirds of the others said they were actively considering doing so in the future.

Investors are being held back by a lack of confidence in the analytical models available to assess the impact of climate change on portfolios, according to PGIM’s study. Fewer than a quarter labelled existing climate change models as effective, while less than 10 per cent utilised these tools in decision-making processes. 

“One of the primary causes of the action gap appears to be uncertainty about climate models and analytics”, says Davis Walmsley, Greenwich Associates head of client relationships, investment management. “This may be an area where better understanding and deployment of existing data and analytics may encourage more investors to incorporate climate change into their portfolios.” 

Around 40 per cent of those already incorporating climate change into their investment processes said they were proactively pursuing investments to mitigate the impacts of climate change. 

Hyat says: “The good news is the trend line shows major investors around the world recognise the importance of climate change. They are building climate change into their governance structures and creating frameworks for evaluating both the impact of their investments on the climate and the impact of climate change on their investments.” 

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