Paris Agreement Goals: Institutional investors to launch new initiative

The Institutional Investors Group on Climate Change (IIGCC) is launching a new initiative to explore how investors can align their portfolios to the goals of the Paris Climate Change Agreement.

Many pension funds and asset owners recognise climate change as one of the largest systemic risks in their investment portfolios.

An increasing number have made commitments to low carbon investment, and there is significant interest in determining how investors can support the objectives of the Paris Agreement.

This project is an IIGCC initiative with a steering committee of leading European investors that includes AP2, Brunel Pension Partnership, Church of England Pensions Board, LGPS Central, PKA, and TPT Retirement Solutions.

This initiative aims to help develop a common understanding of the concepts relating to alignment with the Paris Agreement, and explore options for approaches and methods that can be used by investors who wish to align their portfolios to the Paris Agreement.

The initiative will initially:

Develop working definitions for key concepts, and identify different approaches and methods relevant to the objectives of aligning portfolios to the Paris Agreement.

Explore the feasibility of these different approaches and methods for different asset classes and sectors.

Test the most promising approaches and methodologies for alignment using real world portfolios.

Explore feasibility and opportunities for aggregation of alignment approaches at the portfolio level.

Identify the financial characteristics of the portfolios and transition options in the context of wider financial risks.

The initiative is delivered as part of IIGCC’s ‘Investor Practices’ programme which helps asset owners and managers better assess and manage both climate risk and opportunity, and to report on their actions more effectively.

Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change explains: “Investors increasingly recognise the role they can play in supporting decarbonisation of the global economy. Putting this into practice however is a different matter. This new initiative will help investors to understand what it means to align investment portfolios with the Paris Agreement and what steps they can take across different asset classes.”

“Making an effort to reduce climate change is a common ambition for pension funds and asset owners all over the world. However, our approaches vary,” adds Peter Damgaard Jensen, CEO, PKA. “By sharing our knowledge and different experiences, we can make it significantly easier for all pension funds and asset owners to make use of the most feasible approaches and thereby align our investments with the ambitions of the Paris-agreement. We hope to benefit from this ourselves and learn from our colleges around the world as well, as we look forward to sharing our approach to climate related investments with fellow institutional investors.”

“As a pension fund we want to be able to demonstrate transparently that we have delivered on our commitment to be aligned to the Paris Agreement. However, we need to be honest; the lack of consensus on frameworks and methodologies means that its simply not yet possible to make such statements when investing across multiple asset classes”, said Adam Matthews, Director of Ethics & Engagement, Church of England Pensions Board. “There are emerging tools for some asset classes but there is not yet an agreed definition of what being aligned to below two degrees or net zero by 2050 means for a pension fund. This is an issue that needs to be addressed by asset owners and we are delighted to work together with leading European asset owners and to co-chair this IIGCC initiative.”

While there is a growing body of experience in specific areas, the concept of aligning investment to the Paris Agreement remains poorly defined. Moreover, the different potential approaches and methodologies that can be used to support alignment of portfolios are not well understood by investors, nor fully tested in the context of different assets classes and sectors. The project will take a collaborative approach, engaging asset owners, asset managers, and other organisations through a series of roundtables and stakeholder consultations.

Faith Ward, Chief Responsible Investment Officer, Brunel Pension Partnership, explains: “In developing a comprehensive approach to managing climate risk across all Brunel’s portfolios we need to identify what portfolio changes would need to happen to align with the Paris Agreement. This project, working with other leading investors and supported by the IIGCC, will equip us with the critical information to move forward in a fully informed and effective way.”

Christina Olivecrona, Sustainability Analyst at AP2, adds: “AP2 welcomes this project, as a common understanding of what it means to align a portfolio to the Paris Agreement hopefully would mobilise capital for the transition to a low carbon economy.”

“If implemented, the Paris Agreement will introduce risks and opportunities to institutional investors. Many investors have considered aligning their portfolios to the Paris climate accord, but unfortunately there is no agreed framework for what this means in practice,” said Michael Marshall, Director of Responsible Investment & Engagement at LGPS Central Limited. “The IIGCC’s initiative is vital for asset owners to understand their portfolio’s impact on a changing climate, and the impact of a changing climate on their portfolios.”

The initiative also recognises the variety of work evolving in relation to this challenge, seeks to build on these outputs and add value by testing emerging approaches with investors and against real world portfolios. The initiative acknowledges that a one size fits all approach is unlikely to be appropriate and will therefore explore a range of options and approaches that may be relevant from an individual asset class and sector perspective.