Asset managers and asset owners have a requirement to take into account risks related to environmental, social and governance (ESG) factors, the European Commission plans to clarify.
Presenting its “Action Plan for the Planet” on the occasion of the high-level climate change summit in Paris this week, the Commission foreshadowed a series of measures it planned to take to place the financial sector “at the service of the climate”.
The summit coincided with the two-year anniversary of the signing of the Paris Agreement.
The Commission’s measures were intended to provide incentives for investors to invest in the green economy.
In March the Commission would present a plan with these initiatives, it said, which would include “integrating sustainability considerations into the duties that asset managers and institutional investors have towards those whose money they manage, to clarify the requirement to take into account risks related to environmental, social and governance factors”.
One Planet Summit
French president Emmanuel Macron hosted a ‘One Planet Summit’ in Paris this week. Held two years to the day after the UN climate change agreement was reached in the same city, it brought together people and organisations from different walks of life, from those engaged in making a clean economy a reality, to those whose primary power lies in their capacity to finance this transition.
An appreciation that action was now needed more than words seemed to pervade at least some of the many announcements made in connection with the summit. But some stakeholders still saw the need to hold to account those making new commitments or launching new initiatives.
IPE reported on some initiatives and views expressed in connection with the summit earlier this week.
Valdis Dombrovskis, Commission vice-president for financial stability and financial services, said in a speech in Paris that the EU executive would propose to integrate sustainability factors into investment mandates. This would clarify institutional investors’ legal obligation to factor sustainability risks into capital allocation decisions.
This essentially means the Commission is taking forward one of the recommendations of the sustainable finance expert group it has established.
The other well-trailed measures included the creation of a “common language and classification system for what is considered green and sustainable”, said Dombrovskis. The goal is a EU classification system for sustainable finance.
Lower capital charges for banks on qualifying “green” assets may also be forthcoming. The Commission was looking favourably on a European Parliament proposal to that effect, according to Dombrovskis.
Commission president Jean-Claude Juncker said: “The time has now come to raise our game and set all the wheels in motion – regulatory, financial and other – to enable us to meet the ambitious targets we have set ourselves.
“This is a necessity dictated by our current living conditions as well as those of future generations. This is the time that we must act together for the planet. Tomorrow will be too late.”
AXA IM implements new climate policy
AXA Investment Managers has brought in a new climate policy that will apply to all of its responsible investment open-ended funds and other products and mandates on an opt-in basis, from the end of January.
According to a spokeswoman, AXA IM planned to divest from companies that derived 30% or more of their revenues from coal. The new policy also covered divestment from any companies with significant exposure (30% or more of revenues) to tar sands activities.
In April, the asset manager sold its holdings in companies deriving more than 50% of revenues from coal-related activities. Fixed income and equity holdings worth €177m were sold.
Climate Action 100+ investors urged to aim high
The advocacy organisation Preventable Surprises has issued a challenge to investors involved in the Climate Action 100+ engagement initiative that was launched in Paris this week.
Carolyn Hayman, board member and climate lead at the organisation, said the initiative had set itself apart because investors were saying what they would do as stewards of capital, instead of telling governments or companies what to do.
“Investors need to quickly come to a view about what stewardship activity would lead to the biggest emissions reduction in the shortest timescale.”
Carolyn Hayman, Preventable Surprises
“Potentially this could be a big shift,” she said.
Although applauding the initiative, Preventable Surprises raised the question of whether it could actually help reshape the current global warming trajectory by 2020.
It highlighted that many major US fund managers – including BlackRock, State Street, Fidelity and Goldman Sachs – did not appear on the list of participating investors.
“Well before the next anniversary, we hope that climate-aware asset owners and investment consultants will have been able to persuade all major global managers, wherever they are headquartered, to come on board,” the organisation said.
In addition, although Climate Action 100+ was explicit about including emissions from the use of a company’s product, Preventable Surprises said the methodology was underweighting energy utility companies. This sector accounted for around 42% of global emissions, according to figures cited by Preventable Surprises, and was “the low hanging fruit for reducing greenhouse gases”.
Hayman said investors needed to quickly come to a view about what stewardship activity would lead to the biggest reduction in the shortest timescale, and Climate Action 100+ was the perfect initiative for experimenting with “different theories of change”.
Lastly, Preventable Surprises called upon asset owners joining the initiative to report on how they were changing their mandates for investment consultants and fund managers to incentivise action on climate-related systemic risk.
This was a prerequisite for “real manager commitment and participation in this initiative”.
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