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Trustees should prioritise climate risk

15 October 2018 – The facts speak for themselves and must be acted on – trustees need to prioritise climate risk says Andrew Voysey, CISL’s Director for Sustainable Finance.

I was recently invited to a training day for the trustee board of a UK corporate’s occupational pension scheme. They wanted my views on what trustees should be prioritising under the theme of ‘sustainable investing’ based on our track record developing sustainable finance business strategies and in executive development.

One of the topics I focused on was the financial implications of climate change. I left the room rather stunned – the overwhelming belief in the room was that this was nothing more than an ethical issue.

Of deeper concern was that the scheme’s investment consultant, who was present, said nothing to challenge this perspective. For me, this implies systemic failings in how pension savers’ capital is stewarded today.

This may sound alarmist, but the logic is clear – the conclusion of mainstream institutions in recent years, from Blackrock to the Bank of England, is that climate change has become a driver of tangible financial risks and opportunities.

Those close to the investment value chain have long been aware of how challenging it can be to engage decision-makers with the longer-term aspects of climate change. So why this shift in thinking?

First, we should not underestimate the near-term impacts of a market shock related to decarbonisation. According to recent Cambridge research, sudden and significant market repricing moments are plausible, with industries restructuring as a result of technological disruptions.

Another challenge often highlighted is whether policy change is credible. Whilst the potential of a global carbon price remains unclear, the automobile industry provides a good example of how stricter environmental policies are already going hand in hand with new value drivers, in this case via the shift to electric vehicles.

The energy sector also illustrates how the economics behind low carbon business models are already compelling. By 2020, all the renewable power generation technologies that are now in commercial use will fall within the fossil fuel-fired cost range, with most at the lower end or undercutting fossil fuels, according to the International Renewable Energy Agency.

From a broader perspective, three fundamentals distinguish this issue from pure ethics.

First, few realise that if we want to stabilise global average temperature at any level, the only way to achieve that is to achieve net zero carbon emissions across the entire global economy in the coming decades.  ‘Net zero’ is equivalent in terms of scale of change to the industrial revolution. The impacts of this kind of restructuring of the global economy are clearly more than ethical in nature.

Second, the material financial opportunities derived from zero carbon solutions are too often dismissed. From energy storage to green building technologies or electric vehicles, many companies are providing products and services that help mitigate climate change risks, generating significant revenue opportunities. Discovering those investment opportunities early on across various asset classes could allow trustees to generate better returns for their members.

Third, despite political and economic progress towards decarbonisation, the United Nations  and investment managers alike conclude that the world is currently heading for a global temperature rise of 3.4 – 4 degrees this century. The last time the planet saw this scale of change was over a 10,000 year time period after the last ice age. Younger pension savers may witness this same scale of change in just the time it takes them to reach retirement age.

The facts themselves should lead trustees to conclude that climate change presents serious financial implications and should therefore be managed like any other investment driver. The growing focus from regulators, politicians, lawyers and beneficiaries on trustee action on climate should help further.

Practical investment solutions already exist. But for the investment value chain to seek them out systematically, trustee boards need to signal loud and clear to investment service providers that they expect the risks and opportunities of climate change to be integrated into the investment advice and management process by default.

Thinking back to my experience of the trustee training day, my view is that the board chair and chair of the investment committee should discuss climate risk with their investment consultant and bring options back to the board as a priority.

For the subsequent conversation to be confident and effective, however, the trustee board needs to invest urgently in building its own capacity to understand this new priority. We know from our work across the market that they are not alone.


This article was first published October, 2018 in Viewpoint onlineRead the original article.

About the author

Andrew Voysey

Andrew Voysey is Director, Sustainable Finance at CISL. He has led the growth of CISL’s work with investors, banks, insurers and their regulators for the decade since the global financial crisis. He is responsible for CISL’s long-term collaborations with over 50 financial institutions, across five continents, that evolve business practices so that finance supports a more equitable and environmentally sustainable economy. He also leads CISL’s advisory work with financial policymakers and regulators and overseas its research activities, designed to produce cutting-edge insights that are actionable by leaders in government, business and finance.

Andrew is an Academic Visitor at the Bank of England and a Fellow at the Royal Geographical Society.

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Articles on the blog written by employees of the University of Cambridge Institute for Sustainability Leadership (CISL) do not necessarily represent the views of, or endorsement by, the Institute or the wider University of Cambridge.