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All Swans are Black in the Dark is a piece of research that helpfully illustrates how the short- term focus of financial analysis does not shed light on long term risks.
In 2006 a leading group of investors established the UN-backed Principles for Responsible Investment (PRI). At the time of writing, the PRI has nearly 1,200 signatories representing over $70trn. The PRI works:
- To understand the investment implications of environmental, social and governance (ESG) factors
- To support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
Leading organisations are starting to take a strategic response to ESG and sustainability, and are considering changes needed to products and market positioning, as well as to processes, operations and supply chains. Read more about ESG investing.
From 2020, PRI signatories must report how they have considered specific climate-change risks in their portfolios.
The financial risk of climate change has emerged as one of the primary issues that the PRI seeks to address. The Inevitable Policy Response (IPR) work involves PRI, Vivid Economics and Energy Transition Advisors. They are building a Forecast Policy Scenario (FPS) which lays out the policies that are likely to be implemented in the 2020s and quantifies the impact of this response on the real economy and financial markets. Much climate scenario work seeks to avoid specific forecasts so the FPS is particularly helpful in this regard.
In Europe the Institutional Investors Group on Climate Change (IIGCC) is a membership organisation of investors focusing on climate change. The Net Zero Investment Framework for Consultation is the first publication of the IIGCC’s Paris AliIGCgned Investment Initiative. Equivalent organisations to IIGCC are Ceres in North America, and C and AIGCC in Asia.
Leading asset owners are seeking to manage the strategic financial risks of climate change. This can lead to designing investment mandates (as a client) or products (as an investment manager) to meet that goal. Early pension fund movers include HSBC Bank (UK) Pension Scheme (TCFD Statement), NEST (Note to members and climate change policy), and the Environment Agency Pension Fund (EAPF).
Outside the UK examples include:
- France: ERAPF (SRI including climate), FRR (The FRR and Climate Change)
- Sweden: AP4 (Climate and the environment), AP1
- United States: CalPERS (Climate Change), New York State Common Retirement Fund (Climate Action Plan), CalSTRS (Transition to a Low-Carbon Economy)
- Australia: HESTA (Climate change)
- Canada: OPTrust (Climate Change Action Plan)
As well as strategic risk, strategic asset allocation and portfolio construction, investors are increasingly using their voting power to influence companies. Climate Action 100+ is a global investor initiative that seeks to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
The Net-Zero Asset Owner Alliance is a growing group of international institutional investors delivering on a commitment to transition their investment portfolios to net-zero greenhouse gas emissions by 2050. Launched in September 2019 with no UK asset owners as m embers, Aviva and the Church Commissioners have since joined the Alliance.
The Investment Integration Project (TIIP) addresses system issues for investors. They continue to publish helpful reports. For example, Assessing System Level Investments is a guide to help asset owners assess their managers’ effectiveness in addressing systemic social and environmental risks and rewards.
The Transition Pathway Initiative (TPI) is a global, asset-owner led initiative that assesses companies' preparedness for the transition to a low carbon economy.
All Swans are Black in the Dark is a piece of research that helpfully illustrates how the short-term focus of financial analysis does not shed light on long-term risks.
The 2° Investing Initiative (2DII) is an international, non-profit think tank working to align financial markets and regulations with the Paris Agreement goals.
Understanding Physical Climate Risks and Opportunities, published by the IIGCC and lead-authored by Acclimatise, seeks to help investors understand physical climate risks and how they are measured. This guidance provides an overview of the physical climate science and illustrates how physical risks are manifesting and causing financial consequences. It provides investors with practical guidance on how they can begin to analyse, assess and manage the risks and opportunities presented by physical climate hazards, both acute and chronic.
Stranded assets are assets that have suffered a premature write-down in value and this may be caused by environment-related risks. You can see a paper that explores stranded assets On the IADB website.
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Louise Pryor, IFoA President, will chair this free-to-view session, in which Alex Darsley, TPR, Actuarial Regulatory Policy, will be discussing the regulator’s Climate Change Guidance Consultation, which is seeking views on new guidance designed to help trustees meet tougher standards of governance in relation to climate change ri
This session will examine the megatrends and themes driving the Future of Work across the Financial Services industry, and how Covid-19 has accelerated new future work priorities with a particular focus on hybrid work and leadership mindset and capabilities.
Internal audit is often the Cinderella of the audit world. It’s a regulatory requirement for insurance companies to have an internal audit function, so why not make it as useful as possible? This session will look at how to link an internal audit plan to the risk register, and how that helps audit committees and boards to spot problems and fix them.
Climate change is one of the greatest risks facing our world today. Addressing it will require multi-faceted solutions. Through this panel session, we will explore the different levers that can be used to meet net-zero targets including climate science and data, government engagement, and mobilising green finance.