Governments and environmental agencies need to introduce, measure and enforce carbon emission limits on companies if asset owners are to more effectively measure the impact of their investment portfolios and pressurise companies to decrease their pollution.

That was a key takeaway from the third annual Global Research Alliance for Sustainable Finance and Investment (Grasfi) conference, hosted online on Thursday (September 10).

Investment experts including a senior investment executive of the California Public Employees’ Retirement System (Calpers) and the former chief investment officer (CIO) of Japan’s Government Pension Investment Fund said governments need to force companies to disclose their carbon emissions, if investors are to better understand and put money into companies that are cleaning up their acts – and avoid those that do not do so.

Anne Simpson, Calpers

“Finance can’t do it on its own. We need the rules of the game sorted out. We need businesses, and we absolutely need the civil society to hold politicians’ feet to the fire,” said Anne Simpson, interim managing investment director for board governance & sustainability at Calpers, speaking on a panel titled 'Revisiting the Role and Responsibility of the Investment Community'. 

Wildfires are raging in California, where the $411 billion pension fund is headquartered, and Simpson said the state was just one part of the world being affected by climate change. “And yet, we cannot get basic information from companies which is consistent, reliable, has gone through the audit process and integrated into the financials.” 

Similarly, Hiromichi Mizuno, the former executive managing director and chief investment officer CIO of Japan’s Government Pension Investment Fund (GPIF), believed that it is critical to “bring the policymakers on board”.

It's a point that Simpson noted is vital if institutional investment is to help act as a catalyst to limit climate change. “We have got to get government commitments, and then the private sector can deploy capital and really be a huge force to move us forwards. But without carbon pricing, without mandatory reporting. It is smoke and mirrors, and I think it’s going be very hard to move the money,” she said.

ENFORCEMENT ESSENTIAL

The US is currently proving to be more an impediment than facilitator when it comes to combating climate change.

While the world’s largest economy is currently part of the 187 nations to have ratified the Paris climate agreement in 2015, it began the procedure to withdraw from the accord in 2019 and will leave on November 4 this year. President Donald Trump has said he doubts that greenhouse gas emissions cause global warming and as a result standard-setting bodies, which are overseen by elected officials, are not demanding the data and information needed to effectively monitor carbon levels, said Simpson.

With no leadership taking place at the federal level, Calpers has done its best to step in and elevate carbon emissions on corporate agendas.

In September 2019, the pension fund became the first US investor to join the UN-Convened Net-Zero Asset Owner Alliance, launched by the United Nations and the Principles for Responsible Investment (PRI). In doing so it committed shift its investment portfolio to net-zero greenhouse gas (GHG) emissions by 2050 through advocacy and engagement efforts. 

That target is likely to prove unrealistically ambitious unless the market at large becomes more receptive to monitoring carbon emissions. “We simply can’t get there unless the wider economy gets there because we’re too big. You can’t get $400 billion in a nice green corner of the world,” said Simpson.

Hiromichi Mizuno,
formerly of GPIF
 

Similar frustrations have limited the ambitions of GPIF. Japan, a signatory of the Paris climate agreement, has targeted a 26% reduction in GHG emissions by 2030 and an 80% reduction by 2050 from 2013 levels, a commitment regarded as “highly inefficient” by Climate Action Tracker. The country also relies on coal for a third of its power generation.

Mizuno explained that during his tenure at the world’s biggest pension fund he had wanted to participate in the UN’s Net-Zero Asset Owner Alliance. However, the government at that time had not committed to achieving net-zero emissions by 2050.

“I felt it is kind of self-contradictory because half of our portfolio resides in Japan,” he said, adding it would be “a bit silly” to create half a net-zero portfolio that is not in line with the other half.

MODERN PORTFOLIO THEORY

While governmental complacency may be restricting the ability of institutional investors to act, investment experts say they should still do all they can, for the sake of their returns and the environment.

Mizuno added that every investment decision not only affects portfolio returns but has a consequence for the environment. “It is very important for people to have a holistic view of what’s happening,” he said.

Mervyn Tang, the global head of ESG research, sustainable finance at Fitch Ratings, offered similar views, arguing that the modern institutional investment portfolio needs to evolve to take into account the impact that investments in companies can have on climate change.

     Mervyn Tang,
Fitch Ratings

Jane Ambachtsheer, global head of sustainability for BNP Paribas Asset Management, agreed.

“The externalities are not all properly priced, and there is too much focus on short-term results versus long-term sustainability,” she said, adding that putting a price on carbon would help in the development of investment models that take into account the harm caused by corporate activities.

Ambachtsheer also believes companies should be required to disclose their emissions, and that it should be mandatory for governments to implement the suggestions of implementation of the Task Force on Climate-Related Disclosures.

Mizuno said another important step is to better train financial professionals about how to prioritise sustainability in their decision-making.

“Unfortunately, I grew up in this industry where the finance education I received basically tries to teach me how to outperform other people.” He added that institutional investors would do better to focus more on collaborating to achieve sustainable value in their investments.

If they do not, the potential losses in investments caused by climate change “will hit everyone”. Asset managers will be held responsible for allocating clients’ assets, and the pension fund manager will be liable for not protecting pensioners, Mizuno noted.