The Apac instos at the forefront of climate change

Jan 22, 2020

Asset owners in the region have begun to take climate change more seriously and weigh how to adapt their portfolios, say regional investment experts.

The Apac instos at the forefront of climate change

As climate change becomes an issue that investors cannot ignore in terms of its impact on their portfolios, several Asian asset owners are becoming increasingly active, say regional experts.

While a broad perception exists that most regional institutional investors lag behind their global peers on addressing climate issues, Rebecca Mikula-Wright, director of the Asia Investor Group on Climate Change (AIGCC) said she is seeing several asset owners take regional leadership on climate change, supported by coordinated action by financial regulators.

Rebecca Mikula-Wright, AIGC

“We expect to see this momentum pick up as more investors translate this into higher climate expectations of companies through Task Force on Climate-related Financial Disclosures (TCFD) reporting and engagement," she told AsianInvestor.

As the physical risks of climate change have worsened, and the exposure of Asian financial systems to broader climate risk has become more apparent, Mikula-Wright said asset owners are looking much more seriously ate how they can work towards sustainable zero emissions economies.

This trend was confirmed by a survey of Asian investors with $1.9 trillion under management, conducted by AIGCC late last year, which found a clear and growing appetite for climate-positive investment.

This is playing out across different Asian markets in different ways, said Mikula-Wright.

“In recent times we have seen, perhaps most prominently Japan’s Government Pension Investment Fund commit to shift investment towards green bonds and step-up engagement with companies on emissions reductions," she noted.

“Elsewhere the Singaporean government fund Temasek has committed to halving emissions across its entire portfolio by 2030. And the Taiwanese conglomerate, Cathay Financial Holdings, is aligning its carbon reduction goals with the methodology of the Science-based Targets initiative."

In addition, Mikula-Wright said that over 200 Japanese financial institutions and companies have signed up as official supporters of the TCFD recommendations, while many lenders and insurers such as Nippon Life and Dai-Ichi have adopted new restrictions or ended their financing of thermal coal plant projects. Singaporean banks including OCBC, DBS and UOB have also adopted similar restrictions.

SUPER RESPONSIBLE

Another boost for responsible investing can be found from Australia. A new new report from the Responsible Investment Association Australasia (RIAA) found that Australian super funds that comprehensively engage in responsible investment are outperforming their peers over one, three and five-year time frames.

Its report noted that 81% of Australia’s largest super funds are committed to responsible investment (up from 70% in 2016), and 72% report annually on responsible investment activity (up from 44% in 2016), highlighting how responsible investing is increasingly being embedded within Australian investment markets.

"Australia’s largest superannuation funds ... are ramping up their engagement in responsible investing to drive superior financial performance, reduce risk, and deliver better outcomes for their members and beneficiaries,” said Simon O’Connor, CEO of RIAA.

It identified 13 Australian super funds for best articulating and demonstrating a comprehensive approach to responsible investment: Australian Ethical, AustralianSuper, CareSuper, Cbus, Christian Super, First State Super, Future Fund, Future Super, Hesta, Local Government Super, Unisuper, VicSuper and Vision Super–along with the New Zealand Super Fund.

The report also showed that the consideration of climate risk by super fund boards continues to grow, but there remains room for improvement.

BLACKROCK'S SHIFT

One positive to come out of Australia's bushfire disaster of the past several months is greater urgency in the investment community to improve their commitment to opposing carbon emissions.

This was encapsulated by the recent decision by US fund house giant BlackRock to join the Climate Action 100+, a group of investors managing assets worth more than $35 trillion. According to the group's report, issued in December, “Investors want to understand the long term investment strategies of oil and gas companies in a world that limits warming to well below 2°C".

According to the group's report, issued in December, “Investors want to understand the long term investment strategies of oil and gas companies in a world that limits warming to well below 2°C".

BlackRock announced the endeavour in the face of mounting backlash for actions that activists said were preventing oil companies from being held to account. The US fund manager had previously voted against multiple shareholder resolutions brought by Climate Action 100+. One example was a resolution for UK oil and gas compAny BP to set out how each of its major investments is compatible with the Paris Climate Agreement. While 99% of shareholders backed it, BlackRock voted against.

The pressure on oil and gas companies is likely to intensify as more fund managers feel themselves compelled to ask questions about their plans to cut carbon emissions. The Climate Action 100+ report noted that fossil fuel firms are looking to diversify into other forms of energy and setting long term intensity targets to reduce their emissions.

But while these commitments represent important progress, Climate Action 100+ noted that no oil company has yet comprehensively explained to investors how its business fits with achieving net zero emissions by mid-century. It also noted that while 85% of fossil fuel companies assign board oversight for climate change, 92% of them are members of industry associations with climate positions that clash with their internal positions.

Some resources companies have made breakthroughs, according to Climate Action 100+. Thyssenkrupp and ArcelorMittal have both set goals to achieve carbon neutrality by 2050. Rio Tinto, the world’s second largest mining company, has exited coal. And Posco, the South Korean steel manufacturer, agreed to align its emissions with the country’s ‘nationally determined contributions’ to the Paris Agreement.