Transcript
1. Summary Climate change is one of the most critical issues of our times. The consequences of the changing climate directly affect people’s livelihoods, and the poorest people suffer the most. A rise in the number of natural disasters increases their vulnerability even more. If our climate is to be stabilised, it is crucial that the financial markets move investments from carbon-intensive companies to climate solution companies and that asset managers encourage companies to undertake better climate work. Climate-smart investment options are available on the fund market today in the form of, for example, green bonds and sector funds with a focus on renewable energy and energy efficiency. However the bulk of capital managed does not take explicit account of climate and there are large sums invested in companies extracting, producing and prospecting additional reserves of coal, oil and gas. The aim of this Swedwatch study is to examine how asset managers integrate climate considerations into fund management, and how this is communicated to customers. Swedwatch has established climate estimates for a sample of 28 funds for small investors (Sweden funds, global funds and niche funds focusing on climate) and interviewed representatives of the ten largest asset management companies in Sweden (Swedbank, SEB, Handelsbanken, Nordea, SPP, AMF, Länsförsäkringar, Skandia, Danske Bank and Lannebo Funds) concerning how climate change is integrated into fund management. This study is primarily aimed at asset managers but also gives some guidance to investors and policy makers interested in climate issues. Through literature studies, estimates of the funds' climate impact and interviews, Swedwatch explores three issues concerning the Swedish fund market: 1. What is the climate impact of equity funds targeted at small-scale investors? 2. How and to what extent do asset managers take into account climate issues in their fund management? 3. What type of information do investors need in order to be able to make comparisons between investment managers and between funds? Estimates of funds' carbon footprint and ownership of fossil reserves of coal, oil and gas show considerable variation. For example, one year of saving SEK 100 000 in the global fund with the highest carbon footprint is the equivalent of more than eight tons of carbon dioxide emissions, while the same amount invested in the fund with the lowest carbon footprint produces emissions equivalent to two tons of carbon dioxide, only a quarter as much. The ownership of fossil reserves in funds also varies. Several funds have no fossil ownership while the fund with the highest fossil holding owns 258 tons of carbon dioxide that is currently stored in the soil but that may be extracted in the future and released into the atmosphere. The magnitude of a fund's impact on the climate varies depending on how much of the fund holdings are invested in climate-damaging sectors and portfolio companies. Swedwatch’s analysis of the climate impact of the funds illustrates how asset managers can use currently-available assessment methods as part of a more comprehensive analysis of their entire fund management’s climate impact. Asset managers individually customise the way in which they take climate into account. These strategies often combine the following tools:
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• Exclusion of climate-damaging enterprises. • Investments in companies that contribute to climate solutions. • Advocacy and ownership influence. Somewhat simplified, asset managers can choose between selling off a climate-damaging portfolio company or remaining as owners and influencing it in a positive direction. The choice is not selfevident. Consequently it is important to assess how well asset managers analyse climate change in their fund management and how efficient and effective their actions are long term. The asset managers interviewed did express ambitions to increase their focus on climate. More than half have taken a clear position for climate-friendly measures by signing key investor initiatives. However, their work regarding climate issues is not yet sufficiently developed or transparent so that it can be examined in a reliable manner, unlike many other industries. The study therefore refers to information provided by asset managers, and comments on this information on the basis of the literature available on the subject. In spite of the fact that all ten asset managers have formally committed to taking climate change into consideration in their fund management, they have not analysed their fund holding's carbon footprint using methods that are currently available. In addition, they lack action plans aimed at reducing climate impact and increasing investment in climate solutions, making it difficult to rank which actors are most environmentally friendly in the long term. Many asset managers have begun to establish processes for climate-friendly investments. Some have focused on the climate issue in their analyses and dialogues with individual companies over a long period of time, without actually reviewing their entire stock of funds or the full range of their financial management. SPP, Swedbank and Nordea have developed processes for sustainable investment including climate issues: • SPP applies a sustainability ranking that includes climate criteria where the worst companies in high-risk industries are excluded on a continuous basis, including some fossil fuel companies. • Swedbank uses a sustainability analysis and excludes certain climate-unfriendly companies, but only in its ten sustainability funds. • Nordea has processes in place to integrate environmental considerations into all investment decisions. However the degree of actual climate integration varies between different funds. Handelsbanken, Nordea and Skandia provide their own separate niche fund focusing on climate, but these funds represent only a small part of the assets managed. No actor in the study can produce examples of formal climate policies or incentives for individual fund managers' investment decisions. Many asset managers instead describe how they rely on informal cooperation between sustainability departments and fund managers. Swedbank, SEB, Nordea, SPP, Skandia and Danske Bank are members of the international advocacy initiative that encourages companies to report and reduce their carbon footprint led by CDP (previously Carbon Disclosure Project). More than half the asset managers in the study give examples from their own work with advocacy dialogues and ownership influence with the aim of improving companies’ climate activities. At the same time transparency concerning their approaches is low and the results of this dialogue are unclear. 2
From an investor’s perspective, the fact that asset managers do not analyse the climate impact of their fund management and that they have no action plans for climate and investment presents a problem. As a consequence they are unable to provide relevant information. In order to compare different asset managers’ work regarding climate, investors need a clear account of the carbon footprint of fund holdings. It is also necessary that asset managers clearly communicate how they invest in climate solutions, and describe their approach and the results of their advocacy work, other corporate governance and any exclusion of climate-unfriendly companies. As the financial market plays an important role in tackling climate change, and time is limited, Swedwatch finds it very serious that the majority of asset managers’ deal with climate as a niche issue or as an issue not systematically integrated into investment decisions. If climate-conscious investors are referred to special funds - while there is no climate strategy or action plan for the entire holdings - the positive leverage that fund capital could exert in order to stabilise the climate is lost. Swedwatch’s recommendation is that asset managers, like most companies that sell products, should begin by declaring the contents of all funds - in this case, using available methods to analyse and communicate the entire fund holding's carbon footprint and portfolio companies' forward-looking climate strategies. It is also recommended that asset managers develop action plans to reduce the climate impact of their fund management and increase contributions to climate solutions over time. They also need to provide clear information for investors about their approach and the results of practical climate considerations in their fund management. In order to ensure that their action plans are ambitious enough to contribute significantly to climate stabilisation, asset managers should take guidance from, for example, the International Energy Agency IEA's recommended levels of investment in renewable energy 1 described in relation to the carbon budget2 objectives that are under development by CDP and WWF3. As climate considerations in fund management is not yet measured or reported, it is difficult to recommend which asset managers are preferable from a climate perspective. The study provides some guidance for savers and investors who would like to choose funds that have lower carbon footprint and limited or no ownership in fossil reserves and for those who wish to invest in climate solutions such as renewable energy or energy efficiency improvements. The primary recommendation for savers, however, is to use their consumer power to request information and demand that climate consideration is integrated throughout all fund management and not be satisfied with asset managers who only take climate change into account in minor parts of their fund range. Finally Swedwatch recommends that policy makers introduce formal requirements for climate analysis and action plans for asset managers throughout the fund management sector, as well as in the corresponding reporting to investors. This would create incentives for investment managers to develop their methods so that real climate improvement would be achieved. It would also make it possible for savers to exercise their consumer power as they would have access to comparable information on asset managers’ climate commitment. Footnotes: 1
The International Energy Agency IEA estimates that an investment of USD 44 000 billion per year until 2050 is necessary to reduce dependence on fossil fuels for the world's energy systems. This corresponds to an increase of USD one trillion (that is 1 000 billion) per year as compared with current levels of investment, also known as the green billion. 3
2. PwC, Busting the Carbon Budget, Low Carbon Economy Index 2013, 201311 http://www.pwc. co.uk/sustainability-climate-change/publications/low-carbon-economy-index-2013-overview. jhtml, retrieved 29 July 2014. 3. CDP, the World Resources Institute, WWF, Mind the Science Mind the Gap, 201405, http://www.wri.org/sites/default/files/uploads/mind_the_gap_faqs.pdf, picked 20,150,130; CDP, the World Resources Institute, WWF, Ecofys, Methodology for setting corporate emission reduction targets in line with climate science: The Sectoral Decarbonisation Approach (SDA), 201 409,http://www.sciencebasedtargets.org/wpcontent/uploads/2014/09/The_Sectoral_Decarbonization_Approach.pdf, retrieved 30 Jan 2015.
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