More Climate Change Recognition, Action Among Major Investors

Since the Paris Agreement's adoption in 2015, a majority of the world's largest investors have begun to take action on climate change. According to a new report, the 2016–2017 year showed an average improvement in decarbonization within all major investor categories except pension funds.

The big picture: As more countries act to reduce carbon emissions, large institutional investors are becoming increasingly aware that high-carbon assets, such as oil firms and coal mines, may become worthless in the long run, driving them to dedicate a larger portion of their assets to renewable energy.

As a group, sovereign wealth funds (with $6 trillion in assets under management) have made some of the largest improvements, with particular leadership from Abu Dhabi, France, New Zealand, Ireland and Canada. Last November, Norway’s SWF, the largest in the world, announced that it would decarbonize its portfolio. (Three quarters of all SWFs, however, still ignore climate risk).

Yes, but: The largest pension funds (AUM $15 trillion) have made no decarbonization progress on average, and the largest insurance companies (AUM $17 trillion) saw only a slight average improvement.

This is because both investor groups share a strong preference for standardized tradable investment products, like government securities and bonds, the vast majority of which are not climate-aligned. Unlike pension funds and insurance companies, SWFs have no explicit liabilities, allowing investment in non-standardized products and infrastructure projects with greater risks.

Why it matters: Together, large institutional investors could finance the transition to a decarbonized global energy system consistent with the Paris Agreement's goals. It might not be easy, but there are steps that can be taken, namely promoting the standardization of green investment products, increasing pension fund risk-taking through regulation, and developing in-house investment capacity among large institutional investors to encourage project finance.