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Global Climate Index 2017

Climate risk rose further up the investor agenda in 2016. The Paris Climate Agreement came into force in November, including a recognition that financial flows must be aligned with the commitment to keep climate change well below 2°C. Regulatory change is on the agenda, with France implementing a worldfirst mandatory climate risk disclosure requirement for institutional investors.
Global Climate Index 2017


EXECUTIVE SUMMARY

Climate risk rose further up the investor agenda in 2016. The Paris Climate Agreement came into force in November, including a recognition that financial flows must be aligned with the commitment to keep climate change well below 2°C. Regulatory change is on the agenda, with France implementing a worldfirst mandatory climate risk disclosure requirement for institutional investors and the Task Force on Climate-related Financial Disclosures delivering its recommendations to the Financial Stability Board, for consideration by the G20 in July this year.


AODP’s fifth Global Climate 500 Index reveals how the world’s biggest asset owners are responding to these signals. For the first time ever, we see a significant majority of asset owners scaling up action to protect their portfolios from climate risk, 299 institutions with funds worth $27 trillion representing 60% of asset owners and 70% of Index AUM. Major institutions are leading the way: TIAA, the $915 billion US pension/asset manager hybrid, and AXA, the $601 billion global insurance giant, have both joined the Leaders group now numbering 34 global institutions.

From Bystanders to Leaders, numbers have increased in every category as institutions improve, with the biggest rise in the Challenger group rated B-BBB, which has rapidly improved risk management – a general theme this year.

The number of Laggards has dropped by 19% and now accounts for just 40% of the index, with $12.4 trillion in AUM. Insurers like Mitsui Mutual and National Mutual in Japan and pension funds like Thrift Savings Plan in the US are putting the financial future of customers at risk by failing to acknowledge the risks and opportunities afforded by the low carbon transition.

Nearly one in five asset owners now has staff focused on integrating climate risk into their investments, a 33% increase from last year. Two in five (42%) now incorporate climate change into their policy frameworks, almost twice as many as last year. 13% of asset owners now calculate portfolio carbon emissions, up from 10%, however assessing the risk of stranded assets is still quite an advanced tool used by only 6% of the Index, mostly in the Leaders group.

Oceania and Europe are the most progressive regions, providing the ten best performing countries. In eight of these – Australia, New Zealand, the Netherlands, Ireland and all of Scandinavia – every fund is taking some action on climate risk.

The world’s two biggest economies, the US and China, are among the worst performers, although the US is highly polarised with some important Leaders. In China, Laggards make up 67% of asset owners with investments worth $2.6 trillion – over 80% of AUM. While China has championed green finance at the G20 and has ambitious targets to boost renewables, a lack of transparency prevents us identifying increased low-carbon investment by its institutions.

In the US 63% of asset owners with $4.5 trillion of investments are ignoring climate change. The US leads in low carbon investment in absolute terms: green investments disclosed by asset owners doubled to $55bn, surging past the $47bn of the Netherlands, last year’s top performer, yet this only represents 0.5% of total US AUM, compared to the 3.1% average of Dutch investors. Across the Index low carbon investment has improved 68% to $203 billion yet still only represents 0.5% of index AUM.

In the US, President Trump’s first 100 days have seen plans to reverse much action on tackling climate change. However, with strong opposition from influential states such as California and New York, it remains to be seen what effect federal action will have on companies and investors. Leading investors made a conscious decision years ago that lack of policy or policy reversal was in itself a risk to be managed and only increased their need to grow the size of their clean asset base as a hedge against a climate acceleration scenario.

Asset owners in the US control $10.3 trillion, a quarter of the Index. If more follow the lead set by peers in Europe, Australia and New Zealand and embrace climate-aware investing, they can radically advance the global transition to a low-carbon economy.



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