Taking accountability back to where it belongs: at the top of the value chain

The newly-formed Asset Owners Disclosure Project seeks to build on the work of the Carbon Disclosure Project to see if emissions data can better drive change. Its executive director, Julian Poulter, outlines its aims to Mike Scott

Investors have asked companies for more than a decade to reveal how much carbon they have emitted, through organisations such as the Carbon Disclosure Project (CDP).

They believe the information contributes to better investment decisions because it gives them greater understanding of the risks and opportunities associated with climate change.

The CDP has been hugely successful at increasing disclosure, particularly among multinationals, but there is no indication whether investors actually put the data to good use.

Later this year, however, the newly formed Asset Owners Disclosure Project (AODP) will write to the world’s 1,000 biggest institutional investors – pension funds, insurance companies, sovereign wealth funds and the like – asking them about the climate risks within their portfolios and how they manage them.

It will use the answers to compile a disclosure database similar to that of the CDP, to produce an index assessing investors on the quality of their disclosure, and to create a social media platform “that will provide a unique opportunity for beneficiaries to engage with pension funds”, says Julian Poulter, executive director of the Australian-based AODP.

Investors will be ranked on their responses according to six criteria – transparency, or how much information they disclose; the amount they invest in low-carbon projects and companies; the extent to which they mitigate their climate risks; the extent to which they are active owners; investment chain alignment or the extent to which they brief their asset managers and advisers to consider climate change in their mandates; and how they communicate all this information to their members.

The average pension portfolio has 50%-60% of its assets exposed to climate change in some way in sectors such as energy, transport, agriculture, mining, property and water, says Poulter.

“It is really important that we have some measurement of what asset owners are doing. This is the last piece in the puzzle,” he adds. “The CDP has done a great job in generating a database of emissions while the UN’s Principles for Responsible Investment has a great group of asset owners and managers demonstrating their intent to invest responsibly. What is missing is the driver that will push investors to use best practice.”

During a three-year pilot in Australia, many asset owners were reluctant, including some considered leaders in sustainable investing that do not want that reputation to be undermined. They fear that “it is human nature to resist if someone asks you to be more transparent”.

However, Poulter is convinced it will “help asset owners know where they are in relation to the leaders”. He said: “A lot of funds find it valuable because often it is only when you ask yourself questions like this that you find out about an issue.”

Poulter acknowledges, however, that gathering the necessary data will be a huge challenge.

“The big asset owners have up to 40 fund managers working for them,” he said. “Some of those have extensive databases of emissions intensity – for some of their investments – but the owners have not aggregated that information up to the portfolio level. It’s not going to happen overnight.”

Nonetheless, he regards it as part of an inevitable trend. He said: “For years, asset owners have essentially outsourced management of this issue to asset managers. Now accountability is moving back to where it belongs, at the top of the value chain.”