$4.5 Trillion in Global Assets Still Exposed to Climate Change Risks

A recent survey reveals that the world’s largest investment funds and managers are taking the long-term risks of climate change far more seriously than they were a few years ago, a trend that has especially become true in Europe.

But according to London-based Asset Owners Disclosure Project (AOPD), far too many companies in the financial sector within the U.S. and China are not taking any action to account for the the risks (and potential opportunities) climate change could exact on their portfolios. As a result, the 114 American companies that are taking no action are putting their firms’ long-term financial viability, as well as those of their customers, in jeopardy.

AOPD estimates that the assets at risk total about $4.5 trillion. Laggards include the Thrift Service Plan, which boasts 4.8 million participants in its retirement funds tailored for federal employees and military personnel. Fidelity Investments, which claims over $2 trillion in assets under its belt, also does not include climate change as a factor while assessing its portfolios’ long-term risks.

AOPD’s researchers cite encouraging development on the climate change front over the past two years, but they insist asset owners still have plenty of room to improve.

Overall, at least 60 percent of the asset owners AOPD surveyed in its most recent report say they are at a minimum taking some action when it comes to climate change. But 40 percent are still doing nothing.

And somewhere between the leaders and laggards are what AOPD calls the “bystanders,” which the group says have much to accomplish before they can truly say they are doing what they can to shield their customers from future climate-related risks. Nevertheless, the report takes an optimistic tone, as the vast majority of asset managers realize the opportunities in joining the world’s transition to a low-carbon economy -- yet foreboding risks at simply maintaining business as usual.

When it comes to the world’s largest asset owners, the funds that received the AOPD’s X rating -- in other words, doing absolutely nothing to track, disclose or mitigate climate risks -- are mostly sovereign wealth funds.

Many of them are in the Middle East’s Gulf region, a worrisome prospect considering countries such as Qatar, Kuwait and Saudi Arabia are already struggling with the three-year trend of low oil prices. And as renewables continue to scale and become far more cost competitive, they will continue to nudge fossil fuels toward irrelevance.

In addition, large Japanese insurance companies -- such as Mitsui and Zenkyroren, which alone have almost a combined $1 trillion in assets -- are also reportedly giving a blind eye to climate change risks.

Meanwhile, AAA-rated funds, those AOPD determined are doing most to prepare their customers for future financial challenges related to climate change, have increased by 17 percent when compared to the organization’s previous report. They include some of the Netherlands’ largest pension funds, the CalPERS fund for California state employees and the $7 billion Australia Local Government Super pension fund -- which AOPD ranks as the global leader when it comes to overall disclosure, strategy and risk management.

AOPD’s evaluation of asset managers reveals a similar demographic split. The highest-rated fund manager, APG Asset Management, is based in the Netherlands. Other globally recognized investment advisors based in Europe, such as Aviva, Allainz and HSBC, are also rated relatively high. But a lack of transparency on climate change policy, combined with the lack of action at the corporate level, are putting far too many investors at risk in AOPD’s assessment.

Along with Fidelity, U.S. firms Affiliated Managers Group and New York Life Investment Management are perched at the bottom of the organization’s rankings. Other American investment firms, such as Legg Mason, Vanguard, Capital Group and Wells Capital Management, do not fare much better.

For those investors who factor climate change risks in the structure of their portfolios, which countries are the safest bets? AOPD lauds France for its recent mandatory climate change disclosure rules, though Scandinavian countries rank higher overall, with Sweden topping the list. The U.S., however, is relegated toward the bottom, with only Switzerland and Japan earning lower overall scores. The Gulf states in the Middle East and Singapore present an even larger risk from AOPD’s point of view. As far as who should manage these funds, the breakdown is similar: The Netherlands is judged as the safest, followed by Germany and the United Kingdom.

Overall, AOPD is confident that both the world’s largest funds, as well as its leading asset managers, will soon start taking climate change more seriously.

The evidence suggests that global investments in the low-carbon economy are already on the rise. And as more companies adopt climate change strategies and become more transparent about them, the pressure will mount on other funds and managers who are resistant to these market shifts.

After all, the only alternative to restructuring portfolios for a 21st-century economy is to see those portfolios dwindle as investors begin to stash their funds elsewhere.

Image credit: Michael Duxbury/Flickr