How to manage climate risk and achieve net zero?

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© Pedro Henrique Santos

Investors face the challenges of climate risk management and apply a number of different strategies. They work with two groups: (1) companies and issuers on the one side and (2) external asset managers on the other side.

Investors can work with companies in an active ownership context and require them to decarbonize and develop a path to implement net-zero strategies. Companies should also define the scientific basis and monitor the progress of decarbonization.

In case companies cannot deliver the required results as part of their climate and broader sustainability reporting investors and asset managers will decide to divest.

Excluding individual companies from a portfolio or fund is part of active portfolio management. Excluding whole sectors from the portfolio is not a viable strategy if the investor is large and the objective is the broadest possible diversification.

Investors working with external asset managers should define their own net-zero objectives and communicate these to asset managers. Specific targets need to be set (for example GHG reduction) and coordinated among external managers.

Measurement and Data Challenge

Investors should be informed about the detailed measurements of the progress towards achieving climate objectives and targets.

One important challenge is the sourcing of data. Asset managers will have to be in a position to adjust their climate risk management approaches to individual investors’ needs.

Investors and asset managers are also engaged in stewardship and engagement strategies and engage with other actors in the industry as well as net-zero emission initiatives.

Stress testing and climate scenarios 

On the basis of the above mentioned factors investors managing  climate risk should be in a position to climate stress test business models of portfolio companies based on the data provided by companies and asset managers and to evaluate the outcomes of different climate scenarios.

Investors also follow different climate policy pathways and asset managers with the ability to follow these pathways and manage carbon budgets accordingly are in a better position to win market share in a competivtive environment.

Net Zero Approach and Strategy RFI

Asset Managers can partipate in a current request on investRFP.com on Net Zero Approaches and Net Zero Strategies. Asset managers can request access.

 

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