How much is at stake with climate sustainability? Moody’s MCO calculates that the world’s largest economies hold $22 trillion of loans and investments subject to carbon transition risk. This is a meaningful number—by comparison, we estimate the total AUM for the global asset management industry at $115 trillion.

Yesterday at the COP26 Summit in Glasgow, Al Gore, former U.S. vice president and environmental advocate, said the world is witnessing a sustainability revolution—and warned that investors caught on the wrong side will face huge losses. Why? “An absurd assumption that all of those carbon fuels are going to be burned,” he answered. In other words, a large systemic financial loss is currently unrealized. 

Many world leaders recognize climate change as the greatest destabilizing force of our time. From Mark Carney’s focus on debt and the banking side to prevent “the tragedy on the horizon” to Larry Fink’s statements from January 2020 that “climate risk is investment risk” to January 2021 “the reallocation of capital (has) accelerated even faster than I anticipated”.

And in their recently-released report, “Crossing the horizon: North American Asset Management in the 2020s”, McKinsey closes with disruptors, with the firm highlighting sustainability as an important investment theme and criteria for capital allocation. McKinsey notes the major shift in investor mindset with “sustainability viewed not simply as an imperative of corporate social responsibility, but also as a critical consideration in both investment risk and returns.”

So against this backdrop, why must Asset Managers address Climate Sustainability now?

Reason One – Fiduciary Responsibility

• Asset managers are re-contextualizing their thinking on fiduciary duty. We cannot simply hedge climate change or somehow offset sustainability in our business model. Nor can sustainability be ignored now to later be “caught up” to standard market practice in several years’ time. Instead, prudent fiduciaries can take direct actions now—ranging from targeted investments, to company engagement and work supporting net-zero policy, to portfolio realignment. Sustainability is already well underway—and asset owners will increasingly hold their asset managers to heightened sustainability benchmarks in fulfilling their fiduciary responsibilities.

 Reason Two – Risk Mitigation

• For asset managers, climate risk is more than just a financial risk; it is an existential risk to our core business model. Relevant, collective, goal-oriented stewardship can be one powerful tool to be wielded as we find our way forward together—initiatives like PRI’s Active Ownership 2.0 and Bloomberg’s Task Force on Climate-related Financial Disclosures (TCFD)  are two such examples. And importantly, asset managers are developing actionable frameworks in which they hold their underlying investments—for instance, for equity securities, such a framework might include action plans with intermediate energy reduction targets, strategies for addressing climate-related market beta, and commitments to hold portfolio companies accountable for the change they must drive in the real economy. 

Reason Three – Commercial Opportunity

• Proactive asset managers are launching targeted sustainability investment vehicles. Late summer two new large funds were announced seeking to back innovations that will limit or even remove planet-warming carbon emissions. TPG has closed $5.4 billion in funding for its new Rise Climate Fund, and is still targeting a total $7 billion. Hank Paulson, former Treasury Secretary and CEO of Goldman Sachs GS serves as executive chairman of the fund. And Brookfield Asset Management closed $7 billion for its climate-focused Brookfield Global Transition Fund. The vehicle is hard capped at $12.5 billion and Mark Carney, former Governor of the Bank of England and current United Nations Special Envoy for Climate Action, serves as head of transition investing.

With practical planning and creative action, asset managers and asset owners are together transitioning to the competitive necessity of climate sustainability.

Source: Forbes