When I started writing about sustainable investing in 2016, I tried to interview as many influential investors I could find around me in the Nordics. One person that made a strong impression was Mats Andersson, who had just left his position as CEO of the Swedish state pension fund AP4.
“Volatility is just a poor measure of risk for a large state pension fund,” Andersson told me. Instead, he suggested, we should define risk where there is a possibility of permanent capital loss in the long term. Climate change, he added, is just the type of permanent capital loss a pension should care about.
One of Andersson’s most significant achievements at AP4 was the co-founding in 2014 of the Portfolio Decarbonization Coalition (PDC), which committed to decarbonising US$ 100 billion of institutional investments worldwide. The co-founding organisations were the United Nations Environemental Program Finance Initiative (UNEP FI), the Carbon Disclosure Project (CDP) and Amundi. After two years, when I met Andersson, the coalition counted 26 members, with US$ 3.2 trillion of AUM, of which US$ 600 billion were allocated to decarbonised strategies. The latest update on the PDC’s website mentions 32 organisations, overseeing the gradual decarbonisation of US$ 800 billion – eight times more than initially targeted!
With such a strong start, we must wonder why we haven’t received an update yet that the trillion mark was surpassed, long time ago. I believe it is hardly surprising that we haven’t. Decarbonisation was always meant to be merely a starting point. Institutional investors worldwide have started looking closer at the details: what is it we measure when we divest from carbon? Is that the right thing to do? Should we stay away from fossil producers or should we influence them and be part of the energy transition?
Those questions are valid and difficult to answer. Meanwhile, the effects of climate change have become more obvious than ever. Average temperatures have never been higher, ecosystems are being destroyed, and weather-born catastrophes are more and more frequent, every year. Capital needs to shift and fast!
The European Commission is working on legislation that should motivate investors to support climate-related investments. Will it be enough? Institutional investors need to have a good look at their allocation and ask themselves if the decarbonisation target they set back in 2014 is really relevant today. In this handbook, we have decided to cover the strategies that offer the lowest possible hurdle to shift capital.
We have looked at the pros and cons of exclusion, we established a history of ESG indexes and dissected the various components the service providers and managers can offer. We gathered the opinions of asset owners and fund selectors. MSCI shared new evidence that shows how ESG factors can lower risk in equity investments. Selected index-based fund managers provided insights and explained how optimisation can best provide climate-adjusted returns at a low cost. Finally, you will read how green bond ETFs can provide a cost-effective solution to achieving climate-related impact.
Now, what’s your excuse for not shifting capital to save the planet?
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