For many investors, taking the actual and likely effects of climate change into account when shaping portfolios is now a central consideration. To help them calibrate their approaches so that they can contribute to meeting global targets for net zero greenhouse gas emissions, BNP Paribas Asset Management is launching this handbook. It offers investors practical guidance.
While the consequences of global warming are clear – severe weather events, rising sea levels, etc. – the significant risks to economies and societies worldwide, the implications for business, infrastructure and supply chains, and what all this means for investors need to be better understood.
Companies face physical risks from climate events as well as ‘transition’ risk from new climate policies, advancing technologies and consumer preferences. These can represent pressures on business, via rising costs, lost revenue, market shifts and possible default.
It can also be argued that opportunities arise for companies integrating climate considerations into their strategies and operations or offering emission-reducing products and services.
Investors, particularly institutionals with diverse portfolios and long-term investment horizons, are acutely vulnerable to the systemic disruptions that climate change may cause. Climate risks and efforts to mitigate them are increasingly affecting the value of portfolios.
For institutionals too, climate change presents potential opportunities – they can opt to invest in companies which provide solutions (products or services) to reduce GHG emissions or companies committed to aligning their operations with net zero goals. In other words, they can choose to bring their investments into line with net zero targets.
We see the role investors can play as a two-way street: they need to be aware of how climate change affects their investments, but also know how their investments impact the climate. As a result, they are pivotal when it comes to addressing climate change.
Strategies for investors to contribute to net zero
To contribute to the net zero emissions goals effectively, investors can:
- Set clear targets: Establish measurable goals, timelines, and methods for achieving net zero alignment, ideally using science-based targets
- Decarbonise portfolios: Engage with high-emitting companies to encourage decarbonisation, or – as a last resort – divest from them. This helps reduce the carbon footprint of portfolios or aligns investments with low-carbon goals or temperature containment trajectories
- Invest in climate solutions: Allocate capital to companies providing products or services that directly or indirectly reduce GHG emissions
- Prioritise stewardship and engagement: Use their influence to drive companies towards net zero targets, either individually or through collective action in groups such as Climate Action 100+.
Four steps to net zero
Here’s our structured four-step approach to assist investors in transitioning portfolios to net zero:
- Set objectives and define indicators: Align targets with science-based pathways and define key performance indicators (KPIs) such as carbon footprints and ‘implied temperature rise’ (ITR) metrics .
- Assess current portfolios: Evaluate the portfolio on the key performance indicators defined in step 1 and assess the gap with the defined net zero objectives
- Optimise portfolios: Transition the portfolio to asset classes or strategies better aligned to the defined net zero objective
- Monitor and report: Track progress towards the net zero objectives and publicly report to demonstrate the commitment and transparency, and avoid greenwashing.
Conclusion
Achieving net zero requires collective action by governments, industries, and companies – as well as investors. They are pivotal in this transition as they direct capital towards sustainable companies, fund low-carbon projects and other climate solutions, and engage with companies to adopt (more) ambitious climate strategies.
Investors themselves should select investment strategies that reflect their unique characteristics and fiduciary duties while contributing to a net zero future. BNPP AM can provide the tools and support necessary for them to set clear objectives and measurable targets suited to their needs, advance their understanding of the issues, and align their portfolios with net zero ambitions effectively.
By taking a proactive stance on climate change, we believe the financial community can not only help mitigate the risks, but also capitalise on the opportunities as the world transitions to a sustainable, low-carbon and more equitable economy.
This article and the handbook are authored by Thibaud Clisson, Climate Change Lead, Senior ESG Analyst, Sophie Debehogne, Client Solutions Manager, Head of Sustainable Solutions, Laurent Delvenne, Portfolio Solutions Designer, and Saule Ualiyeva, Senior Strategic Marketing and Innovation Manager at BNP Paribas Asset Management
