Investor Activity Prompted By Climate Risk Is Surging, Says FFI

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Investor engagement and activity stemming from a desire to mitigate and minimize climate risk is surging, according to a recent report from Fossil Free Indexes.

Published earlier this week, the third annual report from the Fossil Free Indexes, The Carbon Underground 2016, revealed that the total potential carbon dioxide emissions from the total reserves of the world’s largest publicly traded coal, oil, and gas reserve-owning companies sat at more than 460% of their allocated carbon budget. Fossil Free Indexes, or FFI, a provider of financial research and products for investors looking for information on how to understand, measure, and act on climate risks, concluded that the companies listed in its The Carbon Underground 200TM list currently own fossil fuel reserves equating to 474 Gt of potential CO2 emissions. 

Of particular interest, however, was the brief suggestion in FFI’s press release that awareness of the potential damage these companies could do to the global climate and environment is growing amidst investors, who are therefore increasing their engagement and activity with these companies to mitigate and minimize climate risk.

“As more investors assess the impacts of a transition to a low-carbon economy, divestment, engagement, risk management, and active portfolio management will all be viewed as appropriate and even complementary responses to climate risk,”said Christopher Ito, FFI CEO and report co-author.

According to the report, these investors who are increasing their engagement to mitigate climate risk have a set of diverse objectives in such engagement, “ranging from those seeking to promote planetary health to those seeking to manage their portfolio risks.” Numerous reports have outlined the potential danger surrounding stranded fossil fuel assets over the next three decades, as more and more countries and organizations are transitioning to cleaner and more renewable energy sources.

This is highlighted by the continuing global divestment trend, which at last count had seen at least 500 institutions divest from fossil fuel investments totaling commitments upwards of $3.4 trillion, according to international climate campaign 350.org, which was announced during the leadup to the Paris climate summit. The Summit itself was partially responsible for a large number of these commitments, as companies and cities around the world looked to make the most of the historic event.

FFI analysts also highlighted the move to mitigate stranded carbon asset risk by introducing “carbon footprinting to measure the financial impact that a future price on carbon emissions would have on companies across sectors.” Carbon footprinting is “the process of measuring the current [greenhouse gas] emissions of companies in an investment portfolio” and “is increasingly becoming a routine management task for investors, asset managers, and asset owners,” the FFI authors write.

The Carbon Underground 2016 report also referenced an often-misunderstood decision available to investors, that of holding onto fossil fuel investments but retaining input into a company so as to increase “pressure on management to address the risks of climate change on their businesses.” According to FFI, such “engagement has increased over the past five years, as investors have used their shareholder voting rights in an effort to generate positive environmental and social changes.”

This method was highlighted in a 2015 report from the Global Research division of Britain’s multinational banking and financial services company, HSBC, in which it identified two responses to “How investors can manage increasing fossil fuel risk?”

Divesting fossil fuel stocks removes assets but dividend yields may suffer and portfolios become more concentrated. Holding onto stocks allows investors to engage with companies and encourage best practice, although there are reputational as well as economic risks to staying invested. Companies can cut capex but risks remain in maintaining exposure.

However, according to FFI, though “shareholder resolutions targeting the CU200 have increased meaningfully over the last five years, their influence … appears modest.”

In the end, this nascent initiative of moderating climate risk from within the belly of the beast, so to speak, is showing encouraging growth and impact. The reality of the situation is that we have only just reached a point where environmental concerns have impinged on and impacted financial concerns, giving investors the motivation to act. As FFI concludes, “As climate risk measurement becomes more robust, we expect that investment strategies will become more nuanced and aligned with investors’ varying climate related objectives.”


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Joshua S Hill

I'm a Christian, a nerd, a geek, and I believe that we're pretty quickly directing planet-Earth into hell in a handbasket! I also write for Fantasy Book Review (.co.uk), and can be found writing articles for a variety of other sites. Check me out at about.me for more.

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