Asset Owners Disclosure Project

How do the ratings work?

The data sourced for the Asset Owners Disclosure Project fund ratings will be taken from a mixture of public information as well as disclosures that participating funds provide themselves.

The rating is based upon performance in five key criteria. The AODP will publish the overall ranking of each fund relative to other funds. All funds are also able to obtain detailed information on how they performed in each of the five criteria, including regional/country comparisons. Service providers are also able to access certain elements of the database of responses, where they have been made publicly available.

In addition to the breakdown of scores the data will illustrate how a fund sits in relation to the following:

  • Sector indices (pension, insurance, sovereign wealth etc.)
  • Jurisdictional indices (Brazil, USA, Australia etc.)
  • Attribute indices (e.g. criteria trends for a particular asset consultant)
  • Asset class information

The AODP fund ratings represent the first time that funds can compare themselves in terms of climate change best practice. In addition, they will provide a new medium for funds to communicate to members how they are preparing for the long-term effects of climate change and carbon regulation.

  • Criteria 1. Transparency

    Transparency illustrates how an asset owner is communicating with their members and how much information they are releasing publicly on their investment strategy and decision process. The more transparent a company's investment and risk strategy the better. Less available information means less certainty for investors. 

    Asset owners should make as much information publicly available to their members as possible so that members, and potential members, are aware of the risks associated with their investments and able to act accordingly. Asset owners need ensure members are informed about what they are doing to look after their long-term interests.

  • Criteria 2. Risk management

    Risk management covers how asset owners manage climate change-related risks at the portfolio level and also how they drive their fund managers to manage climate risk at the fund and company levels. Asset owners need to assess long-term risks and take an evidence-based view of possible and likely future carbon regulation and physical impacts and factor these into investment decisions. 

    A robust risk management approach is imperative in order to manage the long-term risks associated with climate change. High-carbon assets are commonly capital-intensive and very long-lived. Whether you are developing a coal mine or building a power station, smelting plant or a building, these are assets that last 25 years, often more. Climate change regulation and, in some instances, physical impacts will affect a significant portion of these high-carbon, long-term assets and this therefore poses a huge risk to asset owners whose investment portfolios contain exposure to them.

  • Criteria 3. Low-carbon investment

    Low-carbon investments include investments in renewable energy, agri-business, water and energy efficiency-related assets as well as the service industries supplying to all these sectors. The low-carbon investment criteria assess which funds are investing in low-carbon assets. That is, whether or not asset owners are hedging their portfolio against climate change risk by allocating money to low-carbon investments. Hedging the climate risk of a portfolio means asset owners have a diversified range of assets that will not all be affected by any rapid re-pricing of carbon. By holding a significant portion of their portfolio in high-carbon assets they are putting themselves at a huge as carbon regulation increases.

    Within a typical diversified portfolio, the portion of carbon-exposed assets could be well over 50% and, with tightening carbon regulation, the majority of these are likely to be replaced by low-carbon equivalents. If the high-carbon assets are replaced at the end of their scheduled life then there is little net cost involved. However, they will most likely have to be sold or closed well before the end of their scheduled life, many of them having lives of 25 years or more. For asset owners to avoid exposure to this situation they need to ensure a healthy balance of low-carbon assets building up in the portfolio which will benefit from tightening carbon regulation.

  • Criteria 4. Active ownership

    Active ownership measures how involved an asset owner is with companies they invest in. When an asset owner buys shares in any company they are able not just to buy and sell that stock as an investment to make money but also to influence the company itself. This includes voting proxies at annual general meetings, being part of shareholder resolutions and using their ownership position to influence the way the company they invest in is     being run.

    In recent years, the awareness of the power of asset owners to control companies has grown rapidly and there are several movements and organisations dedicated to furthering the involvement.

    Asset owners have a duty to their members to ensure that their investee companies factor long-term climate change risks and other important long-term decisions into their strategy. If they fail to do so they are risking their members' savings and retirement.

  • Criteria 5. Investment chain alignment

    Investment chain alignment means that the actions of asset owners, their advisors and fund managers are consistent with the best interests of the beneficiaries. That is, the asset owners have policies, governance structures, investment mandates, review processes and remuneration structures in place to ensure that there are no conflicts of interest between all parties involved with managing money on behalf of beneficiaries such as pension fund members.

    It is important that asset owners manage third party organisations to ensure that they are not putting their own interests first. Climate change is providing asset owners with a new challenge for driving change in their fund managers. One of the key barriers to this change has been incentive alignment - pension funds members typically have an investment horizon of 40 years whereas fund managers that invest on their behalf are rewarded for performance over a much shorter period of time. Asset owners that rate highly in this area are credited for talking responsibility for their assets and provided a superior service to their members.