The landscape for asset owners around the world, particularly pension funds, is changing faster than at any other time in the industry’s history. Since AODP launched its first Global Climate Index in December 2012, civil society organisations have successfully questioned the legitimacy of an industry that is supposed to manage key long risks on behalf of its beneficiaries. Climate change represents the perfect test and the perfect criteria for judging the industry and any particular fund within it. Indeed such is the sheer scale and potential reach of climate risk that any fund cannot claim to be looking after the long-term interests of its beneficiaries if it is not managing the components of climate risk. However, an alarming number of asset owners still pin most of their long-term risk strategies on a financial marketplace that has become infamous for its short-termism and built more for trading than long-term risk management or value creation.
Asset Owners now face a choice. The education of beneficiaries has begun. The marketing and public acknowledgement of those funds who have acknowledged the need to change for the benefit of their members has already started and the AODP Global Climate Index is a cornerstone of this change. Civil society assisted by a hungry media fascinated as to how the world’s largest industry will manage its own redevelopment will continue to create new pressures on laggard funds and there will likely be no escape. The coming year will see the industry smoked out of its fiduciary duty bunker to prove to members that it is actively addressing this calamitous systemic risk and that the business as usual scenario currently supported by stock markets is simply not a professional position for a long-term portfolio manager with a high to low-carbon asset ratio of 20-1 or more.
What was once a sleepy industry is already discovering the pressures of a new era, where funds at the top of the index are beginning to actively monitor their unburnable carbon and hedge their portfolio risk against the many uncertainties of climate change and those at the bottom stick to what they have always done and guarantee themselves an increasingly tense and public relationship with the members they claim to represent.
Unlike the sub-prime crisis and previous market upheavals, they will find no protection from the complexity of their industry and their refusal to question their own out-dated investment models and other investment sacred cows will be proved a dereliction of duty. Time is running out for them to begin this change as the leaders are beginning to move ahead at an impressive pace.
Climate change risk management is everyone’s business. It needs to be embedded in the risk strategies of every fund. AODP, in conjunction with its partners, will continue to show the 700 million beneficiaries worldwide that there is a choice for their funds to act or not to act and that it is in their best interests to be with a fund that is acting and to engage with funds that are not. The basis of that conversation is the AODP Global Climate Index and its underlying methodology for improving how funds are managing the next great financial crisis.