Winning Climate Strategies

Strong leadership from the Board and senior management was commonly identified as a driving force behind leading climate strategies, with many also undertaking climate-related education and training. Leading asset owners are also exploring climate-related advisory groups, incentive schemes, and organisation-wide involvement.

A significant number of respondents discussed the importance of their organisational culture in driving their climate strategies. Some key cultural dimensions include environmental, social and governance (ESG) and responsible investment backgrounds, entrepreneurship, and governance.

Leading asset owners are looking beyond traditional reporting avenues to help build meaningful relationships with their members around climate change. Some innovative approaches include undertaking member delegate programmes, climate-related events, transparency in their communications, and exploring more engaging narrative styles.

Some asset owners are leading by example in publicly responding to the TCFD recommendations by already publishing TCFD-aligned reports.

All respondents are taking systematic and holistic approaches in their climate strategies, with the majority also incorporating various climate-related targets, and some incorporating the Sustainable Development Goals (SDGs).

Developing or integrating low-carbon indexes, exploring green bonds, and increasing investments in low-carbon illiquid assets are some of the most common approaches to low-carbon asset allocation.

Many respondents are proactively driving their relationships with external asset managers via selection and monitoring, creatively using metrics such as carbon footprinting, or applying climate-related targets.

Leading asset owners are increasingly prioritising the transitional and physical risks associated with climate change in their risk and investment analysis. Many have also already undertaken first steps in scenario analysis and are integrating key findings into their climate strategies.

Respondents are refining and escalating their climate-related company engagement by targeting core issues and sectors, and increasingly relying on influential collaborative initiatives such as the Climate Action 100+.

Recognising the importance of a supportive regulatory and policy environment for a successful low-carbon transition, some respondents are prioritising regulatory and policy engagement in their climate strategies.

Nearly all respondents raised concerns about climate-related data quality, on a variety of levels. The topic of scenario analysis was also commonly raised due to concerns around a lack of clarity and expectations for asset owners, and the investment-relevance of currently available scenarios.

Another dominant barrier raised by respondents related to climate-related regulation and policy concerns, mostly at national levels. Some leading asset owners have responded by prioritising policy engagement in their climate strategies.

Respondents offered mixed views around the availability of low-carbon investment opportunities. While some reported facing difficulties in finding enough investable opportunities, others noted they had faced no such issue. Some respondents also reported liquidity constraints as an issue where opportunities existed, in non-equity asset classes.

Misaligned time horizons also featured as a barrier on a variety of levels, from the time horizons of different categories of climate-related risks to the time horizons between actors across the financial ecosystem (asset owners, asset managers, and investment consultants).

Some respondents identified traditional mindsets as a barrier, such as investors who still consider ESG and financial performance as a trade-off, or trustees who still regard climate change as an ethical or political issue.

A lack of confidence in the climate-related stewardship or asset management services from the asset manager community was also identified as a barrier by a number of respondents.

Some respondents noted concerns around the use of language and terminology in this field as a barrier, which have tended to be complex, historically focused, and unable to connect with multiple audiences.

Becoming informed around the investment risks of climate change is a fundamental step in developing an effective climate strategy. Seeking assistance from external professionals (such as researchers, investment service providers and leading peers) helps to develop an internal knowledge-base and gain commitment. Sharing climate-related knowledge throughout the organisation also helps clear misconceptions and gain internal ‘buy-in’.

A strong climate governance foundation is also pivotal for developing a successful climate strategy, which can be developed through climate-related education, training, incentive schemes, and internal participation.

Clear and simple communication with both internal and external stakeholders around climate-related investment issues can help gain commitment, strengthen relationships, and signal ambition.

Our respondents emphasised how their leading climate strategies developed over years. Following a step-by-step approach also leaves appropriate room to learn from experience.

The simple process of collecting all climate-related initiatives into a single document helps identify strengths and weaknesses. Developing a more formalised climate-related strategic response with corresponding beliefs, goals, targets, objectives, and responsibilities helps to identify barriers and gain commitment.

Leading climate strategies often begin with small investments in low-carbon opportunities, which help to develop a stronger understanding of these investments before incrementally increasing over time.

Considering climate change as a material investment risk helps to identify areas of portfolio risk exposure and guide climate strategy development.

Supporting climate-related shareholder resolutions is an affordable and effective way to begin company engagement on climate-related issues. Another step could involve introducing key climate-related issues into direct company engagement activities.

Collaborative initiatives present an affordable way to influence systemic-level change beyond the reach of individual investors, build networks, share best-practice, and gain valuable information.

Undertaking carbon footprinting of listed equity portfolios (where services and methodologies are most developed) helps to identify areas of climate-related portfolio exposure and develop literacy around carbon data.