Global systemic risks can significantly impact investor returns and long-term objectives so it is important that asset owners - sovereign wealth funds, pension funds, endowments, foundations and insurers - understand not only the associated risks and opportunities, but also how to improve the decision-making processes that integrate them into portfolio investments.
As pressure mounts on asset owners to tackle the impacts of climate change as a major global issue, investors are seeking benchmarking perspectives, data standardization and disclosure, and an ability to measure achievements against their peers.
Understanding that even the most sophisticated investors struggle with the myriad activities required to address these issues, we partnered with the World Economic Forum and engaged some of the largest and most advanced asset owners to define the most prevalent climate-investing challenges facing investors and uncover solutions to address each of these challenges.
Our latest paper - Pacesetters – Setting the Tempo of Advanced Climate Investing, – details practical solutions to address four challenges of climate investing, and shares global best practices of large asset owners captured using our new Climate Benchmark tool.
Pacesetters – Setting the Tempo of Advanced Climate Investing
Fiona Dunsire, Investments and Retirement Leader, AMEA and LATAM introduces this year’s paper in partnership with the World Economic Forum.
Asset owners that completed the Climate Benchmark of investment practices identified four challenges impeding climate investing today. Below is a brief summary and the paper provides an in-depth analysis of these four challenges.
1. How to define and implement a transition roadmap for climate investing
Transition roadmaps translate the inherently complex and interrelated challenges of decarbonizing the global economy into applicable investor steps that address asset owners’ unique objectives and stakeholders’ requirements. Roadmap development serves to unify organizational beliefs and produces forward-looking policy and governance action steps.
2. Measuring achievement and success for climate investing
Standard benchmarks and performance indicators are ineffective in measuring the results of climate investing activities. Understanding the advanced climate practices of other investors – learning how they define, monitor and report climate-related investment outcomes – allows investors to assess their achievements and measure success.
Our Climate Benchmark tool captures the activities that integrate climate investing into investment decision making. A commitment to these activities leads to material improvements in both measurement processes and how to successfully pursue climate‑investing practices.
3. Engaging investee companies actively and effectively
Asset owners that commit to enhancing long-term value across investee companies undertake the full range of stewardship activities available to them.
We believe key characteristics of successful programs, whether executed in-house or delegated to external managers, include proactively identifying and engaging with companies on material risks (rather than being reactive) alongside engagement that focuses on quality over quantity.
4. Defining climate-reporting metrics by asset class and manager
Lack of industry standardization, disclosure, and awareness of best practice represent the key challenges to metric development. Advanced asset owners today actively address obstacles and integrate available data into investment decision-making.
An awareness of the financial materiality of data together with an understanding of associated limitations is key to tracking progress against transition roadmaps, manager performance, and commitments.
Using the advanced climate investment practices of pacesetters, we developed a climate-investing benchmarking tool and framework (the tool) that provides practical climate investing protocols. The tool evaluates 10 categories of activity and assesses current level of progress on a scale from 1 to 5, with 1 indicating ‘not started’ through to 5 indicating ‘fully developed’.
The tool assesses current practices to uncover activity gaps that require improvement for advanced climate investing. Dozens of asset owners have already used the tool to uncover their activity gaps. Using these results, Mercer identified the top four challenges and solutions, based on the advanced practices of global asset owners.
“This peer-to-peer comparison tool is the first of its kind and is designed to help asset owners integrate climate factors into their investment strategies” – Rich Nuzum, President Investments & Retirement
In partnership with the World Economic Forum, we undertook a three-year study to gain insight into how asset owners address the most prevalent transformational investment challenges such as climate investing. We worked with large asset owners across the globe to uncover how they establish vision, governance, and implementation practices to translate the complicated risks of climate investing into investment opportunities. Through extensive interactions and research, we identified more than 80 investment-related activities that integrate climate-investing considerations into investment decision making.
In our third and final transformational investing paper Pacesetters – Setting the Tempo of Advanced Climate Investing, we provide potential solutions for investors to address the top four climate investing challenges identified by asset owners. In a long-distance race such as a marathon, pacesetters define the tempo and set the overall standard, increasing the probability that the entire group achieves its goals.