”The Finnish asset owners have a genuine opportunity to be a world leader in sustainable investments, which is a much sought after honour. The transition to a low-carbon economy requires an unprecedented transformation facilitated by global capital markets. This calls for the portfolio analysis to steadily deepen and best practices to be shared also beyond our Northern borders.”
The speed at which the sustainable finance landscape has once again marched on during 2017 leaves most of us panting. Most notably, the launch of Michael Bloomberg-led
Task Force on Climate-related Financial Disclosures (TCFD) reporting framework and the European Commission’s High Level Expert Group’s recommendations, give us hope that actions to tackle climate change are indeed progressing. We at WWF are acutely aware of the need for a science-based approach to prevent the climate crisis, as the narrow window of opportunity is rapidly slipping through our fingers. This grim reality also forces us to be steadfast in our demands towards the financial community.
Therefore, the reallocation of capital must be compatible with the emissions trajectory dictated by our fast dwindling carbon budget – as opposed to comparisons óf relative performance to peers and benchmarks. This prompted us to test the European equities portfolios against the 2 °C benchmark, using Sustainable Energy Investment Metrics. We approached 80 asset owners in 12 countries and assessed the portfolios of 29. The study revealed the EU’s biggest investors are partly aligned with the Paris agreement’s climate target of keeping global warming to well below 2°C, yet still invest too much in coal. Lack of disclosure on climate risk remains an element of grave concern as it prevents third parties from scrutinising current investment practices.
Much to our delight at WWF Finland, Finnish asset owners outperformed virtually all of their European counterparts on coal mining, coal use and renewables in the power sector. Varma, State Pension Fund of Finland (Valtion Eläkerahasto), Elo, Ilmarinen and even Keva with their high exposure to foreign companies, consistently topped the ranking.
The Finnish pension funds are to be applauded in a few key areas. A significant one is the level of transparency of equity holdings, this made the research conducted by WWF possible in the first place. The European and global asset owners must learn from Finland, the other Nordics and the Netherlands, who truly lead the way in the culture of transparency. Furthermore, Finanssiala (Finance Finland) and the Finnish pension fund, Varma, have explicitly endorsed the Paris Agreements 2 °C temperature goal. Another tale that deserves to be told in international fora to demonstrate best practice.
Yet, as this relentless march of the frontrunner investors there is no reason to have a break by the guard rail yet – Not even in Finland despite the encouraging first round of results. Our research has thus far covered only a handful of key sectors, excluding heavy industry (steel, cement, pulp and paper), transport, oil and gas. In addition, our analysis could not yet cover all asset classes and the myriad of funds leaving large amounts of assets under management out. This means that sector by sector, asset class by asset class, we intend to deepen our analysis and ultimately cover the entire portfolio as methodologies mature. With time we will also include tighter carbon budgets as they are being made available by the International Energy Agency and other authoritative organisations.
A torrent of actions to climate-proof portfolios have been tried and tested. We as WWF decided to weigh in on the discussion through our own prism of what is adequate for the climate. To entice asset owners into further action, we are launching three sets of recommendations to tackle climate change, coal mining and the power sector’s coal and renewables exposure.
The first batch of recommendations, launched 6th December, are targeted at asset owners providing the right recipe to recalibrate the portfolio to tackle climate change. The launch of our sectoral recommendations will soon follow.
A growing body of research shows that inaction – leading to global warming of 4 to 6°C – is the scenario with the highest risk for investors. Conversely, that a 2°C scenario does not jeopardise financial returns for a diversified portfolio, and is expected to better protect long-term returns. Therefore, the action on climate change does not mean that the investors need to breach their fiduciary duty. Instead, it makes sense for prudent investors to comprehensively factor in the changing operating environment that we are faced with in our changing climate and as a result of the global energy transition now underway.
WWF recognises that addressing climate change requires several steps and thatasset owners are at different stages on this path. Some are well ahead, including some of the Finnish asset owners. However, many have also been caught napping needing to better understand climate-related risks and opportunities. The first guide including 15 topline recommendations is particularly aimed at those investors.
Our recommendations in a nutshell:
The full WWF Guide to Asset Owners: Aligning Investment Portfolios with the Paris Agreement can be downloaded here and the shorter summary here.
Kaarina Kolle, Climate and Energy Policy Officer, WWF Finland
