Asset Management

Heat On Fossil Fuels As Managers Warned To Avoid Liability Risk

Jackie Bennion 2 May 2019

Heat On Fossil Fuels As Managers Warned To Avoid Liability Risk

European asset managers are on a bumpy road to low-carbon investing and mitigating climate risk, a new survey reveals.

A new report warns that fund managers put investors at risk because their portfolios don't fit with internationally-agreed climate targets, don't meet clients’ growing demand for low-carbon products and aren't doing enoug to make oil firms mend their ways.

These are the main findings of the second annual report on fund managers’ attitudes towards oil company investment released this week by the UK Sustainable Investment and Finance Association (UKSIF) and the Climate Change Collaboration, part of the Sainsbury Family Charitable Trusts.

A poll of 39 UK and European fund managers, responsible for $10 trillion in combined assets, said most (86 per cent) of them are urging oil companies to align their businesses with Paris Agreement objectives, and nearly half want them to adopt policies consistent with limiting global warming to below 2°C. But just a fifith said they have policies in place across their own portfolios to fit with the Paris goals. A third said that they have a policy for aligning some funds, and nearly half (45 per cent) have no policy. Many of the UK's largest asset managers responded to the survey, including Legal and General Investment Management, Quilter, and Schroders.

By their own admittance, managers are a long way from integrating climate risk into their asset allocation and protecting investors, the report said.

“It is not impossible that firms that apply climate risk policies inconsistently may risk litigation if clients lose out. Asset managers need to ensure as many clients as possible are protected and should actively consider applying firm-wide climate policies consistently across all the portfolios they manage,” it said.

The report follows similar warnings this month from Bank of England Governor Mark Carney who said that meeting the Paris targets “requires a massive reallocation of capital,” and that, “if some companies and industries fail to adjust, they will fail to exist.” As head of the Financial Stability Board, Carney has been pushing for the industry to reveal the level of which financial companies have embedded climate risk into their overall risk management.

By BoE’s own forecasts, climate change could wipe up to $4 trillion off the value of fossil fuel assets and up to $20 trillion across all sectors of the economy. Carbon emissions from energy consumption were still rising in 2018, up by 1.7 per cent, and the highest growth since 2013, according to the International Energy Agency. Emissions from all fossil fuels also increased in 2018, with the power sector accounting for nearly two-thirds of growth, the IEA said.

“Asset owners are increasingly prepared to hold fund managers to account for their action, or inaction, on climate risk," Tim Manuel, head of responsible investment at Aon, UK, said. They can benefit by "setting clear goals and deadlines for how they expect fund managers to engage with companies, and for the circumstances where exclusions should apply.”

In many ways, divesting from coal has been easier. It is dirtier and a smaller sector than oil and gas, which still supplies the majority of the world’s energy needs. On current estimates, oil consumption is not expected to decline before 2050. Oil is a huge component of the plastics industry; big oil companies pay some of the highest shareholder dividends; and gas is seen as the best mid-term transition to renewables. From any angle, divesting from fossil fuels is a tough nut to crack.

Climate action refuels
More recently, the general public has shown a renewed sense of urgency on climate action. Over Easter, the Extinction Rebellion movement disrupted several European capitals, including paralysing parts of central London and calling for an emergency climate response. Just last week, UK lawmakers received a characteristically blunt message from 16-year-old Swedish climate activist Greta Thunberg, following similar stark warnngs she gave delegates at Davos and the UN about robbing her generation of a future. It is a measure of how strong sentiment flows that no major politician dared to rebut her claims, even if they wanted to do so.

The deal struck in Paris in 2015 was to keep global temperature rises to within 2 degrees. So far, 185 parties have ratified and markets have responded. Figures from the Global Sustainable Investment Alliance (GSIA) show that the market for sustainable investments has grown by 34 per cent since 2016. Europe leads with $14.1 trillion in sustainable assets in 2018. Second is the US, holding $12 trillion in 2018, up from $8.7 trillion in 2016, and a rise of 38 per cent.

“Asset managers have clearly woken up to climate issues,” said ClientEarth lawyer Joanne Etherton. What is needed is "institutional policies on managing climate risk to protect clients from potential loss – and asset managers themselves from potential liability.”

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