From the blog: With a binding climate agreement likely to be signed at the COP21 summit in Paris this month, UK pension funds need to be aware of which companies and sectors are managing their climate risks, and which are not.
Using data collected by CDP, the global environmental disclosure system, combined with other publicly available sources, we can clearly see how three important sectors – extractives, automobiles and electric utilities – are responding.
Extractives
CDP analysis shows that the world’s largest mining companies are failing to manage carbon and water risks effectively.
For example, of the 11 largest miners, almost half have yet to report meaningful emissions reduction targets. This is a ‘canary in the coal mine’ that suggests monitoring and management of these risks is poor.
They are also exposed to an increasing trend towards carbon pricing – something that will be discussed in Paris. Our analysis shows that the leading mining companies have more than $10bn (£6.7bn), or 15 per cent, of earnings at risk if a carbon price of $50 per tonne is introduced ($50 being the price already used in internal accounts by extractive companies that report a number to CDP).
How fiduciaries can get a handle on climate change
Disclosures on fossil fuel investments by local authority schemes have demonstrated the tension between managing the material risks of climate change and upholding fiduciary duty to members.
Momentum to ignite change has galvanised the divestment movement over recent months.
More than 400 institutions and 2,000 individuals, including governments and investors from 43 countries and multiple sectors, have pledged to divest from fossil fuels.
Automobiles
Don’t expect Volkswagen to be the only car company facing financial penalties as emissions legislation gets tougher around the world.
Indeed, many automobile companies are struggling to keep up with existing emissions regulations, let alone more stringent requirements.
In our research, we highlight Hyundai, General Motors and Fiat Chrysler Automotive as poor performers on fleet emissions compared with tightening regulatory targets.
With a potential shift towards hybrid and electric vehicles in the years to come, some companies such as Toyota and Nissan are better positioned than others.
Electric utilities
Recent research shows that the European electric utility market is poorly prepared for a low carbon future.
The EU hopes to cut greenhouse gas emissions by 40 per cent by 2030 (from 1990 levels), requiring more than 45 per cent of European electricity generation to come from renewables and a switch from coal back to gas.
However, few of the major electric utilities in Europe are managing risks such as coal exposure. For example, the three German utilities, RWE, E.ON and EnBW, all have a high exposure to coal.
What can pension funds do?
Climate risks may not be at the top of most trustees’ risk management lists, but the window to act is finite and shrinking.
Trustees should ensure that climate risks are factored into their investment process, and need to engage with the companies in their portfolio that are managing these risks poorly.
James Magness is head of investor research at CDP (formerly Carbon Disclosure Project)
