There are a number of private sector initiatives aligning behind the goals in the upcoming Paris climate talks. One of them involves a group of investors called the “Portfolio Decarbonization Coalition” who are demonstrating their values with their pocketbooks, while at the same time earning a handsome return on investment. We learn more about them in this interview with Frederic Samama, Deputy Head of Institutional Clients and Sovereign Entities at Amundi, one of the Coalition’s founding firms.
Sustainability: What is this new group of powerful firms doing in something called the “Portfolio Decarbonization Coalition”?
Amundi: The Portfolio Decarbonization Coalition is a group of investors committed to “decarbonize”, or to reallocate their capital and assets to support a low carbon economy. To date, the PDC has gathered 18 investors, jointly decarbonizing $94bn AUMs, and the initiative is on track to hit his target of US$100 billion for COP21.
Sustainability: When did the movement start, and who are the founders and members?
Amundi: The movement was formally launched in New York during United Nations Secretary General Ban Ki-moon’s Climate Week in September 2014. It was co-founded by the United Nations Environment Programme and its Finance Initiative (UNEP FI), the fourth National pension fund of Sweden AP4, Europe’s largest asset manager Amundi and CDP, the most important mechanism for climate disclosure worldwide.
Answering the Secretary General’s call to bring bold announcements and actions on climate change, the founders took the commitment to support institutional investors in taking climate action by gradually decarbonizing their portfolios.
Current members include a large spectrum of investors ranging from very large, mainstream pension funds (AP4, ERAFP, FRR, Local Government Super, EAPF), insurers (Storebrand, KLP, Mandatum), endowments (University of Sydney) to smaller ethical funds (Church of Sweden, Australian Ethical, Toronto Atmospheric Fund). Some specialized and mainstream investment managers are also members.
Sustainability: Is it just about saving the planet, or is there an underlying profit motive?
Amundi: The motives behind decarbonization are obviously diverse and depend on investors’ profile. That being said, the Coalition members all share the strong view that climate change involves many risks for investors, with a specific emphasis on transition risks (carbon risks stemming from climate policy or technological change). Diminishing some of these risks when they are not rewarded can be considered as part of investors’ fiduciary duty.
It should be highlighted that whatever the underlying motives are, members of the coalition always put a strong emphasis on returns. Investors members of the coalition all stress that, across asset classes, either profits have been enhanced or risks reduced.
Sustainability: What is some of the detailed evidence that “decarbonization” is delivering for investors?
Amundi: Detailed evidence can be provided on the MSCI Low Carbon Leaders Index, which is but one example of investment solutions to decarbonize a portfolio (in this case an equity portfolio). These indices have been co-developed by Amundi, FRR and AP4 together with MSCI to lower the carbon intensity of their equity portfolio passively managed while keeping a broad market exposure. Even though these strategies are very much forward looking, with the goal to outperform in the long run in the event transition risk materialize, the respective excess returns have been of 95 and 159 basis points between the launch of the indices and November 4, 2015 for the World and Europe.
Another area worth mentioning is real estate where green strategies are often clearly associated with enhanced returns. Having said that, it is still very early to offer a definitive view on the relationship between investment performance and portfolio decarbonization.
Sustainability: How is this movement shaping the climate talks happening in Paris now?
Amundi: Overall, engagement from non-State actors provides an enabling environment for the climate talks happening under the umbrella of the UNFCCC. Investors and financial institutions in general have been at the center of attention because their involvement can help society to hasten the transition towards a low carbon economy, both by contributing directly to the financing of the energy transition and steering the capital expenditure of the companies they own.
By displaying portfolio decarbonization by mainstream investors, the PDC is sending a strong signal to investors worldwide that transition risks should not only be assessed but can be tackled now. The PDC has been an advocate of better disclosure of climate related risk, which can be a complementary measure to countries’ Intended Nationally Determined Contribution. It also strongly supports carbon pricing and carbon tax as efficient ways to bring down emissions and drive investments into cleaner options. Investors decarbonizing portfolios ahead of more stringent climate regulations are creating immediate incentives to initiate a transition towards renewable energy.
Sustainability: How is it likely to continue to grow, given the current trajectory?
Amundi: Capitalizing on climate talks in Paris and building on a strong base of committed institutional investors, the PDC will continue to expand the scope of its pledges and the number of its members. Hopefully, COP21 will have a twofold effect in that matter : first it will show to the world that the finance community is a key player to reach the 2°C target, thanks to its ability to mobilize huge amounts of private capital and invest massively in the transition towards a sustainable economy. Second, it is one PDC’s determination that investors all around the world realize that by committing to decarbonize their portfolios they will both reduce their exposure to climate risk and foster the energy transition. Those two realizations, by global civil society and investors themselves, may create a favorable climate for the PDC to grow and become more encompassing than ever.
Sustainability: Is there increasing regulatory pressure emerging which will accelerate this trend and will other key external factors drive decarbonized investing?
Amundi: Financial regulations improving investors’ information on the climate-related risks of their portfolios (eg. Art. 173 of the French law on the energy transition) will not only improve our understanding of companies’ exposure to climate-related risks but also favor capital reallocation towards greener strategies. The recent involvement of widely regarded prudential authorities such as the Bank of England and People’s Bank of China as well as the Financial Stability Board proposal to create a disclosure task force on climate-related risks are signs that regulators and financial institutions are taking climate-related risks more and more seriously.
Company Profile: Amundi S.A.
Headquartered in France it is a leading European asset manager and ninth largest worldwide manages over USD 1.024 trillion in AUM (as at March 31, 2015). It serves 100 million retail clients and 2,000 institutional clients with operations in more than 30 countries around the globe. Amundi currently has about 565 investment professionals (portfolio managers and analysts) with over a 20-year presence in Middle East and over 30 years in Asia.