Revealing new research shows how global investors are using climate data to support smarter investment decision-making.
This year marks the fifteenth birthday of CDP, the not-for-profit global environmental data platform, and over 800 institutional investors with assets of US$100 trillion now ask companies to disclose environmental information through its reporting system.
It is remarkable that in just a decade and a half climate data has emerged to become as much a part of mainstream investment decision-making as traditional financial data.
For example, investors representing over $10 trillion of assets are now using climate data to take a carbon footprint of their portfolio. While earlier this month for example, the giant US pension fund New York State Common Retirement Fund (CRF) became the latest major asset owner to join the $3 trillion Portfolio Decarbonization Coalition committed to designing investment portfolios with a smaller climate change impact.
The level of climate data available is now considerable – over 5,800 companies (representing close to 60% of global market capitalisation) report their climate data to CDP last year.
But what are investors actually doing with the data?
Shining a light on climate-smart investment processes
To help answer this question CDP is launching its first piece of research on investor case studies, illustrating how seven leading global investors use climate data to shape their investment decisions.
For example, the new case studies include an explanation from UK asset manager Schroders on how the potential implementation of more stringent pricing for carbon emissions influenced their stock picking in the aluminum industry.
Similarly, mainstream New-York based manager Neuberger Berman, explains how data points such as whether a company has climate change integrated into its business strategy, or whether there is board level oversight of climate risk, can sit alongside fundamental financial analysis and research as part of a holistic investment process.
Looking at the case studies as a whole, what is perhaps most striking is that they show investors using climate data not just for risk management but also as part of finding new opportunities for lucrative returns in a rapidly-changing world.
New types of investment products and programmes
Many of the investors profiled in CDP’s case study booklet are also using environmental data as a foundation for in-house products and strategies such as a carbon footprint, an engagement programme or a low carbon index.
Investors such as the UK’s Environment Agency Pension Fund and CalPERS, the largest pension fund in the US, for example, both use CDP data to help assess the carbon footprint of their portfolio, i.e. to understand the total greenhouse gas emissions of their holdings relative to annual revenue.
Remarkably, CalPERS found from its carbon footprint exercise that out of over 10,000 companies in its portfolio, just 340 are responsible for 75% of the emissions. This has lead the fund to prioritize companies to engage with on climate risk, creating a list of 100 ‘Systemically Important Carbon Emitters’ to engage with to drive down their climate risk exposure.
Over on the East coast of the US, CRF has used climate data to help create a new investment strategy, a $2 billion custom Risk Aware Low Emissions (RALE) index. RALE, which was created in partnership with Goldman Sachs Asset Management, underweights investments in companies that are large contributors to carbon emissions, and increases investments in companies that are lower emitters, while closely tracking the return of its benchmark, the Russell 1000.
Investor use of climate data is becoming business as usual
While there may be uncertainty about the new US administration’s approach to climate policy, the private sector is providing clarity and leadership – recognising first-hand the impact of a changing climate on their bottom lines, customers and supply chains.
Investors recognise that as the world strives to implement the Paris Agreement, and restrict global temperature rises below 2°C, they face a pressing challenge to align their portfolios with the transition to a low carbon economy. Being able to measure and monitor the environmental performance of their holdings, and where necessary to act on these issues, is a vital part of meeting that challenge Indeed, access to structured, comparable and consistent data and its importance in investment decision making has been given further emphasis by the recent recommendation of the G20-backed Task Force on Climate related Financial Disclosures (TCFD).
For investors, the question is no longer whether to use such climate data, but how best to apply it to their particular investment strategy. In the space of fifteen years, that has made that use of climate data part of business as usual for investors.