Asset owners must drive the fundamental changes needed to fight climate change in the next five to 10 years before time runs out, a $4 trillion investor alliance has warned.

The warning, made at the
World Economic Forum event in Davos, comes from the UN-convened Net-Zero Asset Owner Alliance. The organisation’s members pledged to ensure their investment portfolios
are carbon-neutral by 2050.

According to the alliance,
while many countries are undertaking ambitious efforts to combat climate change
in line with the Paris Agreement, the responsibility for climate protection
falls on asset owners and business leaders.

“It is us who must act - as private individuals
investing on our own behalf, as company leaders managing assets and portfolios,
and as politicians responsible for households and stability in society,” said Günther Thallinger, member of the board of
management at Allianz, which formed the investor alliance in 2019.

“It is no longer possible to just
continue. Economic systems will be reshaped, as businesses commit to a
sustainable future with a focus on climate protection. The making and meeting
of human demand must change - and this will drive fundamental structural changes.
We must make this happen in the next five to 10 years. Time is running out,” he
added.

“Doing their bit”

Asset owners, such as
pensions funds, insurance companies and foundations, must accept they must “do
their bit” and become active investors, Thallinger said, and strive for
net-zero emissions across their investments.

“Asset owners should communicate
net-zero emission targets for their entire portfolios. This is relevant for
corporates, too, who will get the message that their investors will support the
long-term change that is required.”

The investor alliance is also urging asset owners to provide proposals
for a reporting standard that expands on the foundations from the Task Force on Climate-related Financial Disclosures (TCFD).

“Expansion here would mean that, in addition to climate change-driven
capital impacts, they should also focus on real-world impacts, for example,
greenhouse gas emissions measured in gigatons,” Thallinger explained.

Formed last September under the aegis of the UN, the Net-Zero Asset Owner Alliance has grown to comprise 16 of the world’s leading asset owners and allocators, including PensionDanmark, SwissRe, CalPERS, Nordea Life and Pension, Zurich, Aviva and AXA.

Prior warning

In December, outgoing Bank of England governor
told pension schemes some of their assets could become worthless if don’t cut
their investments in fossil fuels.

Speaking to BBC Radio
4, he said: “A question for every company, every financial institution, every
asset manager, pension fund or insurer is, what’s your plan?”

He argued that while
around “$120 trillion worth of balance sheets of banks and asset managers” now
want more fossil fuel investment disclosures, things weren’t moving fast
enough.

Referring to pension
fund data, Carney warned that the policies of the companies analysed were
consistent with a warming of 3.7°C-3.8°C, well above the ‘safe’ 1.5°C target set by
policymakers.

As these concerns come
more to the fore, a number of asset managers and funds attending the World
Economic Forum are exploring the idea of a “temperature score” to measure how
investments contribute to climate change.

By translating the
greenhouse gas emissions of a company into a single score, investors could get
a snapshot of a company’s climate impact and how it is contributing to the rise
in global temperature.

According to a Reuters report, only a handful of financial institutions are adopting this metric, although more firms are starting to consider applying the scores across their portfolios, including Standard Life Aberdeen, German reinsurer Munich Re, Swiss rival Swiss Re and Zurich Insurance.

However, asset managers
admit there’s still a lot of work to be done to develop the scores due to the
complex calculations required to make them workable, including measuring how
companies contribute to global emissions and their planned reductions over
time.