Institutional investors are worried about the political and legal ramifications of integrating climate factors into their portfolios, as well as the consequences of failing to do so, according to a new survey by international asset manager Robeco, which also indicated that other ESG issues including biodiversity and the social implications of the energy transition are emerging as increasingly important investment factors.
For the report, the 2023 Global Climate Survey, Robeco commissioned a research study of 300 institutional and wholesale investors, cumulatively representing over $27 trillion in assets under management, across Europe, North America and Asia-Pacific, and encompassing organizations including insurance companies, pension funds, private banks, fund-of-funds, advisory firms, wirehouse broker/dealers, endowments and foundations, sovereign wealth funds, and family offices.
The survey indicated that despite the political and macroeconomic turmoil of the past year, climate change continues to be a key focus area for investors, with 71% reporting that climate change is a significant part of, or is central to, their investment policies. While this result marks a slight decline from 75% last year, the investors indicated that it is expected to gain in prominence, with 85% reporting that it will be “central or significant” over the next two years.
One of the key issues highlighted by the survey, however, was the political pressure facing investors as they look to further integrate climate factors into their investment policies, particularly in light of the growing anti-ESG movement by Republican politicians in the U.S., resulting in over 60% of North American investors reporting that are “concerned that investment policies to avoid investing in fossil fuels will make it harder to operate in certain jurisdictions or locations, which are taking an anti-ESG approach.”
At the same time, investors worry about the implications of not integrating climate policies, with many, including 63% in Europe, 40% in North America and 57% in Asia Pacific reporting being concerned about political pressure and legal action if they don’t take action on climate change and other ESG issues.
As political pressure from both sides builds, climate-related commitments by investors continue to increase. In the 2023 survey, 48% of investors reported that they have made, or are in the process of making, a public commitment to achieve net zero portfolio emissions by 2050, up slightly from 45% in the prior year. While commitments increase, however, efforts to decarbonize portfolios appear to remain at early stages, with only 42% of investors reporting that they have calculated the Scope 1 and 2 carbon footprint of their holdings, only 20% have taken steps to measure Scope 3, and only 18% reporting that they have actively engaged with investee companies unilaterally on decarbonization and fossil fuel usage.
Victor Verberk, CIO Fixed Income and Sustainability at Robeco, said:
“The headwinds we face include ongoing geopolitical tensions, tightening regulations in the EU, an ESG backlash in the US, and often a lack of suitable data and expertise. Nevertheless, the results from our third climate survey demonstrate that investors are keeping the faith and moving forward with a sense of purpose.”
The survey also found that ESG issues other than climate were becoming increasingly important to the investors. Nearly half (48%) of investors, for example, reported that biodiversity was at the center of, or a significant factor in, their investment policies, compared to only 21% two years ago. Additionally, 68% said that biodiversity is expected to be central or significant in the next 2 years. The investors also reported several challenges on decarbonization and biodiversity actions, including a lack of investment data, research and ratings (53%), and a lack of internal expertise (41%).
Similarly, investors appear to be increasingly focused on a Just Transition, or ensuring that the move to a low-carbon economy is socially and economically just and equitable, with 48% reporting that this concept is central or significant to their investment policies, compared to only 24% two years ago, and 67% expecting it to reach this level of importance in the next two years.
Lucian Peppelenbos, Climate and Biodiversity strategist at Robeco, said:
“Climate action continues to mature, but the road to net zero is not linear. All in all, I believe we are close to reaching a tipping point for the mainstreaming of climate change and biodiversity into investment strategy.”
Click here to access the Robeco survey.