Highlights

• Asset owners need investment products that put decarbonisation before profits.
• “Systemic funds” could be the answer by taking lower returns for more risk reduction.
• Work with governments, advocate for carbon markets and responsible lobbying to drive economy-wide decarbonisation.

Asset owners need access to investment products that put targets like decarbonisation before short-term returns.

New research from the Institute for Energy Economics and Financial Analysis (IEEFA) suggests the creation of “systemic funds.” These would take lower short-term returns as a trade-off for more risk reduction.

If designed to avoid free-rider and liquidity issues, systemic funds could be a useful addition to current active ownership approaches. This addresses the current limitations asset owners face in their investment choices.

“With an increasingly supportive legal framework around sustainability and fiduciary duties, systemic funds could be a growth area and business for active managers,” said Alasdair Docherty, author of the report and sustainable finance and data analyst at IEEFA.

The research also shows active owners can decarbonise the economy through:

Work with Government Stakeholders

Governments and policymakers need to create the conditions for decarbonisation. Since many of the biggest carbon emitters are state-owned or state-controlled, universal owners should work with sovereign entities to mitigate systemic risk.

Support Carbon Markets

Universal owners, such as sovereign wealth funds, pension funds and insurance companies, should advocate for stronger carbon pricing mechanisms that price emissions costs so people can change their behaviour quickly.

Address Climate Lobbying

Investee companies need to be aligned with decarbonisation, not working against it with contradictory lobbying.

Use Banking Relationships

Universal owners can use their position as both shareholders and customers of banks that still support fossil fuel expansion.

Consider Divestment as a Stewardship Approach

Asset owners should see engagement and divestment as complementary, not opposing strategies. Divestment can be a means to mitigate idiosyncratic risk but also to deliver systemic benefits.

“By doing all of these, universal owners can decarbonise the economy more effectively,” said Docherty.

For more information, you can read the full report here.

Follow KnowESG's Investor News for regular news and views.

Discover an extensive network of ESG providers here

Check out KnowESG's latest ESG Event updates

Source: IEEFA