UK Asset Managers see significant climate impacts on company valuations in next 3-5 years
Climate change related financial risks will significantly impact the valuations of oil and gas majors in the next 3-5 years according to major UK asset managers. There is also a growing interest from investors in fossil fuel free products. At the same time, many asset managers still do not see enough demand from clients to expand their product portfolios on fossil free investments. Among 13 major UK asset managers that responded to a recent survey, only one offers a fossil free passive investment fund, while many offer solutions for actively managed portfolios.
In March 2017, the Climate Change Collaboration conducted a survey of the 25 largest asset managers (by the size of assets under management) operating in the UK to find out what fossil fuel free investment strategies and products are available to UK investors and whether any new products are in the pipeline. They also asked their views regarding the timescale of the revaluation of fossil fuel companies arising from climate change related financial risks.
A key finding of this survey is that most of the asset managers expect that climate change related financial risks will significantly impact the valuations of oil and gas majors in the next 3-5 years. This is a major risk for all investors, especially those invested in passive funds. The latter group includes pension savers, many charities and universities who currently face a lack of availability of financial products that invest in ways that appropriately manage climate change related financial risks.
Given the short timescale over which asset managers anticipate major gas and oil companies will be revalued and the extent to which many passive investors rely on the dividend payments from these companies, there is an urgent need for new fossil fuel free passive investment products that manage the climate change related financial risks associated with fossil fuels and provide income and capital growth for investors as we transition to a zero-carbon economy.
The report recommends that asset owners assess the climate change-related risk of their investments and review options to manage these risks including Divest Invest, and communicate their demand for new products to asset managers. Over 700 organisations – including universities and local authority pension funds – worth more than $5.5 trillion have moved their money, or have a policy to do so in line with Divest Invest.
It also recommends that asset managers assess and report climate-related risks of investments (including the anticipated revaluation of major oil and gas companies) to clients and develop products, including fossil free products for active and passive investors that manage and mitigate climate change related financial risks.
Meryam Omi, Head of Sustainability and Responsible Investment Strategy, Legal and General Investment Management:
“We welcome the publication of The Climate Collaboration’s recent survey and report, which further highlights asset owners’ demand for investment strategies that address the transition to a low carbon economy. Indeed, the launch of LGIM’s Future World Fund was an important step in this direction. We continue to support the development of investment approaches that address climate change and encourage asset managers to respond to the increasing demand from asset owners.”
Catherine Howarth, CEO, ShareAction:
“This timely research highlights a growing risk to which millions of UK pension savers are exposed. The auto-enrolment generation is investing through passive equities funds that often track a high carbon index, such as the FTSE 250. This leaves savers highly vulnerable to a permanent downward revaluation of fossil fuel stocks as the world transitions to a lower carbon energy mix. A response is urgently needed from the major pension providers in the auto-enrolment space. The people running these schemes and overseeing them should examine the evidence in this report and respond to it if they are to avoid liability themselves for wilful neglect of material climate risk in their funds.”