Half of UK investors facing ‘major’ climate-related risks to assets

Questions are constantly raised as to what constitutes as green or responsible in the investor community

The analysis, which was conducted by consultancy LCP for its report The tip of the iceberg, analysed the exposure of UK institutional investors to climate risks. The report analyses risks linked to equity, credit, data availability, transparency and asset transition risks and how climate change can and will impact each criterion.

The research, which analysed 321 UK institutional asset owners with total assets of over £280bn, warns that 50% are facing major climate risks, with just 10% of asset owners facing “low levels” of climate risk.

LCP found that 82% of UK institutional investors today hold more in corporate bonds and gilts than they do in equities, averaging 54% of their investments. As such, the consultancy is calling for investors and corporates to strengthen relations and disclosure related to current or intended net-zero business pledges.

LCP partner Dan Mikulskis said: “These types of investments can present serious climate risks. With spread levels reaching their lowest point for more than a decade, there is a question mark over whether any climate transition risks are realistically priced within corporate bonds. Because of the rising allocation to this asset class and the under-the-radar nature of this risk we believe this is potentially the most significant class of climate risk faced by investors.

“At the same time, in private markets there simply isn’t the data to make any accurate judgements around carbon intensity or climate alignment, making climate risks difficult to quantify and address.”

LCP is also urging asset managers to increase transparency across all investment products, particularly those in private markets, with the research revealing that 90% of UK institutional investors could significantly reduce climate exposure over the next decade.

UK institutional investors hold around 75% of their assets in listed equities, investment-grade corporate bonds and government bonds, for example, all of which have pledges and commitments to net-zero targets, or will do in the future.

Standardised disclosure

It comes after the Cambridge Institute for Sustainability Leadership’s (CISL) Investment Leaders Group (ILG) called for the introduction of a standardised climate disclosure framework for investors.

A report from the group assessed 15 funds that are ranked highly on climate performance by CDP, in terms of disclosing direct and financed emissions and reducing them in line with climate science. Of these funds, eight explicitly measure and disclose the climate performance of their activities; six disclose climate intensity, one discloses emissions on a portfolio basis and one discloses the emissions its activities have helped to avoid. The ILG praises this progress but argues that the use of different metrics makes it challenging to compare performance.

Earlier this year, the Net Zero Asset Managers Initiative announced 43 new members, bringing its membership to more than 70 organisations collectively representing $32trn of assets under management. New members include BlackRock and the Vanguard Group.

The initiative commits members to reaching net-zero financed emissions by 2050 or sooner. Several members are also part of the Institutional Investors Group on Climate Change’s (IIGCC) efforts to develop and pilot what has been described as the world’s first blueprint for aligning investment portfolios with the Paris Agreement on climate.

Matt Mace