Railpen Investments – the investment manager of the approximately £17bn railways pension schemes – has today challenged its asset managers, investment advisers and actuaries to prove they are prepared for the long term economic shift necessitated by climate change.
Created by HSBC, architect of the HSBC Climate Change Index, Linklaters and Railpen the 77 question Risk Audit will be sent by Railpen to more than 40 institutions. It will then be made available by all three organisations, at no cost, to other investment managers who want to review investment strategy to ensure that their assets are positioned correctly for the impacts of climate change.
This coincides with increasing focus from governments worldwide on the risk and fiduciary obligations of asset owners’ current and future exposures to climate change. Through 77 separate questions in four sections* the Risk Audit empowers asset owners to proactively assess and drive their advisors’ current thinking, level of engagement and degree of sophistication applicable to climate change.
Lord Stern, author of the Stern Review[1] and adviser to HSBC, said: "The structural shift and new investment that will be required for the global economy to move from one fuelled by high-carbon energy to low-carbon is on a larger scale than the industrial revolution. The majority of the investment will be provided by the private sector. This Audit will provide a fascinating insight into the current thinking and views of actuaries, investment consultants and asset managers thereby stimulating the dialogue between asset owners and their advisers."
Frank Curtiss, Head of Corporate Governance at rpmi / RAILPEN Investments added: "This audit is part of our ongoing evaluation of our investment managers’ and advisers’ views, opinions, their investment processes, investment structure and practical implementation in relation to the potential risk and rewards arising from climate change. Climate change is very real and must be taken into account when looking to the future of investment strategy: those who successfully move to a low carbon future are likely to prosper but those who don’t will risk being stranded managing portfolios linked to an increasingly outdated high-carbon world. We will be issuing the Audit to our actuaries, investment consultant and all our external asset managers and asking them to supply us with full answers."
Gordon Morrison, Head of Portfolio Risk Analytics, HSBC, said "While many investment managers have incorporated a portion of their assets to climate change, we firmly believe that the evidence points to climate change affecting all companies wherever they are located in the world and necessitating a long term seismic shift in economic investments at the very centre of portfolio construction.
The world will have to move from a high-carbon to a low-carbon economy and this transition must take place over a comparatively short period – forty years at most. The challenge is therefore clear for investment managers: for responsible medium to long term financial and risk management, climate change must be at the core of investment objectives."
Vanessa Havard-Williams, global practice head of climate and environmental regulation at Linklaters, commented: "The role of a trustee is to invest assets in the interests of beneficiaries, which requires taking account of all relevant factors including longer-term investment value. Trustees, like the rest of us, should be aware of the scientific consensus on climate change and the emerging policy response. If they fail to take any account of these factors, that omission could expose beneficiaries to lower midterm returns. Our audit should help trustees to assess progress in doing so and their advisors' approach to integrating climate change issues into their offering."
Climate Change, energy availability and security, natural resources shortages, poverty (particularly in developing markets), food and water shortages and other social and environmental crises all have potential to cause shocks to the global economy in future. Sustainability, although by no means a new phenomenon, is yet another important influence. All of these pose potential risks and opportunities to asset owners. This Audit is an important first step in reviewing the scale of engagement in this important theme.
The Risk Audit is available at no charge.
Please click on the link and provide us with your name, company and job title and we will send a copy out to you - climate.audit@linklaters.com.
*The sections are:
- Legal - lists a set of questions that are primarily aimed towards asset owners/trustees and asset managers, and the relationship between the two. It also addresses issues relating to fiduciary and director responsibility in the context of changing climate policy.
- Client interest and demand - these questions are on the medium/long-term investment strategy and are aimed at those ultimately responsible for the assets’ investment performance and the setting and implementation of the investment strategy.
- Investment Strategy, Asset/liability modelling and actuarial demands.
- Asset Categories - specifically targeted at how climate change is incorporated into the day-to-day analysis and management of securities
[1] The Stern Review: The Economics of Climate Change, October 2006
