February 6, 2024
SINGAPORE – Executives at many of the world’s largest investment firms are more concerned about reputational risk to their company than the climate impacts of the companies they invest in, according to a survey released on Feb 5.
The findings show a worrying disconnect between executives’ understanding that climate change is a threat and investment decisions that fail to match that concern.
“Most CEOs and executives are very concerned about climate change, but they are not doing enough to ensure that the soaring climate risks they face are incorporated into their investment decision-making,” said Ms Rose Tehan, report author and analyst at Australian activist group Market Forces.
“Corporate leaders and investors must make better choices for their companies to prosper,” she told The Straits Times.
Climate risks include direct impacts of worsening weather extremes on companies’ assets and supply chains, such as floods, storms and wildfires. They also include risks from tougher regulations such as taxes on carbon pollution or tighter emissions controls on transport.
Market Forces and market research agency NewtonX conducted the survey of 150 chief executives, other executives and investors at 100 of the world’s largest financial institutions in Britain, the United States, Singapore, Japan, Australia, Hong Kong and Belgium.
The online survey, conducted from September to November 2023, mainly involved banks, asset managers and pension funds with a minimum of US$20 billion (S$26.9 billion) in assets under management. Just over half of the respondents were in the United States, 28 per cent in Britain and 19 per cent in the Asia-Pacific region.
The survey showed that executives regard climate change as a threat, with 84 per cent of respondents saying they were moderately to extremely concerned about global warming.
Yet nearly 80 per cent of respondents said reputational risk had a high or very high level of influence on decision-making when evaluating investments.
A total of 57 per cent said climate change risk had a high or very high influence on their decision-making.
However, this refers only to climate risks that might affect the investor’s own company and not to the activities of firms they might invest in.
The climate change impacts of the investee’s activities (such as the planet-warming emissions of a coal miner or oil and gas producer) ranked lower as a concern, with just half of respondents viewing it as highly influential in their investment decisions.
“Unlike previous studies, our survey found that the reputational risk to investors and their companies is more important to them than maximising returns for clients,” said Ms Tehan.
That is concerning because big investors have trillions of dollars at their disposal and are a critical force in the global fight against climate change and environmental destruction.
Decisions on whether to invest in companies can help determine how quickly the world switches away from fossil fuel emissions, as well as the adoption of cleaner and greener practices. Similarly, when big investors are shareholders in companies, they can influence these firms to change.
But to be effective, there needs to be consistency in investment decisions and good data to assess climate risk.
Corporate greenwashing – false or exaggerated claims of climate action – and inadequate information from companies on their climate management plans are barriers to investors incorporating climate risk more effectively, the survey found.
The researchers also found that a large proportion of respondents indicated they largely disregard Scope 3 emissions when evaluating investments, and respondents were overall far more concerned about government regulatory risk.
Yet, Scope 3 emissions are increasingly in the sights of regulators looking to hasten the decarbonisation of economies.
Scope 3 emissions are those that a company is indirectly responsible for up and down its value chain, and include emissions from customers using their products and services.
For some companies, such emissions – for instance, those from fuels produced by oil and gas companies – can be the largest portion of their emissions.
Scope 1 and 2 emissions are already part of wider mandatory corporate reporting on climate impacts and risks and therefore a key focus for investors.
Scope 1 covers emissions from sources that an organisation directly owns or controls. Scope 2 emissions are those a company causes indirectly, such as the emissions from the energy it purchases and uses.
A quarter of respondents reported they had never or rarely considered Scope 3 emissions when evaluating an investment, while 37 per cent said they only sometimes did this. Just under 40 per cent of investors said they consider Scope 3 emissions “often” or “always”.
“Scope 3 emissions are a key indicator of regulatory, market, reputational and financial risk for fossil fuel companies, so this is a major concern for the clients who entrust their money with investors, as well as for the climate,” said Ms Tehan.
So what can be done to improve investment decisions?
One key area is better data when assessing companies’ climate risk. Respondents said they wanted an authoritative, objective and standardised body of data they could draw on to quantify risks and impacts, and inform their decisions.
“Climate risk is still not a widely adopted and standardised risk topic,” said a senior executive with a bank in Britain, in a response to the survey.
And until that risk can be pretty accurately and universally agreed upon and quantified, it will be difficult to get the investment industry to agree, the executive added.