Pacesetters in 2022: Responding to climate risk 

Globally, we are seeing asset owners take action to shape their investment processes in response to climate-related risks and opportunities. 

In a collaboration with the World Economic Forum, Mercer has looked into the specific accomplishments of advanced asset owners to consider how best the investment industry can tackle the most common challenges restricting progress in the area of climate investing.

1. Defining and implementing a transition roadmap

There is an inherent degree of uncertainty surrounding the pace and nature of the transition to a low-carbon economy. For investors, there are obvious risks and opportunities within this challenging landscape. That is why transition roadmaps are vital; they serve to unify organisational beliefs and can position investors’ portfolios for attractive risk-adjusted returns.

Transition roadmaps translate the inherently complex interrelated challenges of decarbonising the global economy into applicable investor steps that address asset owners’ unique objectives and stakeholder requirements. The potential benefit of this is the production of forward-looking policy and governance steps that support reactive decision-making which is vital for any organisation navigating the transition.

2. Measuring achievement and success

When it comes to evaluating what an asset owner is doing right as part of the transition, regular investment performance benchmarks do not provide the insight required.

Climate investing activities necessitate their own criteria, stemming from an understanding of advanced climate practices and an awareness of who is doing what in the market. The Climate Benchmark tool, developed through the research, captures more than 80 activities that integrate climate into investment decision making. A commitment to these activities can lead to material adjustments in both measurement processes and how to pursue climate-investing practices.

3. Engaging investee companies actively and effectively

For asset owners, the decision to engage or divest is nuanced across the majority of sectors.

Asset owners seek to promote long-term value across investee companies, so a decision to divest shouldn’t be taken lightly. However, in light of the need to promote a period of transition, it is now imperative for asset owners (or managers acting on their behalf) to utilise the full range of stewardship activities available to them before turning to divestment. 

In practice, this means being proactive in recognising and engaging on material risks within a company, rather than being reactive, in conjunction with a focus on quality – rather than the quantity – of engagement.

4. Defining climate reporting metrics by asset class and manager

A lack of standardisation, disclosure and awareness of industry practice underpins the challenges facing asset owners as they seek to integrate climate-related data into investment decision making.

That said, advanced asset owners are actively integrating available data into their investment decision-making processes. Central to the successful integration is an awareness of the financial materiality of the data, together with any associated limitations. This is already providing asset owners with the ability to track portfolio progress against transition roadmaps and climate commitments.

Overcoming systemic risks

Each day, asset owners and managers handle the challenges of transformational investing in pursuit of absolute and risk-adjusted returns. 

Alongside the World Economic Forum, we identified a three-step process asset owners can take to translate the challenges associated with systemic risks, such as climate change, into investment opportunity.

• Become familiar with the advanced practices of investors around the globe that already have addressed climate investing.
• Uncover current shortcomings by benchmarking current practices against the activities of advanced practitioners.
• Refine the vision, governance and implementation processes that integrate climate-investing factors into ongoing investment decision-making, consistent with strategic objectives, stakeholder requirements and fiduciary duties.

Benchmarking progress

Using the advanced climate investment practices of advanced investors – the ‘pacesetters’ – we developed the Climate Benchmark tool and framework that provides practical climate investing protocols. The tool evaluates 10 categories of activity and assesses asset owners’ level of progress on a scale from 1 to 5, with 1 indicating ‘not started’ through to 5 indicating ‘fully developed’.

The tool, already used by dozens of asset owners, assesses current practices to uncover activity gaps that require improvement for advanced climate investing.