A fresh report from the Institute for Energy Economics and Financial Analysis, or IEEFA, has been released based on which there is a pressing call made to the asset owners to change their investment strategies from gaining short-term profits towards decarbonization. The research enunciates that building “systemic funds” could be the way out that helps balance lower short-term returns with higher risk reduction, thereby pushing the world toward economy-wide decarbonization .
The Call for Decarbonization-Centric Investment Products
Asset owners- pension funds, insurance companies, and sovereign wealth funds- are looking for long-term investment opportunities that align with their sustainability goals, such as decarbonization. Most current investment products, however, are designed to serve short-term financial purposes.
IEEFA’s research is setting forth a new category of investment products based on a systemic need-risks government action in causing climate change and the like-over maximizing short-term financial returns. In doing so, they could offer asset owners a more effective way to be part of efforts to decarbonize the globe while still managing their financial risks.
Systemic Funds: A New Approach to Active Ownership
The IEEFA report outlines a design for systemic funds which are structured to avoid free-rider problems and issues of liquidity associated with common investment. A new model for investment will allow asset owners to be put in charge of acquiring better control over climate risks while also providing an opportunity for mitigating financial risks from environmental degradation.
Systemic funds should be yet another area for growth amongst active managers- especially as legal frameworks evolve on sustainability and fiduciary responsibilities. The systemic funds would thus become alternatives to traditional investment products which would allow asset owners to contribute to decarbonization actively without sacrificing long-term financial stability.
Collaboration with Governments and Policymakers
The main strategy incorporated into the report by IEEFA implies that asset owners should now start interacting very closely with governments and policymakers in achieving a favorable environment for decarbonization. Most of the world’s biggest carbon emitters are state-owned or state-controlled, so asset owners need to interact with sovereign stakeholders to avoid system-wide risks associated with climate change.
Through such collaboration, asset owners would be able to help influence policies favoring sustainability and, at the same time, create conducive conditions for large-scale decarbonization. This is through lobbying for tougher regulatory practices and encouraging governments controlled industries to reduce harmful practices through greening and sustainability.
Campaigning for Carbon Markets
The report also highlights the need to enhance carbon markets in addition to government cooperation. Overall, globally diversified portfolio asset owners-including pension funds and sovereign wealth funds-should push for stronger carbon pricing mechanisms with accurately reflected environmental costs of emissions.
But, on its part, asset owners must be catalysts of behavior change-from corporation to individual-by ensuring the carbon market is big enough to motivate companies to a suitable level of emission reduction. It will also compel more companies to adopt decarbonization strategies and will therefore be pushing down global greenhouse gas emissions.
Climate Lobbying
The core focus of this report by IEEFA is that investing in companies has contradictory climate lobbying. Thus, asset owners are urged to engage only in investments in those companies whose moves and actions converge with sustainability goals, such as decarbonization, while excluding those lobbying against it.
Climate lobbying addressed by asset owners can ensure investments would not indirectly fuel policies or practices aggravating climate risks. Such alignment between investment strategies and corporate actions becomes instrumental for systemic change and, by extension, meeting decarbonization targets.
Engage in banking relationships
Thus, asset owners are themselves giant customers in most cases of some of these banks; therefore, they can become a fierce voice demanding the use of more sustainable practices. For example, they should inspire banks to reduce financial inflows in fossil fuel expansion, and instead invest in renewable energy and other sustainable enterprises.
This report suggests the role universal owners are to be put to — using their dual hat as owners and customers of banks to advocate for more responsible lending in the banking sector. Along these lines, they can contribute towards directing financial flows away from carbon-intensive industries and toward more sustainable alternatives.
Divestment as a Stewardship Approach
In addition to engagement with companies as a powerful way of compelling corporate change, the IEEFA report also prescribes divestment as a further complementary strategy that helps address climate risks. Divestment, or selling investments in firms that are not in line with goals for sustainability, can be an efficient way also to mitigate both idiosyncratic and systemic risks.
These steps will reduce asset owners’ direct exposure to financial risks posed by climate-related issues while focusing on a call for increased corporate responsibility. This report encourages asset owners to “use engagement and divestment as complementary tools to accelerate the transition toward a more responsible, decarbonized economy.”
The Road Ahead for Asset Owners
With a global economy under increasing pressure from climate change and other environmental risks, asset owners are increasingly tasked with doing more about decarbonization. The potential for systemic funds, in combination with active engagement, lies ahead for asset owners seeking sustainability alignment of investments.
They can alleviate these financial risks associated with climate change by engaging with governments, supporting carbon markets, addressing climate lobbying, and considering divestment where appropriate. This way, asset owners are able to contribute toward the effective end, which is economy-wide decarbonization.
Conclusion
This IEEFA report presents a compelling argument for systemic funds that place decarbonisation over the short-term return. When these funds are married with a proactive approach to engagement, they offer asset owners an effective tool in their quest to manage climate risks and bring about meaningful global economy change. As the investment landscape remains in a constant state of flux, asset owners will continue to have to think up new strategies that marry their financial goals and urgent decarbonization needs on one end.
Source: IEEFA