On November 3 the conference Climate Investment Summit was held in Stockholm at Berns Salonger. The conference was arranged by Veckans Affärer together with the partners Hermes Investment Management and South Pole Group. The main theme for the conference was: How can the financial sector be a part of the solution to the climate crisis - and how can the climate crisis contribute to good returns for asset owners?
Veckans Affärer interviewed Max Horster, Director Financial Industry at South Pole Group, about his view on climate impact for investors in the future.
Dr. Maximilian Horster, Director Financial Industry at South Pole Group. Image credits: Pax Engström Nyström
South Pole Group has been working with the Swedish AP-funds valuing and measuring climate impact. Most investors realize that climate risk is something to take into account, but how should they measure and value this in comparable figures?
Max Horster: It is only since about two years that investors start taking climate risk into account –it is by no means all of them and it is a journey. Sweden, however, is certainly leading the topic and the AP funds have prominently paved the way over the last year by reporting part of their climate impact. A smart way to start this journey is to conduct a carbon footprint of an investment portfolio. This provides a "heat map" to locate climate neuralgic industries and holdings in a portfolio. From there, investors can dive deeper and complement the footprinting information with dynamic and qualitative risk and opportunity assessments.
What kind of results are you able to provide for your customers? Do you have estimates of the potential value from assessing risk and value from climate impact?
MH: We deliver everything from initial investment footprints to detailed company-by-company analysis of climate strategies, fossil fuel reserve analysis, 2 degree portfolio checks etc. More often than not, we deliver the results to the investors in form of a workshop: This helps contextualizing the analysis, understanding the limitation and setting priorities for next steps. The value at risk can be quite significant. We just conducted a study for the Swiss government on the risk of a carbon bubble for the financial markets in Switzerland: If there would be a price on carbon that would reflect the level of destruction, the average public equity returns would decrease by about 40% per year – before fees! This is equivalent to 10% of the financial industry's (significant!) contribution to the Swiss GDP, from public equity fund investing alone!
Have you noticed an increased demand among investors to measure climate impact of their portfolios in the past year?
MH: Yes, the uptake has been unexcpected and incredible. Background is that industry initiatives like the Montreal Carbon Pledge and the Portfolio Decarbonisation with well over 120 investors and trillions of assets have generated a momentum of self-disclosing climate impact among investors. This dynamic continues. On top of that, the French government just announced to make climate impact reporting mandatory for all institutional investors in France. This impacts us as a firm as well - we have been very busy and have to keep hiring smart people.
What kind of investors have you seen, regarding type of ownership, type of company and source of capital/overall risk profile of portfolio?
MH: I see three waves. The first wave of investors until two years ago, measuring their climate impact, had usually some sort of mission so this type of analysis was in ine with their DNA. The Church of Sweden is an example, but also a range of foundations that did not want to contradict their mission with the way they manage their money. The wave two years ago came through a range of pension funds, with AP 4 being quite prominent among them. They underwent a carbon footprinting exercise, realized the value of it and passed the task on to the asset managers who are now building the third – and by far the largest – wave.
What kind of actors are there in different countries? What are your thoughts about geographical spread and differences?
MH: Leading geographies in this field have either a very educated and investment savvy public, a strong political advocacy focusing on climate change or, as in Sweden, both. Leading countries include France with the mandatory disclosing scheme, the Netherlands and Australia with their very mature pension system, some UK investors, and some pockets in the US.
How has the industry developed over the last five years with regards to climate risk understanding - and where do you see the industry in 2020?
MH: Five years ago? That was the stone age of climate impact measurement! The financial industry has undergone a huge transformation – from disregarding climate change as investment risk entirely, to slowly embracing the topic, developing different risk assessment approaches, overcoming their limitations and taking different and often contradictory means to act upon the issue. The heated discussions around engagement and divestment are testimony to that and so is the "carbon bubble" complex. The learning curve has been steep and there is no end in sight. An increasing number of investors understand: If politics succeeds in bringing the world on the path to a 2 degree economy, this world will look very different tomorrow. And this has implications for investments today. It means that in the near term that climate impact measurement will become the rule and climate risk reporting a standard for every investor. In 2020, I expect that the emerging understanding will have found its way into the investment processes. If there is a meaningful price on carbon by then, investment portfolios will look very different than in the last 20 years!