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The climate change imperative - the role of capital

It is undeniable that climate change has become a major problem facing humanity. The World Health Organization has called it the greatest threat to global health in the 21st century. However, the world is beginning to respond. Spurred by the Paris Accord and annual global conferences, the most recent being COP 26 in Glasgow, countries and companies have come together to pledge commitments to reduce their greenhouse gas (GHG) emissions by various target dates. Where climate change discussions were once on the fringes, today, they are front and centre in almost any sphere of influence.

 

One of the major reasons why climate change has captured global attention is undoubtedly a financial one. Extreme weather events like hurricanes, tropical storms, floods, and droughts have resulted in massive financial losses as well as human suffering. Add to that the cost of rising sea levels and the warming of oceans, and climate change went from being a passionate cause to an existentialist threat not just to humanity at large but also to capital owners.

 

Meeting the Paris Accord targets will not only be difficult, but it will be expensive. It is estimated that the total global cost of reducing carbon emissions significantly could run into trillions of dollars annually. Developing countries will need to be assisted with aid and financing plans from the more developed countries, while private-sector organisations will need to invest significant capital into achieving net-zero targets. While this may sound like an astronomical sum of money, the cost of doing nothing is far higher.

 

Institutional investors such as sovereign funds or retirement funds have several trillion dollars of assets under management. As the shift happens, these capital owners will be key players in nudging companies towards net-zero status. Already many pension funds have committed to climate change action by choosing to work towards a net-zero portfolio, many are also engaging with government at all levels, and using their clout to effect change.

 

A clear example of this is the largest pension fund in the world, California Public Employees’ Retirement System (CalPERS), which committed to no longer making fossil fuel investments. At COP26 which was held in Glasgow, several Nordic and UK pension funds announced to collectively invest US$130 billion by 2030 in clean energy and climate. In New York City, the two largest pension funds agreed to achieve net-zero GHG emissions in their investment portfolios by 2040. And here in Malaysia, the Employees Provident Fund (EPF) have announced plans to fully decarbonize its portfolio by 2050. These are just some of the many pension funds that have committed to climate change action, signalling that more will follow suit.

 

Institutional investors have a massive impact on climate change action because of the sheer size, scale, and reach of their investment portfolio. As financial institutions, they can always look to the Task Force on Climate-Related Financial Disclosures (TFCD) to help with reporting in this new paradigm. The TFCD structures climate change action reporting around four thematic areas that represent core elements of how organisations operate: governance, strategy, risk management, and metrics and targets.

 

Historically, large public companies have been some of the biggest GHG emitters. Having major institutional shareholders that are committed to reducing carbon footprints will create an outsized impact in helping to achieve the goal set out by COP26.

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