In 2014, when I first started engaging pension funds on the issue of climate change, a worrying number would respond that they could not take savers’ “ethical concerns” into account. Not only a simplistic reading of their fiduciary duty, but a complete misunderstanding of the financial risk posed by climate change.

Since then the culture and discourse around climate risk has shifted significantly; climate change is now seen as a mainstream risk to financial stability by investors and regulators around the world.

The recommendations by the Taskforce for Climate-related Financial Disclosures (TCFD) last year topped off years of work by savers, researchers and campaigners to establish climate change not as an environmental or PR issue, but as worthy of C-suite attention and crucial to good management practice.

The challenge now is to translate this understanding of climate risk into robust and credible action that drastically reduces emissions, transforms business practices and sets us on a path to “well-below 2°C” of warming. And the slower we are in rising to the challenge, the harder it becomes.

There is still a gap between the way investors and companies identify climate-related risks and how they are preparing to tackle them. Investors cannot manage the systemic risks created by climate change by settling for disclosure, or by stock-picking and portfolio decarbonisation.

The risks created by climate change are universal, interconnected and pervasive and should be managed in ways that reflect this. One key element is a proactive stewardship strategy calling on major carbon emitters to take meaningful and time-bound action to reduce their emissions and plan for a carbon-constrained future.

To meet that challenge, ShareAction coordinates a group of investors on the new frontier of investor activism, not content with calling for climate disclosures, but pushing for action. Our Investor Decarbonisation Initiative brings together pension funds, asset owners and asset managers to encourage companies to set proactive emissions reduction targets, known as science-based targets, and to make complementary clean energy commitments.

More than 60 investors managing $1.2trn in assets under management have joined, including Aegon Asset Management, Candriam Investors Group, and Ethos Foundation.

Targets

A science-based target is a greenhouse gas emissions reduction target that is aligned with the level of decarbonisation required to limit global warming to less than 2°C of pre-industrial levels, as set out in the Paris Agreement. By calling on companies to set science-based targets, investors are asking them to do the hard work required to prepare for and contribute to the low-carbon transition.

Science-based target-setting is a strategic tool that helps companies to future-proof their business model, allocate resources appropriately and reduce regulatory risk. It is one of the clearest indications of a credible corporate climate strategy.

More than 390 companies have committed to set a science-based target, and 105 companies have now had their targets approved by the Science Based Targets initiative. And this call for action is well-aligned with the TCFD recommendations, which encourage companies to disclose identified climate risks and opportunities and their associated risk-management strategies and governance structures.

But beyond that—and arguably most importantly—the TCFD also recommends the disclosure of forward-looking targets used by companies to manage climate risks. Disclosing a science-based target as part of this can currently be regarded as best practice, and over the coming years needs to become the new normal.

Call to action

It is crucial that this call to action from institutional investors registers with the highest-emitting sectors, who are key to delivering the low-carbon transition at the pace required to avoid dangerous climate change.

The power generation and cement industries are key. The latter, for example, accounts for 6% of global CO2 emissions, and recent research from CDP concluded that cement companies need to more than double their emissions reductions in order to achieve a “below 2°C” climate pathway.

Since February 2018, ShareAction’s investor group has sent letters to the CEOs of 30 high-carbon companies, including a number from the cement, power generation and construction industries such as HeidelbergCement, Xcel Energy and VINCI.

For pension funds, delivering on their fiduciary duty to savers means pushing for the level of action necessary to safeguard our climate and our economy. We welcome the addition of more investors to our initiative.

Another test for institutional investors is coming up at the Royal Dutch Shell AGM in May. Going beyond the shareholder resolutions of 2015, which called for climate disclosure, this year’s Follow This resolution, supported by ShareAction, calls on the company to set Paris-aligned climate targets. This is another opportunity for investors to prove that their approach to climate risk is commensurate with the scale of the challenge.

Sophia McNab is campaign manager at ShareAction, the responsible investment charity.