Asset Owners Urged to Address Climate Change in Their Investments

[Editor's Note: This article originally appeared at SocialFunds.com and is reprinted with permission.]

Describing climate change as "perhaps the largest single threat to an asset owner's long-term performance," a new report from the Australia-based Asset Owners Disclosure Project (AODP) seeks to establish a methodology with which asset owners can "combine fundamental quantitative analysis with carbon risk research, thereby optimizing the risk/return profile of their portfolio."

The report, entitled "Climate Change Best Practice Methodology" (PDF) provides asset owners with tools for measuring climate change-related risks and opportunities, measuring and ongoing monitoring of those risks and opportunities, and protecting investments from the effects of sudden climate change events.

The methodology proposed by AODP consists of four phases. The initial assessment phase consists of a checklist addressing such areas of assessment as governance and policies, agreements with consultants and investment managers, active ownership, collaborations, and reporting.

In the second phase, which comprises the bulk of the report's 77 pages, a fund's climate change blueprint is designed, in which "detailed business policies and processes are defined and steps on how they are to be implemented are prescribed." Each of the 15 steps of the second phase describes best practice for each of the areas addressed in the checklist, and then provides detailed recommendations for achieving the goal of best practice.

In the area of reporting, for example, best practice consists of ensuring that "climate change risks are identified and prudently accounted for throughout the investment chain." To achieve the goal, asset owners are directed to "conduct inventory audits of the direct and indirect greenhouse gas (GHG) emissions in relation to their investments as well as their own operations."

"Whilst selected company data is available through the Carbon Disclosure Project (CDP)," the report continues, "asset owners should, directly or indirectly, encourage more frequent and accurate reporting" in order to establish baselines for strategies and trends.

The third phase provides advice on implementing the climate change blueprint, from business processes to risk management.

The fourth and final phase addresses ongoing risk management. As the report states, "This is an area which will shape many aspects of an asset owner's business in future years and so a determination to continually evolve and update best practice will be key to creating and maintaining a leadership position."

"The key objective" of the methodology," according to AODP, "is improved management of climate change-related risks leading to better long-term risk-adjusted returns."