Climate Finance


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In this section, Novethic outlines what investors do to tackle climate change. Carbon footprint and other different forms of investor actions are also explained.

Divestment Fossil Fuels

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Divestment consists in excluding high greenhouse gas emitters or other environmentally harmful companies and/or industries from portfolios. It affects in particular fossil fuel sectors like the coal, oil and/or gas industries. Environmental NGOs are running numerous campaigns targeting banks, foundations, major universities and pension funds to try to force them to sell their stock (for example, stocks in the 200 companies ranked by the Go Fossil Free movement as the worst polluters on the planet) and reinvest their capital in financing renewable energy. 

By October 2015, roughly 500 investors with €3.7tn assets under management announced their intent to divest from these companies.

In the last years, several divestment initiatives were launched which have gained momentum recently. The main initiatives are:

Green Investment and Bonds

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Green investment encompasses all actions to fund low carbon projects. This type of investment leads to a reduction in CO2 emissions as it funds renewable energies or improves the energy efficiency of existing technologies. 

Recently, one particular financial product has gained wide recognition in the financial industry: the Green bond..This specific type of bond is designed to fund dedicated green projects. According to the Climate Bond Initiative, $41.8bn green bonds were issued in 2015.

The more the market grows, the more market standards are established: these help investors better identify the environmental benefits of an investment. Two initiatives and frameworks are well acknowledged in the financial market: the green bond principlesand the Climate Bond initiatives.

By October 2015, roughly 330 investors with €20.4tn assets under management were investing in green investments.

Read the full Novethic study to learn more 

Shareholder Engagement

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Shareholder engagement actions consist in dialoguing with invested companies about their environmental performance. 

With the ongoing debate on climate change and finance, large investors are focusing on executing their shareholder rights. They are building voting alliances with other investors in order to push high polluting companies towards more climate-friendly business models. This type of activism proved spectacularly effective in the spring of 2015: virtually all of BP and Shell's shareholders demanded that the two companies come up with a strategy that would be both resilient to climate change and drastically reduce their greenhouse gas emissions.

One of the most recognized initiatives is Aiming for « A ». Several UK asset managers and asset owners, including the CCLA AM, the most influential members of the Church Investors Group and the Local Authority Pension Fund Forum (LAPFF), teamed up to launch a collaborative engagement initiative in 2012 focusing on the 10 major UK-listed extractives and utilities companies. The goal of the Aiming for A Coalition is to bring about improvement in these companies' CO2 reporting so that they obtain the highest CDP performance band ("A") and become eligible for the Climate Performance Leadership Index, made up exclusively of companies demonstrating best practices.

By October 2015, roughly 400 investors with €11tn assets under management have taken action into shareholder engagements.

Read the full Novethic study to learn more

Low-Carbon Index Benchmarking

The demand for low-carbon indices and for indices excluding fossil fuels companies has risen recently. To satisfy this demand, major providers of stock market indices began developing customized indices.

Two types of indices can be observed: divestment of holdings in the fossil fuel sector with ex-fossil fuel indices (for instance MSCI ex Fossil Fuels or MSCI ex Coal) and the financing of a multi-sector, low-carbon economy with low-carbon indices (for instance the MSCI Low Carbon Leaders).

From the perspective of energy transition, these low-carbon indices are similar to the best-in-class methodologies for fighting climate change that are used in active management. They eliminate the most polluting companies and significantly reduce CO2 emissions by removing a small number of companies, thus allowing investors to keep their sector allocation.

Click here to see Novethic's study to learn more 

Climate change drives the financial world

Since the New York Climate Summit in October 2014, investors have been mobilizing to tackle climate change. Today, more than 1,100 investors, mainly ethical investors, pension funds or insurance companies have taken a firm stand regarding this issue. The main examples are AXA, the largest insurance provider in the world, and Norway’s Government Pension Fund. 
Since then, Novethic’s Research Centre has been analyzing the extraordinary mobilization of investors against climate change. It has assembled a select sample group of international investors whose engagements and initiatives have been closely examined in a study already updated three times, last time in October 2015.

Click here to see Novethic's report on investor pledges to tackle climate change 

First step: measuring the exposure of investments to Climate Risk

In order to take action, investors need to know how their investments are exposed to climate risk, notably how high the carbon emissions of their assets are. There are two approaches: measurement of emissions (carbon footprint) and assessment of the risk posed by the presence of many carbon-intensive companies in the portfolio (carbon risk exposure).

Carbon footprint: To make this measurement, greenhouse gas emissions of companies in the portfolio are added up according to shareholdings; that is, the carbon intensity of the companies in relation to their weight in the portfolio. The footprint of a portfolio can be compared with its benchmark or with the change in the portfolio’s carbon footprint over time. At the end of the day, investors should be able to envisage comparing their carbon footprint with an emissions level compatible with a given climate scenario (the 2°C limit, for example).

Carbon risk exposure: The aim of this measure is to assess the portfolio's exposure to carbon-intensive companies, starting with fossil fuel producers. There method takes into account both the importance of the extractive sector in the portfolio and information from companies on their future investments to exploit oil and gas reserves. The target is to compute the portfolio’s exposure to stranded assets risk.

Second step: taking action

Once an investor has identified its carbon footprint and/or carbon risk exposure, he/she could take different forms of action to decarbonize his/her portfolio: Divestment Fossil Fuels, Green Investment and Bonds, Shareholder Engagement and Low-Carbon Index Benchmarking

The Portfolio De-carbonization Coalition

Established by the UNEP (UNEP-FI) and the CDP, the Portfolio De-carbonization Coalition is a multi-stakeholder initiative whose slogan is: "Mobilizing financial markets to catalyze economic de-carbonization". Its founding signatories are the Swedish pension fund AP4 and the French asset manager Amundi. Investors joining the Coalition are committed to specifying the amount of assets that they will de-carbonize. There are no restrictions on the methodology or asset class, but the information concerning both must be disclosed.

Read more on the Portfolio De-Carbonization Coalition 

Montreal Carbon Pledge

The Montreal Carbon Pledge, launched at the PRI annual conference in Montréal on 25 September 2014, aims to establish a framework for the de-carbonization commitments made by those taking the pledge. It is meant to complement the Portfolio De-carbonization Coalition. The signatories agree to measure, publicly disclose and reduce the carbon footprint of their portfolios.

Read more on the Montreal Carbon Pledge 

Go Fossil Free

This international civil society movement is using the carbon risk concept in campaigns that resemble those protesting apartheid in South Africa in the 1980s and 1990s. Its aim is to encourage investors to divest from the 200 most carbon-intensive companies in the world. It is also attempting to get individuals to question their banks about their financing of fossil fuels. Carbon risk has already become a reputational risk for financial institutions.

Read more on the Go Fossil Free movement