Your investment manager is a PRI signatory, but do they understand climate change?
If asset owners want to ensure their investments are climate resilient, having managers who are Principles for Responsible Investment (PRI) signatories is a good start but it’s not enough. Forward-looking asset owners are doing more on climate change—here’s how you can identify the climate leaders.
The PRI is the leading organization advocating for responsible investment. With more than 2,000 signatories, the PRI has helped make environmental, social, and governance (ESG) investing a mainstream financial practice. Investors who sign on to the PRI commit themselves to reporting annually on their responsible investment activity. In 2020, the PRI included mandatory questions related to the Task Force on Climate-related Financial Disclosures (TCFD) framework in its annual signatory reporting—an important step forward in having the financial industry recognize climate risk.
However, only certain aspects of the TCFD were incorporated into the PRI reporting process. Disclosures on risk management, metrics and targets, and actions specific to asset classes remain voluntary. While a PRI report is a great consolidated summary of responsible investing practices at an organization and facilitates comparisons across investors, it can be difficult to fully understand the depth (or lack of depth) in climate approaches. Some investment managers may be doing the bare minimum and signing on to the PRI as a way to “check the box”, while not fully understanding the impacts of climate change.
When trusting an external investment manager with funds, asset owners need to be confident that their investment managers have clear climate-related policies, experience, and a track record of asking the right questions. These are the building blocks to ensure that your investments are resilient to climate-related financial risks and take advantage of climate-related financial opportunities.
Four questions to ask your asset manager about climate change
At Mantle314, we regularly work with asset owners to make sure they know how to assess the “climate competence” of their investment managers. Even if your investment manager is a PRI signatory, here are four questions every asset owner should be asking:
Do you have a clear statement on climate change?
When looking at your investment manager’s policies, they need to have a clear and credible statement on climate change. This needs to go beyond just a “we believe in the science” boilerplate assertion. An investment manager should be able to point to a public statement that outlines how they view the risks and opportunities of climate change and what this means for their business strategy. This statement is the basis for all future engagements with the investment manager and is an important step in the process of holding them accountable for their investment decisions.
Are your analysts trained to identify and assess climate risks?
Climate risk can threaten many aspects of a company’s operations, which means there are multiple facets to assess. Traditional financial education does not include climate risk, and therefore investment managers may not have the right skills in place to undertake meaningful climate analysis. Investment teams may not know how to properly assess a company’s TCFD-aligned report, or effectively use third-party ratings or raw data to enhance their investment processes. Simply stating that they take climate change “into account” is not enough. An asset owner should understand how their managers assess and manage climate risks, and what they consider to be material, in order to have insight into how managers are planning to make climate-resilient investments.
Do your analysts understand what constitutes good climate governance?
A company’s ability to properly identify and manage climate change risks starts at the board level. Your manager’s analysts need to know the various types of governing structures for climate risk management across multiple industries. An investment manager that understands climate change will be able to determine if a company has a robust climate-related risk management framework and board accountability structure. If they do, they will be well placed to evaluate a portfolio company.
How do you engage portfolio companies on climate-related issues?
Investment managers are increasingly expected to demonstrate that they take climate change seriously. What this means will differ depending on the investment strategy and asset class. It could mean transparent proxy voting on climate issues, or deep engagement with a few portfolio companies. It’s easy for an investment manager to say they have “conversations” with the firms they invest in, but owners should go deeper. A solid understanding of what is driving the manager’s engagement on climate change issues will also help with the asset owner’s reputation and reporting.
Credible answers will bring you confidence in the investment process
An investment manager that is a PRI signatory and who is climate competent will be able to provide credible answers to these questions. By having these discussions with investment managers, asset owners can gain confidence in their managers’ investment processes, decision making, and ultimately their thinking around climate. This is particularly critical for large organizations like public sector pensions and university endowments, which could be under pressure to decarbonize or divest.