About 70% of more than 200 investors surveyed across Asia have publicly recognised climate as a source of material risks and opportunities, according to a report released by the Asia Investor Group on Climate Change (AIGCC) on April 8.
However, investors still face challenges to effectively manage climate risks and opportunities in line with global climate goals, says AIGCC, a network of asset owners and managers.
In addition, asset owners in Asia trail asset managers on nearly every key climate metric surveyed.
With support from MSCI, AIGCC’s 41-page State of Net Zero Investment in Asia report draws on data from more than 200 mainstream asset owners and managers with more than US$76 trillion ($102.41 trillion) in assets under management.
The report combines data from 58 investors who responded to a survey, supplemented with a “desktop review” of key metrics and aggregated progress from over 200 asset owners and managers, 186 of which are headquartered in Asia.
The report identifies five priority areas for Asian investors to protect beneficiaries from climate risks. They are: physical damage and disruption, fossil fuel approaches, deforestation, climate solutions and climate transition planning.
AIGCC released a policy-focused extract of this report in November 2023. It found that while Asia-headquartered investors recognise coming climate risks, they face significant barriers to setting short- or medium-term climate targets and realigning capital flows at a speed that can mitigate economic and physical damages.
Physical risks
Physical damage and disruption from climate change are enormous systemic risks but only a small portion of investors have disclosed actions to drive adaptation and resilience across their portfolios, says AIGCC.
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Of the investors, 15% disclosed a detailed physical climate risk assessment (over part or all of their portfolios), with an additional 16% having undertaken some preliminary or high-level physical risk disclosures.
The Asia-Pacific is the world’s most disaster-prone region, with 80 disasters linked to climate costing US$36 billion in 2022. This poses significant and persistent financial risks to investors as well as massive costs to societies, economies and governments in the region, says AIGCC.
Fossil fuel approaches
Asia is still largely reliant on fossil fuels to meet energy needs. Investor engagement and collaboration with policymakers on policies to quickly transition to renewable energy is key to achieving climate goals, says AIGCC. “There has been increased participation from a small subset of investors through AIGCC’s policy roundtables and direct engagements.”
However, AIGCC’s report found that, overall, few investors in Asia have established strategies or policies regarding fossil fuels phase-down or transition finance. Of the investors, 24% of asset managers and 19% of asset owners have investment policies on fossil fuels.
Deforestation
Progress on deforestation across the investment community remains relatively nascent, says AIGCC. However, leading investors are considering deforestation in their strategies and policies through risk assessments and disclosures, company engagements and investment decisions.
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AIGCC’s report found that 19% of asset managers and 3% of asset owners have incorporated deforestation into investment approaches.
Investments in climate solutions
Asia needs US$71 trillion in investments to achieve net zero carbon emissions by 2050. There is strong interest from investors to allocate capital to low-carbon companies and clean energy solutions under the right policy conditions.
However, the vast majority of investors have not positioned themselves to capture opportunities in the net-zero transition. AIGCC’s report found that only 12% of investors have committed to increasing investments in climate solutions. Likewise, few investors have formalised climate solutions strategies, targets and metrics.
Investor climate transition planning
Investor net zero transition plans are integral to enabling the net-zero transition of the financial sector. AIGCC’s report found that 33% of asset managers and 20% of asset owners have some form of climate action plan, albeit with varying levels of detail and robustness.
These transition plans could be central to investors’ performance over the long term. With a top-down strategy, leading investors demonstrate how they are addressing systemic climate risks, aligned with their fiduciary duty.
Overall, AIGCC’s report shows that investors have momentum in setting climate strategies and short-term targets, however much more critical action is needed to accelerate the net zero transition. The report also identifies the actions that leading investors have taken to reach the climate objectives that are in the beneficiaries’ interests.
AIGCC CEO Rebecca Mikula-Wright says institutional investors know that climate risks and opportunities are financial risks and opportunities. “Asset owners, as stewards of capital, hold the power to accelerate the energy transition. Now is the time for them to act and lead by example in their respective markets and transition, not only their portfolios but whole economies, to net zero.”
It is now clearer than ever that climate change presents both an existential threat and a world-changing opportunity to the global economy, says MSCI head of APAC ESG & climate Chitra Hepburn.
“Through our collaboration with AIGCC, asset owners and asset managers can better understand where they stand on climate progress, and more importantly, the challenges ahead to effectively convert climate commitments to action,” adds Hepburn, who is also head of South and Southeast Asia. “Clarity, which advances through quality data, tools, indexes and insights, can drive actions and MSCI is committed to enabling clients across the capital ecosystem to get a clear view of the climate transition at different stages of the process.”
