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ESG

Investors urged to take holistic approach to portfolio’s climate-change risk

Institutional investors should consider whether and how climate change risk is built into their portfolios and work to understand measures taken by money managers to address this risk, a new report states.

The report, launched by money manager DWS, is a collaboration among the firm and experts from the fields of science, law, investment consulting, and actuarial and accounting services. It brings together views and advice on how institutional investors should manage climate risk and how they can use their influence to help shift society toward sustainability.

The first contribution to the report is by the British Antarctic Society, warning "climate change is a threat to financial stability."

Among the contributions to the overall report is a piece by law firm Pinsent Masons, which said that irrespective of their values, "all trustees now need to recognize the importance of having a proper governance structure around their approach to climate risk."

While Pinsent Masons' submission acknowledged there are challenges related to this — including a "lack of regulatory clarity and methodological issues ... these potential barriers should no longer be the 'excuse' for trustees not to engage with this issue."

The contribution by the law firm said trustees should at a minimum talk to their investment consultants about whether and how climate change risk is incorporated into their recommendations, as well as understanding the rationale behind the approach consultants have taken. Trustees should also discuss their own beliefs on climate risk and should develop a written policy on the issue — as part of a wider environmental, social and governance policy.

In its own contribution to the report, DWS set out a list of opportunities and actions by asset class, such as considering thematic strategies within equities; targeting low-carbon technologies within general infrastructure strategies; and by looking at opportunities to support the expansion of new technologies, such as in China, via private equity funds.

"The aim of this report is to encourage all institutions to take stronger action to address climate change," said Petra Pflaum, chief investment officer for responsible investments at DWS, in a statement accompanying the report. "Climate change should be analyzed and valued like other risks. Divesting, or over/underweighting stocks only shifts financial risk and does not truly change real (capital expenditure) decisions unless investor influence is also used to encourage companies to integrate ESG factors into their strategy and policymakers to improve policies. A growing number of asset owners are setting engagement expectations."

The full report is available for download on the DWS website.