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The Institutional Investors Group on Climate Change (IIGCC) is a leading European organization driving investor collaboration on addressing climate change. The IIGCC has over 330 members, mainly pension funds and asset managers, from 22 nations, representing more than €39 trillion in management assets to pursue a more sustainable, profitable, and low-carbon future.
On September 23rd, 2021, researchers from the IIGCC released Building Resilience to a Changing Climate: Investor Expectations of Companies on Physical Climate Risks and Opportunities, an executive report outlining investor expectations towards identifying and responding to physical climate risks and opportunities. This document underscores the necessity for global enterprise organizations to develop corporate climate resilience strategies to define the materiality and costs of risks. In addition, it includes actions and investments needed to mitigate impacts by implementing innovative solutions.
"Companies cannot afford to ignore the impact that climate change could have on their businesses. It is more important than ever that investors are able to understand the risks and associated financial impacts that companies are facing when it comes to the physical effects of global warming. This means that they can effectively identify sectors and individual businesses that are resilient or well-placed to adapt, and increase engagement with those that don't have an effective risk management strategy in place," explains Stephanie Pfeifer, CEO, IIGCC. "This set of investor expectations is intended to provide a framework to facilitate effective engagement with companies and support them in adapting accordingly."
Alongside the ESG recommendations set forth by the IGCC, the organization identified more than 50 highly exposed global companies, including: Kerry Group, Swatch, Valaris, Centrica, Nestle, FirstGroup, Logitech International, Clorox, Campbell Soup, Delta Air Lines, Nan Ya Plastics, Nippon Express and Nissin Foods Holdings that they believe should take immediate actions to reduce direct and indirect climate risks.
"In a world where temperature rises are becoming unavoidable, investors are faced with the reality that we cannot insulate our investments from the effects of climate change. Instead, we need to be able to understand the material risks that companies are facing so that we can engage with them appropriately and build resilient portfolios in line with investors' fiduciary duty. By setting out our expectations of companies, we can support companies in improving their governance, management and disclosure in this area." adds Marion Maloney, Head of Responsible Investment & Governance, Environment Agency Pension Fund.
Listed companies generate up to 40% of the industrial emissions responsible for driving climate change. Reducing industrial pollution along organizations' value chains requires addressing Scope 1, 2, and 3 risks. 'Scope 1' covers direct emissions by a company – for instance, using fuels to heat a building or in an industrial process. 'Scope 2' is connected to purchases of electricity. 'Scope 3' covers all other indirect emissions: the energy used by a supplier, the use of equipment by customers, or the transportation of goods by a third party.
The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for generating and dispersing the leading scientific research on climate change. The IPCC's Sixth Assessment Report on Climate projects a modest increase of 1.5°C within 20 years without immediate actions to reduce industrial pollution.
Researchers believe that an increase of this magnitude will lead to a wide variety of environmental risks. For instance, a rise of 2.3°C would increase the average drought time by about two months. Increasing 3°C would create a 100% probability of at least one ice-free Arctic summer, dramatically raising water levels worldwide.
Around the world, floods, wildfires, and severe storms have taken place with greater frequency in recent years, increasing the need for investment managers to think pragmatically about how to allocate resources in a way that responds to direct and indirect risks caused by climate change.
The floods and wildfires that have taken place across Europe, the US, and Australia over the last few months also highlight the urgency of understanding physical risks and assessing the direct and indirect impacts on companies and investment portfolios. According to research conducted by the IGCC, climate change is exposing public and private organizations to risk in the following focus areas:
Transition risks
Physical risks
Microeconomic Risks
Macroeconomic Risks
Financial risks
Market risk
Underwriting risk
Operational risk
Liquidity risk
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