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global Climate 500 INDEX 2015/
TRANSPARENCY
TRANSPARENCY
PREFACE
The AODP Global Climate 500 is the world standard
for assessing the world’s largest investors on
climate-risk management. In a year that has seen
carbon and fossil fuel risk become centre stage in
the climate debate, the question of who owns and
manages the carbon is critical.
ACKNOWLEDGEMENTS
REPORT WRITTEN AND PRODUCED BY:
RACHEL MADEIROS-MHENDE CFA, OLIVER WAGG AND JOSHUA SHEPPARD
THE ASSET OWNERS DISCLOSURE PROJECT GIVES SPECIAL THANKS TO THE FOLLOWING PEOPLE
IN PRODUCING THIS REPORT:
VICTORIA BRYANT, LUKE FAY, ROBERT SCHWARZ, HUGUES LETOURNEAU, PAVEL KIRJANAS,
MARK MCCAW, SERENA RITCHIE, MARCUS MORLEY, ELLIOT LAVERS, GINA SAHOTA, OLIVIER CASSARO,
TRACY NGUYEN, NOZUKO MKETO, DANIEL GOCHER, AADESH GOSRANI, ANDREA BARBERIS
THE ONGOING SUPPORT OF AODP’S FUNDERS IS ACKNOWLEDGED. A FULL LIST CAN BE FOUND ON
OUR WEBSITE (WWW.AODPROJECT.NET).
THE VIEWS IN THIS REPORT REMAIN THOSE OF AODP.
In addition to measuring and reporting their portfolio
exposure, asset owners have come under new
pressure to adjust their core investment processes
to consistently reduce this exposure and manage
third parties whose models and investment decisions
drive that exposure.
Some of the questions we answer include: how are
asset owners rising to the unique challenge of
climate change? Are the leaders accelerating?
Who are the largest laggards? Which country’s asset
owners are most pro-active? Have endowments or
foundations improved as a result of the divestment
movement?
The AODP Global Climate 500 has been produced
by assessing the world’s largest 500 asset owners
including pension funds, sovereign wealth funds,
insurance companies, foundations and endowments.
Funds are rated from AAA through to D grade, with an
extra X category being added for those funds at the
bottom that appear to be doing absolutely nothing to
manage this critical risk.
KNOWN
UNKNOWN
CONTENTS
PREFACE
ABOUT AODP 02/
EXECUTIVE SUMMARY 03/
KEY FINDINGS 05/
DATA 17
NOTES 27
ABOUT AODP
The Asset Owners Disclosure Project (AODP) is
an independent not-for-profit global organisation
whose objective is to protect investments held by
the world’s largest asset owners’ – pension funds,
insurance companies, sovereign wealth funds,
foundations and endowments – from the risks
posed by climate change. It does this by working
with asset owners to improve the level of disclosure
and industry best practice in climate risk assessment
and management.
AODP researches and produces the annual Global
Climate 500 Index, while developing stakeholder
communication platforms and campaigns to drive
the use of the index data. This creates a top-down
and bottom-up approach to driving asset owners to
manage climate risk.
The AODP has a board of senior leaders with
investment, risk-management, business,
trade union, political, academic and environment
backgrounds, including John Hewson, Bob Litterman,
Sharon Burrows and John Connor.
The index provides asset owners (and their
stakeholders, members and beneficiaries) with
valuable insight into the strategies deployed by some
of the largest asset owners in the world in relation
to climate change. The initiative encourages funds
to engage in climate change-related investment risk
assessment through the investment chain, often for
the first time.
Another initiative of the AODP, The Vital Few
(www.areyouthevitalfew.org), piloted a community
of superannuation/pension fund members in UK,
Canada and Australia who have been inspired to take
action to ensure investments made on their behalf
provide for their future prosperity – both financially and
environmentally. They do this by asking the pensions
funds to disclose their current investment assets and
their portfolio climate risk management strategies.
02
EXECUTIVE SUMMARY
WHERE IS THE MONEY TO SOLVE CLIMATE CHANGE?
80
the asset owners
INVESTMENT SPLIT
LOW-CARBON INVESTMENT
2%
CLIMate change exposed
INVESTMENTs
50%
OTHER INVESTMENTS
48%
70
60
$37Tn
PENSION FUNDS
50
40
30
$28Tn
INSURANCE COMPANIES
20
10
$Tn
COST TO SOLVE
CLIMate change
$10Tn
$<1Tn
SOVEREIGN WEALTH
FUNDS
FOUNDATIONS/ENDOWMENTS
aodp research 2012 based on
analysis of stem 2006
With the December 2015 UN Climate Change
Conference in Paris looming large many people
are doubtful the world’s nations will reach a
solution without the successful realignment of the
investment chain, the most important part of the
global financial system.
In turn, the most important link in the investment
chain consists of long-term institutional investors,
known as asset owners. Together they own over
$70 trillion capital, which dwarfs the approximate
$10 trillion required to effect a low-carbon transition.
2014 was an extraordinary year for climate-change
investment. The 350.org fossil fuel divestment
campaign has driven many funds to take a public
stance on climate risk. 350’s great resources
and penetration has meant that there are few
asset owners in the world not considering how
to communicate a climate risk strategy to their
stakeholders.
The ratings methodology behind the AODP Global
Climate 500 is purely performance focussed and asset
owners do not get points for commitments or media
releases. Full, direct disclosure was received on
nearly $5 trillion worth of assets under management,
a doubling from last year’s direct disclosure.
KEY DEVELOPMENTS
CARBON COMPARISON
The key developments over the past year on climate
risk communication include:
7%
/ R
egular announcements by
asset owners on carbon-risk
management
/ Proliferation of low-carbon
investment initiatives
/ Greater acknowledgement of asset
owners’ role in climate action by
politicians and economic agencies
/ Greater commitments (and some
action) by leading asset owners
Only 7% of assets owners are able to
calculate their emissions
1.4%
Only 1.4% of asset owners have
reduced their carbon intensity from
the previous year
2%
Only 2% of asset owners have an
emissions intensity reduction target
for next year
04
KEY FINDINGS
IF ALL FUNDS WERE
ACCELERATING AT THE SAME
RATE AS THE AAA FUNDS WE
WOULD BE MUCH CLOSER TO
SOLVING CLIMATE CHANGE.
The gap between climate
risk management
leaders and laggards
is WIDENING.
This year nine
asset owners
achieved the AAA
rating, four more
than last year.
With the number
of AAA-rated asset
owners rising to
nine, the still small
group of leaders
are accelerating
progress.
Many of the higher rated asset owners have
significantly lower carbon emissions than their
respective indices. We recommend underweighting
carbon, however simply doing this will not create a
low-carbon transition without a full blown capital
switch and increase to their low-carbon investment.
Asset owners are not going to be able to remain
underweight whole sectors for long without adding
alternative low-carbon investments to their portfolio.
However, assuming that the equivalent low-carbon
assets in each sector eventually balance this
underweighting of carbon intensive assets would
release hundreds of billions of dollars into the
low-carbon economy. The implications are simple,
but staggering: leaders are well on the way to solving
climate change, but will only succeed if their peers
join them in moving towards this tipping point of a
capital switch into low-carbon.
With this year’s ratings methodology being
recalibrated more towards performance,
the performance of these AAA funds is even more
impressive. This gap between top and bottom
is exacerbated by an increase in the number of
laggard (D and X rated) funds. The size of the
leadership group rating A or above is interesting.
The mean assets under management (AUM) for the
AODP index is $72 billion, but the mean AUM for
the leadership group rated A and above is actually
$145 billion. This shows that generally speaking
the larger asset owners have built the kind of
internal capacity that allows them to more
pro-actively manage climate risks. However,
it is worth noting that size is clearly not a factor
in leadership per se as there are significant
leadership examples such as Local Government
Super in Australia that ranked number 1 in the
index, with only $7.5 billion under management.
06
KEY FINDINGS
Climate laggards
continue to be stuck with
ineffective climate-risk
management systems,
and are not moving at all.
There is still a general
crisis of transparency
amongst asset owners,
but the tipping point is
close.
There were in total
232 X-rated asset
owners this year
and 192 D-rated,
for a total of 424
laggard asset
owners, or 85% of
the industry.
This year the
number of direct
disclosers to
AODP doubled.
Last year, AODP introduced a new ratings band below
D – the X rating. This was to highlight those asset owners
that are doing nothing material to manage the financially
material risks associated with climate change.
This year the number of X-rated asset owners has
actually increased by 59, party because AODP decided
to remove credit in the ratings methodology for general
policy commitments that in reality had no evidence
of execution or implementation. With no meaningful
points for transparency, some of these asset owners
actually lost points from last year’s score.
For those asset owners with fiduciary exposure,
such as pension funds and possibly endowments,
it is only a matter of time before the recently announced
UK initiative involving AODP and environmental lawyers
ClientEarth is replicated in other jurisdictions.
In addition to the prospect of future legal escalation
around fiduciary duty, there is a new pressure that is
building on all asset owners to do better, which comes
from their peers. Impressive action by leading asset
owners to minimise risks to their stakeholders’ funds,
is being diluted by laggard asset owners resisting such
change either by refusing to do the requisite analysis
or to change processes, policies or culture.
While the AODP index is widely recognised by asset
owners as the leading framework for disclosure,
a large number of them chose not to disclose directly.
In AODP’s experience this is for two reasons: Firstly
asset owners do not want members discovering that
they have no other solution than to rely on their fund
managers to bail them out of a carbon crisis, or that
they rely purely on traditional strategic asset allocations
to manage climate risk. The second reason is more
encouraging as many asset owners have indicated to
AODP that they are midstream in the development of
a carbon-risk management plan and that they would
rather not disclose anything until they are able to
portray their fund’s conduct in a more favourable light.
While we are still concerned about the level of
overall transparency, this year’s improvement in the
number of disclosing asset owners together with
the promises for next year give us confidence that
we are close to a tipping point. None of this direct
transparency impacts our ability to rate asset owners
however, as AODP rates the asset owners regardless
of direct disclosure and those asset owners that are
active or commencing their journey are generally
proud of their achievements, and keen to show their
stakeholders that they have nothing to hide.
08
KEY FINDINGS
Many funds have simply
not done their homework
and are relying on
short-term oriented
fund managers to save
them in the long term.
Only a very few asset
owners have implemented
some protection against
a financial crisis.
Only 17 asset
owners have done
any systematic
scenario analysis
on climate risk.
Protection can
only be afforded
by creating and
implementing a
diversified hedging
strategy.
The AODP Best Practice Methodology that is linked
to the ratings methodology describes seven different
but parallel market-based pathways to a low-carbon
economy, any of which could have the same devastating
impact on a portfolio as if governments were forced
to implement 2 degree carbon-pricing. The traditional
processes within many asset owners make portfolio
wide assessment of systemic risks difficult and the
default strategy of many asset owners is to assume
that their fund managers will be able to sell and exit
any portfolio wide risks once such an acceleration of
climate risk begins. This is of course a fallacy as when
it comes to systemic risks such as climate change
(or sub-prime mortgages) there will be no liquidity in
markets for stranded assets and so it will be impossible
to protect value.
Some of the best performing leaders in this year’s index
have recognised this and have made statements about
abandoning indexation as an ineffective climate risk
management tool, essentially recognising that shortterm markets continue to misprice the risk. These
asset owners are using low carbon indexes and other
asset classes to hedge climate risk while addressing
the distinctive climate risk issues within their equity
portfolios to form an overall approach.
Given the lack of mitigation options available
for climate risk, protection can only be afforded
members by those managing their assets, creating
and implementing a diversified hedging strategy.
This might include some divestment, some
underweighting, strong engagement with blue chip
high-carbon companies and a low carbon allocation.
In particular, the low-carbon investments are the
ones that will increase most in value once highcarbon investments are priced out of the market.
The reason for this is because any carbon pricing
mechanism implemented will create higher earnings
forecasts and thus higher valuations for assets, such
as renewable energy projects which currently have to
compete on largely equal terms, as many investors
have not allowed any forward carbon pricing to impact
the investment models of such assets.
Whilst innovation is one driver of competitiveness for
clean assets against fossil fuel based ones, there are
other forces such as attempts at carbon pricing and
off market capital shifts by some leading investors
who have decided to reduce their high-carbon
investments -some base this on scenario analysis
others do so for ethical reasons.
10
KEY FINDINGS
There is an increasing
sense of accountability
around risk management.
Change is possible.
Many asset owners
have improved their
communications
functions in the
past year realising
the increasing
pressure to explain
their investment
positions.
Changing fund
processes to better
manage climate
risk is achievable
without significant
return sacrifice.
Sovereign wealth funds and insurance companies have
not made much ground in recognising accountability
over climate risk to their stakeholders. However,
pension funds, foundations and endowments certainly
have. Whilst foundations and endowments do not have
members as such, they recognise the responsibility for
enhanced stewardship that comes with advantageous
tax treatments of their capital and some have
stakeholder groups such as university alumni and
committees who are deeply aware of climate risk.
Many pension funds have recognized that the age of
new member accountability and financial democracy
has arrived. The divestment movement run by 350.org
and similar movements such as Share Action’s
Greenlight campaign and AODP’s Vital Few have
generated a new recognition from pension funds about
the need to explain their long-term strategies.
Enough leaders have emerged to prove that changing
fund processes to better manage climate risk is
achievable without significant return sacrifice and
without immediate government carbon pricing. We
would normally expect there to be some cost to the
implementation of a climate hedging strategy that
might in the short term inhibit the returns of asset
owners implementing climate-risk management
strategies. But so far this has not been the case.
However, these stronger returns may be medium term
only as asset owners looking to underweight carbon
in the last few years, as part of their hedging strategy,
would have done exceptionally well due to the collapse
in fossil fuel based commodity prices.
Many asset owners have improved their communications
functions in the past year realising the increasing
pressure to explain their investment positions, but
also as a genuine attempt to communicate to peers
the progress that is possible. However, some asset
owners are still using the media to highlight particular
examples of progress without being transparent on their
overall position leading to accusations of ‘green wash’.
12
KEY FINDINGS
REDUCING PORTFOLIO
CARBON EXPOSURE IS KEY TO
MANAGING CLIMATE RISK.
Only 7% of asset
owners calculate
their portfolio
carbon footprint
and only 1.4%
have a target to
reduce this.
A key metric that AODP applies to its ratings
methodology is the level of portfolio carbon exposure,
strategies to reduce the exposure and the success or
failure of these strategies. Currently, only 35 asset
owners (7%) calculate their portfolio carbon footprint
and only seven asset owners (1.4%) have a target to
reduce this. This is despite the encouragement by
various initiatives such as the Montreal Carbon Pledge,
run by the UN Principles for Responsible Investment.
However, there have been some exceptional examples
of funds reducing their portfolio carbon exposure
within certain asset classes. For example one of our
AAA-rated asset owners reduced its portfolio carbon
exposure in their equities portfolio by 23% in a single
year. With the growth of-low carbon indices we expect
to see this kind of example increase next year.
12
HOW ARE THE WORLD’S
LEADING INVESTORS
MANAGING CLIMATE RISK?
AODP GLOBAL
CLIMATE 500
2015
DATA
BY RATING
TABLE 01 / ASSET OWNERS in each rating category
rating
asset owners
PER CATEGORY 2015
2015
(%)
asset owners
PER CATEGORY 2013-14
2013-14
(%)
AAA
9
1.8%
5
1 .1%
AA
7
1.4%
10
2.2%
A
8
1.6%
12
2.6%
BBB
9
1.8%
6
1.3%
BB
8
1.6%
10
2.2%
B
8
1.6%
10
2.2%
CCC
9
1.8%
16
3.5%
CC
9
1.8%
9
2.0%
C
9
1.8%
16
3.5%
D
192
38.4%
191
41.7%
232
46.4%
173
37.8%
500
X
TOTAL
X
458 These funds were rated X by the AODP analyst team where they could find no evidence at all on how
these funds are managing climate change.
18
DATA
BY Country
BY REGION
TABLE 02 / COUNTRY RANKING TOP 10
TABLE 03 / REGIONAL RANKING
1
NORWAY
1
AUSTRALASIA
2
AUSTRALIA
2
SCANDINAVIA
3
SWEDEN
3
CANADA
4
5
6
FRANCE
UNITED KINGDOM
NETHERLANDS
4
5
6
7
SOUTH AFRICA
=7
MIDDLE EAST & AFRICA
8
DENMARK
=7
CENTRAL & SOUTH AMERICA
9
10
NEW ZEALAND
CANADA
9
REST OF EUROPE
UNITED STATES OF AMERICA
ASIA
UNITED KINGDOM
20
DATA
BY WORLDVIEW
MAP 01 / RATINGS GLOBAL OVERVIEW
RATINGS KEY
22
TABLE 04 / ASSET OWNER TYPE RANKING
TABLE 05 / THE 500 ASSET OWNERS
PENSION FUNDS
2
INSURANCE COMPANIES
3
FOUNDATIONS/ENDOWMENTS
4
SOVEREIGN WEALTH FUNDS
375
75
77 20.5
INSURANCE COMPANIES
66
13
14
21.2
SOVEREIGN WEALTH FUNDS
39
08
05
12.8
20
500
04
100
04
100
20
PENSION FUNDS
FOUNDATIONS/ENDOWMENTS
TOTAL
% IN TOP 100
1
% OF SURVEY
BY OVERVIEW
NUMBER RATED
BY TYPE
NUMBER IN TOP 100
DATA
24
DATA
BY PORTFOLIO RETURN
BY LEADERS
TABLE 06 / 2014 PORTFOLIO RETURNS OF THE 9 AAA RATED ASSET OWNERS
TABLE 07 / 2015 AODP global climate 500 top rated asset owners
RANK
fund
COUNTRY
NET PORTFOLIO RETURN / 2014
1Local Government SuperAUSTRALIA
9%*
2Kommunal Landspensjonskasse KLPNORWAY
8.2%
3CalPERSUSA
6.5% 4ABPNETHERLANDS
5Environment Agency Pension FundUK
6
New York State Common Retirement Fund (NYSCRF)USA
7AustralianSuperAUSTRALIA
14.5%* 8.4% 13.02%*
13.88%*
8Pensioenfonds Zorg en Welzijn (PFZW)NETHERLANDS
15.5%
9
15.7%
*
Fjärde AP-Fonden (AP4)SWEDEN
These Asset Owners returns are for the 2013-14 period
2015 COMPARISON ASSET OWNER NAME
rank to 2014
COUNTRY
ASSET OWNER type 2015
RATING
1
+1Local Government SuperAustraliaPension
AAA
2
+36Kommunal Landspensjonskasse KLPNorwayPension AAA
3
0CalPERSUSAPension
AAA 4
+28ABPNetherlandsPension
AAA 5
-4Environment Agency Pension FundUKPension
6
+21New York State Common Retirement Fund (NYSCRF)USAPension
AAA 7
-1AustralianSuperAustraliaPension
AAA 8
-4Pensioenfonds Zorg en Welzijn (PFZW)NetherlandsPension AAA
AAA AAA 9
+54
10
+35Pension & Health Benefits of United Methodist ChurchUSAPension AA 11
+93Andra AP-Fonden (AP2)SwedenPension AA 12
-2Aviva plc - InsuranceUKInsurance
13
90
First State SuperAustraliaPension
AA 14
+1
California State Teachers’ Retirement System (CalSTRS)
USAPension
AA 15
-10
VicSuper
AustraliaPension
AA 16
+70
Universities Superannuation Scheme
UKPension 17
-5
CareSuper
AustraliaPension
A 18
+80
PKA A/S
DenmarkPension
A 19
+36
New York City Employees Retirement System (NYCERS)
USAPension
A 20
+35
Teachers’ Retirement System of the City of New York (TRS) USAPension
A 21
+139
United Nations Joint Staff Pension Fund
USAPension
A 22
+19
Government Pension Fund - Global (GPFG Norway)
NorwaySovereign Wealth A 23
N/A
ERAFP (Etablissement de retraite additionnelle de la Fonction Publique)
FrancePension
A 24
+10
Allianz SE
GermanyInsurance Fjärde AP-Fonden (AP4)SwedenPension
AA AA A NOTES
THE AODP RATINGS
METHODOLOGY
The Asset Owners Disclosure Project (AODP) 2015 Global Climate 500 Index is built from data acquired directly
from the largest asset owners which are invited to respond to the survey and by a research team using publicly
available information.
The AODP research team use the collected data to score and rank the funds according to the AODP ratings
methodology which uses multiple data sets across five main aspects of an asset owner’s climate change
performance:
1.
2.
3.
4.
5.
Transparency
Risk Management
LOW-CARBON INVESTMENT
Active Ownership
Incentive Chain Alignment
RANKING
The AODP survey also ranks each asset owner on the basis of its score.
RATING
Once the asset owners are ranked, a comparative rating is awarded to each asset owner. The AODP rating system
is a unique feature of the AODP survey. The larger survey meant that the benchmarks for all categories in the
AODP rating system were raised for the 2015 survey.
Copies of the AODP 2015 survey and the survey methodology are
available on the AODP website
W W W. A O D P R O J E C T. N E T
28
www.aodproject.net