The planet is getting hotter. According to the World Meteorological Organization, 2015-2019 was the warmest five-year period since records began1. We are all aware by now, of the climate emergency- and of the fact that we have only ten years at most, before reaching the point of no return.
One thing is clear; governments cannot solve the problem on their own. So how can the investment industry play its part? By the end of 2019 close to $90 trillion of assets were being managed by Asset Managers around the world2 - to put that into perspective, it is over six times China’s GDP! With such large amounts to invest, Asset Managers have a real opportunity to drive sustainable change around the world.
Is climate truly an investment topic?
Climate change is becoming a key topic for investors around the world. There are several reasons for this, the first being a question of investment risk management as investors seek to manage climate-related transition and physical risks. Identifying these risks and accounting for them in the investment process will lead to better long-term investment decisions. A further risk to consider is regulation. With a constantly evolving regulatory landscape climate can be an important consideration for investors as new climate related principles are implemented around the world.
On the other hand, investors do not like to miss return opportunities and climate investments have shown some promise in terms of their risk-return ratio. An analysis of MSCI climate indices over the past five years is a simplistic indicator of this. Across all time periods and geographies, the climate version of the index has shown consistent outperformance compared to the parent index.
Positive Climate Index Performance
Past performance does not guarantee and is not indicative of future results
Source: MSCI as at 31 July 2020 (Indices shown are MSCI World Climate Change Index, MSCI EM Climate Change Index, MSCI Europe Climate Change Index and MSCI AC Asia Pacific Climate Change Index)
The practicalities of considering climate
Investors looking to incorporate climate into their portfolios historically focused on impact investing strategies or active investment solutions. However, index approaches to climate investing do exist, and have done for some time; in fact, Amundi was at the forefront of low carbon index innovation when they co-developed the MSCI Low Carbon Leaders index series with FRR (French Pension Reserve Fund) and AP4 (Swedish National Pension Fund) in 2014. Improved data quality and addition of comprehensive climate index labels from the European Union are breeding a new generation of climate change indices, meaning investors can use index investing to incorporate climate goals in their portfolios more effectively.
The EU Benchmark Labels
The EU Climate Transition Benchmark (CTB) and Paris-Aligned Benchmark (PAB)3 labels are the first pan European labels for sustainable investment indices; they provide investors with a clear and transparent framework for sustainable investing. The two labels require specific levels of “self-decarbonisation” of the labelled indices year-on-year as well as ambitious carbon intensity reductions versus the parent index. PAB labelled indices also require specific activity exclusions. Together, the benchmark labels offer a structure for index providers and asset managers to facilitate widespread, cost-effective climate investing. And, the wider climate investing reaches, the greater the impact it will have.
Amundi’s Climate ETF Range
Amundi was one of the first asset managers to launch ETFs managed in line with new EU climate indices. The range covers investors’ core geographies with PAB labelled funds alongside a series of climate change ETFs that are expected to meet the criteria of the CTB label4. Thus allowing investors to incorporate climate simply, cost-effectively and in a way that matches their objectives.
The Amundi uses indices that follow comprehensive positive- and negative-screening, reweighting and scoring methodologies to deliver on their carbon reduction objectives. They also leverage historical data on direct and indirect greenhouse gas emissions to allocate explicitly to the most climate positive companies. This analysis is a combined consideration of company strategy and the transition risks associated with carbon emissions.
Driving impact with climate index investing
When selecting an index approach to climate investing the choice of asset manager is key. Identifying a manager who has a robust engagement and voting strategy can help deliver on climate investment goals. For example, an asset manager who manages a climate ETF but votes against climate-related shareholder proposals would ultimately disappoint an investor seeking real climate impact.
Amundi has a comprehensive engagement strategy comprising continuous engagement, an active voting policy (which saw Amundi vote against management in 55% of shareholder meetings in 2019) and targeted impact engagement on core themes such as environmental strategy, energy use and biodiversity.
Exclusions, divestment and engagement can all be achieved in passive investment strategies, and it is important to select a fund manager who not only “talks the talk” on ESG issues, but also “walks the walk”.
Responsible Investing at Amundi ETF, Indexing and Smart Beta
Amundi was established in 2010 with responsibility as a core belief and was one of the founding signatories of the UN Principles for Responsible Investment5 - and has recently been awarded an A+ across all categories in the PRI6 assessment. Amundi offers a broad range of ESG investment solutions and has an extensive engagement and voting policy, applied equally across both active and index.
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1 World Meteorological Organization, 15 January, 2020
2 BCG article, Global Asset Management 2020: Protect, Adapt, and Innovate (May 19, 2020)
3 European Commission Delegated Regulation of 17.7.20 supplementing regulation (EU) 2016/1011 as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. This regulation sets out minimum technical requirements for EU Climate Benchmarks, as well as a number of environmental, social and governance (ESG) disclosure requirements.
4 Pending index compliance with the CTB label, or an index change
5 The PRI was founded in 2005 with Credit Agricole Asset Management as a founding signatory. Amundi was borne of the merger of Credit Agricole Asset Management with Société Générale Asset Management in 2010.
6For more information visit unpri.org and view the 2020 transparency reports.