Fund Solutions

Investor Framework to Focus on Physical Risks of Climate Change

Investors need to be accounting for adaptation alongside mitigation, IIGCC says. 

The Institutional Investors Group on Climate Change (IIGCC) is developing an investor framework to help asset owners and managers measure and improve the climate resilience of their investments.  

The European membership body for investor collaboration on climate change has published a discussion paper to support the development of its planned Climate Resilience Investment Framework (CRIF), which will introduce guidelines for addressing asset, portfolio and systemic risks posed by the physical impacts of climate change.  

The framework structure will cover governance and strategy, targets and objectives, strategic asset allocation, asset class alignment, and policy advocacy and market engagement.  

“It can be hard for an investor to understand how significant the changing climate is on an investment portfolio or spot the investment opportunities which can help build resilience,” said Marion Maloney, Co-Lead of IIGCC’s Adaptation and Resilience Working Group and Head of Responsible Investment and Governance at the Environment Agency Pension Fund.  

“I hope IIGCC’s CRIF is the impetus for wider action across the investment community and that together we can help build a clean and climate resilient future.” 

The discussion paper said that there has been a welcome increase in investor commitments to mitigating the impacts of climate change in investments, most notably through decarbonisation targets, but noted slower progress on understanding and investing in climate resilience.  

A group of investors representing US$10 trillion in assets called on companies to identify and respond to physical climate risks last year. Global climate resilience financing will need to reach US$300 billion per year by 2030 and US$500 billion a year by 2050, according to a 2021 UN Environment Programme report.  

Stakeholders can submit feedback to the discussion paper until 14 October. Following road testing of the initial recommendations, the IIGCC will release components of the framework “on an iterative basis” throughout 2023 and beyond. 

The IIGCC has more than 375 members across 23 countries, collectively managing over €51 trillion in AUM. 

Making new commitments 

Subject to feedback, the CRIF will require investors to adopt a distinct set of new targets alongside their existing net zero commitments.  

“There are important differences between net zero alignment and alignment with climate resilience objectives which will likely necessitate separate commitment vehicles,” the report said. “Net zero goals are quantitative, clear and pathway-reliant, whereas climate resilience goals are more process-based and context-specific. In addition, the data required for alignment with climate resilience objectives is more granular, location-specific and typically harder to obtain.” 

Recognising that the physical risk and resilience data landscape is “nascent”, the discussion paper has proposed a range of indicators across the framework’s core themes, which can evolve into quantitative targets in the future.  

Under the engagement theme, the IIGCC said asset owners can track the percentage of asset managers they have asked to report on climate resilience in accordance with the CRIF. It also suggested asset owners include climate resilience in their stewardship policies and practices, and also disclose the number of investment mandates that incorporate expectations relating to climate resilience.  

As an initial step towards defining an overall climate resilience commitment for investors, the IIGCC has also proposed possible components, including recognising the existence of limits to climate adaptation and resilience, pledging to support and encourage governments to address climate-related vulnerabilities at a systems-level, and acknowledging that this commitment aims to supplement mitigation efforts, not replace them.  

Stephanie Pfeifer, CEO, IIGCC, said: “Not only does the proposed CRIF aim to help investors better understand their exposure to physical climate risk, but it also seeks to promote investor action that will build climate resilience at an asset, portfolio and wider societal level. We look forward to collaborating with interested parties on the future development of the framework.”    

Connecting frameworks 

The CRIF will be designed to work in tandem with IIGCC’s existing Net Zero Investment Framework (NZIF) and Net Zero Stewardship Toolkit.  

First established in 2019, the NZIF outlines the recommended scope, metrics and targets, and implementation actions investors can use when aligning assets with their net zero ambitions.  

Used by signatories of the Net Zero Asset Managers initiative, Net Zero Asset Owner Alliance and the Paris Aligned Asset Owners to guide efforts to achieve net zero emissions globally by 2050 or sooner, NZIF currently covers listed equities, corporate fixed income, sovereign bonds, real estate, private equity and infrastructure.  

The Net Zero Stewardship Toolkit was developed in partnership with UK pension scheme Railpen, consisting of six key steps codifying best practice for asset owners and managers to make sure their net zero-focused engagement priorities and objectives are aligned.  

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