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Lack of Transparency, Climate Action Putting $4.5T in Global Assets at Risk

Image Credit: Air Worldwide

Long-term climate change risks are increasingly informing financial decisions for the world’s biggest investors says a recent report from the London-based Asset Owners Disclosure Project (AODP). Yet, a considerable number of companies in the financial sector, particularly in North America, Asia and the Middle East, show no evidence of any action to address climate change, putting $4.5 trillion in global assets at risk.

Following the ratification of the Paris Agreement in late 2016 and subsequent delivery of recommendations by the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD), 60 percent of the world’s 500 biggest asset owners, with funds worth $27 trillion, now recognize the financial risks of climate change and opportunities in the low-carbon transition. Forty-percent, however, are doing nothing.

“The Paris Agreement sent a clear message of global commitment to tackle climate change. Institutional investors are responding by rapidly scaling up action to tackle climate risk and seize opportunities in financing the low-carbon economy. This is recognized as a key issue by the Financial Stability Board and our Index enables asset owners and managers to report against the framework which will be recommended to the G20,” said Julien Poulter, CEO of AODP.

Europe was named the global leader on managing climate risk, with 190 asset owners worth $15.3 trillion achieving an average CC rating and 20 out of 34 Leaders rated AAA-A. The Netherlands, Scandinavia (Sweden secured the top spot), Ireland, the UK ranked high, while France was applauded for its mandatory climate change disclosure rules.

Europe’s 19 asset managers, which include the ten institutions with the highest ratings overall, achieve an average B rating. The only asset manager to earn an AAA rating is the Netherlands’ $441 billion APG Asset Management. The $1,140 billion Legal & General Investment Management, rated AA, comes second, one of five UK asset managers in the top ten. Asset managers are concentrated in 10 global markets and the six highest rated are all European: Netherlands, Germany, UK, France, Switzerland and Italy.

North America, Asia and the Middle East, on the other hand, present considerable risk, with an average asset rating of D. For the US, Fidelity Investments, Affiliated Managers Group and New York Life Investment Management ranked at bottom of the list. Legg Mason, Vanguard, Capital Group and Wells Capital Management did not fare much better.

A similar story exists for China’s asset owners controlling $2.6 trillion, who were classed as Laggards, a position at odds with the country’s leadership on green finance within the G20 and its ambitious plans to invest in renewables, suggesting that there may be significant action that is not being disclosed. Gulf states present an even larger risk.

“It is shocking that many pension funds and insurers are still ignoring climate risk and gambling with the savings and financial security of millions of people. As the number of these laggards falls, their exposure to market repricing grows significantly higher and a time may be approaching when it is too late to avoid portfolio losses,” he added.

AODP rated asset owners and managers on three capabilities which align with the key areas highlighted by the TCFD: governance and strategy, portfolio risk management and metrics and targets. It aims to provide an effective framework for them to meet and, ideally, exceed any climate disclosure guidelines endorsed by the G20. Institutions are graded from AAA-A-rated Leaders to D-rated institutions taking their first steps on climate risk. Those providing no evidence of action are rated X and classed as Laggards.

Overall, the report suggests that institutions are rapidly scaling up their action on climate risk and the transition to a low-carbon economy. As increased transparency and sustainability strategies become the norm, companies who turn a blind eye to climate change risks will be faced with increasing pressure to adopt strong sustainability strategies.


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