Will ignoring climate change and human rights concern investors?
Paul Chandler & Felicitas Weber, UN Principles for Responsible Investment
Long-term Investors increasingly see the benefit of addressing climate change & human rights risks now to safeguard returns in the future.
Companies should use their shareholders’ support to take action on climate and human rights. Investors clearly care about these issues: the Principles for Responsible investment (PRI) is a United Nations-supported network of more than 1350 investors working to integrate environmental, social and governance factors into their investment processes. Signatories to the PRI represent around half of the world’s institutional investment capital or around $59 trillion.
Stop for a moment and compare that to, for example, the $10.2 billion pledged by national governments to the Green Climate Fund as of May this year.
To be fair, contributions to the Green Climate Fund are dedicated to climate mitigation and adaptation while PRI signatories’ capital is almost entirely not. However, this comparison does illustrate the huge scale of private capital available to make a difference compared to that of national governments and intergovernmental organisations. For global challenges like climate change and human rights, private capital – especially that of pension funds, insurance companies, endowments and sovereign wealth funds – will be essential to bridge the gap between the necessary finance and the funding available from governments and intergovernmental organisations.
Addressing these issues is crucial for investors to protect long-term returns and reduce portfolio risks
While climate change and human rights represent a huge global financing challenge, addressing these issues is crucial for investors to protect long-term returns and reduce portfolio risks. Institutional investors are largely ‘universal owners’. This means that their holdings are so widespread across the economy that financial impacts affecting society at large are likely to impact on their overall portfolios, even if some companies or sectors do better or worse. Climate impacts such as extreme weather, food and water scarcity, increasing income inequality, interstate conflict and mass migration all could present a risk to long-term investors.
To put this another way, investors have an interest in a structured transition to a low carbon economy to reduce long-term risks. The Global Investor Statement on Climate Change, endorsed by more than 370 investors with more than $24 trillion in assets under management, makes this very clear and sets out specific requests of policymakers.
In addition to calling for climate policy, investors are also acting themselves to address climate and human rights risks by engaging with the companies they own. They are calling for companies to reduce emissions, to address stranded asset risk and to ensure their lobbying is not inhibiting adequate policies to mitigate and adapt to climate change. Additionally investors are committed to measure and disclose emissions in their investment portfolios through the PRI Montréal Pledge. Some are also changing the structure of their portfolios to direct capital away from polluting industries and towards low carbon solutions. The Investor Platform for Climate Actions showcases all of these efforts and more.
While often seen in isolation, investors are increasingly aware that climate change is part of a set of interrelated global issues. Over the last year we have seen an increase of investor activities aimed at improving human rights due diligence in companies they own. The UN Guiding Principles on Business and Human Rights provide a common due diligence framework for both companies and investors – and investor support for the UN Guiding Principles Reporting Framework continues to grow. The Corporate Human Rights Performance Benchmark illustrates interest among investors to measure progress, as it is the first public human rights benchmark developed by a coalition that includes investors. Moreover, a group of PRI signatories with combined assets under management of $5.7 trillion are also working together to engage extractive companies on human rights risks.
Overall it is clear that long-term investors increasingly see risks related to climate change and human rights as crucial to safeguarding returns. For companies, this should give confidence that acting on these issues is aligned with the interests of their shareholders. We encourage companies to consult documents from investors and others on climate lobbying, on management of climate risk by oil and gas companies and on human rights through the UN Guiding Principles on Business and Human Rights or the PRI’s report for the extractive sector. Alternatively, companies can reach out to their shareholders directly to seek clarity on their expectations.
Growing investor support for climate and human rights can give companies – and the individuals within them – confidence to address these issues and improve long-term financial outcomes for them and their investors alike.