In cautioning against a disorderly and disruptive transition arising from a likely forceful near term policy response to climate change, the UN Principles for Responsible Investment (PRI) has, through its Inevitable Policy Response (IPR) project,1 sought to prepare investors for these climate transition risks. By forecasting a central scenario of accelerated and disruptive policy actions, occurring between 2023 and 2025, the PRI identifies eight critical policy levers, of climate-related policy and technological developments that are likely to emerge between now and 2050, to ultimately secure an accelerated and just transition to a low carbon emissions world. These are illustrated in Figure 1.
Figure 1: The PRI's The Inevitable Policy Response forecast policies could secure an accelerated and just transition to a low carbon emissions world
CARBON CAPTURE AND STORAGE (CCS) IS THE PROCESS OF CAPTURING WASTE CARBON DIOXIDE (CO2) USUALLY FROM LARGE POINT SOURCES, SUCH AS A CEMENT FACTORY OR BIOMASS POWER PLANT, TRANSPORTING IT TO A STORAGE SITE AND DEPOSITING IT WHERE IT WILL NOT ENTER THE ATMOSPHERE.
Source: PRI, The Inevitable Policy Response, December 2019.
Against this backdrop, asset managers and asset owners in analysing the potential transition and physical risks across the various asset classes held in an institutional portfolio, can adopt a number of non-mutually exclusive mitigating actions to address them, by choosing to engage, embed, effect and/or exclude, as appropriate.
Of course, who exerts this influence is principally determined by whether a mandate is segregated or pooled. Within a segregated mandate the asset owner is in the driving seat, whereas in a pooled mandate, it is the asset manager. That said, the asset owner can, of course, make the manager aware of their climate policies and ultimately decide whether to hire or deselect the manager.
In considering these potential mitigating actions, Figure 2, below, separates the asset classes held within most institutional investor portfolios into three broad categories: listed and private equity; investment grade and alternative credit; and real assets, comprising real estate and infrastructure. It then analyses the potential responses (engage, embed, effect and/or exclude) to the climate change risk posed by each asset class.
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