As the global elite wrangle with the costs of climate risk on the Alpine slopes of Davos, investment managers are lining up to strengthen their commitments.
Switzerland's two biggest banks muscled in on the environmental investing arena to amplify what they are doing to protect investors from climate risk and boost natural capital investments, two themes dominating the agenda in Davos as the world’s change makers arrived on Swiss soil for the annual World Economic Forum.
The world's largest wealth manager UBS used the occasion to launch its new sustainable advice programme, "Advice SI", to help clients manage climate risk more effectively. “Our private wealth clients are eager to build focused portfolios around climate change and other specific sustainable investing issues that they care about,” CIO for wealth management Mark Haefele said, adding that the new tool is “designed to help them invest in climate-related opportunities as well as mitigate associated risks.”
The group said it plans to map climate data to approximately 10,000 issuers, and will partner with multilateral development banks to help drive scale. It is also adding a green bond issuance as an investment-grade credit substitute to private wealth portfolios. “Investors tell us they're looking for climate smart solutions. But they need actionable tools and techniques to guide capital allocation,” the Swiss bank said.
Recent estimates from MSCI and the United Nation's PRI suggest that failing to act on climate risk could cost equity markets $2.3 trillion in the near term, while the economic opportunities of a low-carbon transition could harvest up to $26 trillion in return.
Speaking for the group’s asset management division, Michael Baldinger said: “Many asset owners now recognise climate change as one of the largest systemic risks in their investment portfolios.” In response to that, UBS said it has "developed ways to systematically identify, measure and report on climate change risks in portfolios" and is becoming more climate aware across asset classes.
With few better stages than Davos to appeal to those weighing the risks and rewards of tackling climate change, the Swiss bank used the event to urge more companies to follow guidelines set out by the Task Force on Climate-related Financial Disclosures (TCFD) as a way of generating more and better data for the industry to realign capital. Other steps financial institutions can take were laid out in a sobering white paper co-released by UBS and the WEF titled Becoming Climate Aware: Mobilizing Capital To Help Meet Climate Change Goals. Holding back progress has been the lack of standardised data and investors still too wedded to short-term goals, the bank said.
As stark warnings and sometimes theatrical optics have unfolded in the Swiss Alps, with President Trump in one corner and climate activist Greta Thunberg in another, Credit Suisse also used the moment to publish survey results about investor uptake in the “blue economy”.
Results of a recent global study of institutional investors by the bank revealed that a third of respondents see "blue economy" investing among the most important topics of the next decade, but admitted that industry expertise is low. Half those polled expressed “high interest” in the topic but three quarters had not evaluated portfolios for their impact on oceans and a fifth admitted being completely unaware of exposure risk to oceans in their investments.
Where investors saw the greatest opportunities were in climate change mitigation and adaptation, tackling marine plastic and other pollution, and supporting sustainable fisheries and aquaculture. The poll was conducted among 328 institutional investors across 34 countries, with more than half in Europe, and split 59 per cent across asset managers and 41 per cent across asset owners. The majority are listed equity, fixed income and multi-asset strategy investors with a combined AuM of over €50 billion.
While results showed that there are already opportunities in early stage, impact and fixed-income investments, with infrastructure and listed equity allocations becoming more available, the main investor stumbling blocks continued to be a lack of investment grade projects, next to no internal expertise, and few projects being offered by managers for asset owners. The survey also highlighted a dearth of innovative financing, including scalable well-managed PPPs (public private partnerships) to help develop the blue economy sector.
These sorts of issues have been routinely levied across philanthropy and impact investing as preventing solutions happening at pace and scale.
Marisa Drew, CEO of Credit Suisse’s impact advisory and finance department, said that the WWF values global ocean assets at around $24 trillion in GDP terms, making it the seventh largest economy in the world. But despite the opportunities, she said, oceans are one of the least invested in of all the UN Sustainable Development Goals, “particularly from a private capital point of view" but the investment theme is expected to "increase significantly over the coming years.”
Dennis Fritsch, researcher at Responsible Investor, a co-sponsor of the study, framed the issue this way: “The transition from the current short-term, destructive approach to ocean assets towards a more climate-secure and sustainable blue economy presents a tremendous economic and sustainable investment opportunity. The public and governments are reacting to the dire state of the ocean; however, not much is known about investors’ awareness of the impact of their investments on the marine environment and how this may subsequently affect their portfolios’ performance and value. Therefore, we wanted to question whether conditions exist for private capital to flow towards a sustainable use of the ocean. And if not, what needs to change.”
The cost of climate mitigation and integrating ESG more comprehensibly into the investment process is something firms will need to grapple with over the next few years and may set off a new wave of consolidation as investors seek economies of scale.