Bad Data, Old Thinking Prevent Climate Risk Integration in Portfolios: CDPQ, Pathstone, Rockefeller Foundation

Institutional investors are increasingly working to ensure that their investment portfolios are properly protected against climate risk. That’s easier said than done, though, so they’re taking a multi-pronged approach, including putting pressure on asset managers. Meanwhile, there’s movement in Congress to force greater, and more systematic, disclosure of climate risks that publicly traded companies face.

There’s still a ways to go, however, and many portfolio managers remain hobbled by poor data, outmoded financial models and even old ways of thinking. Simply put, “The climate crisis is not currently being priced into portfolios,” said Mark Peters, managing director at multi-family office Pathstone, speaking at a recent CleantechIQ panel discussion in New York.

That may be starting to change, however, with asset owners leading the charge. Last month, the nonprofit Ceres launched a new program, the Ceres Accelerator for Sustainable Capital Markets, that will lobby bodies like the Federal Reserve and the Securities and Exchange Commission to get them to force action on climate change disclosure and action; and also working with pension and other large investors to move their portfolios to net-zero emissions as soon as possible.

The program will “provide a necessary lever for investors to address systemic financial climate risks more quickly and collaboratively,” California controller Betty Yee said in a statement. She’s a board member at CalPERS and CalSTRS as well as Ceres.

“Current efforts are falling short — and the financial regulators and policymakers that govern our capital markets need to address climate change as a systemic financial risk,” said CalSTRS CEO Jack Ehnes, also a director of Ceres.

In July, the Climate Risk Disclosure Act was introduced to both houses of Congress. It would direct the SEC to issue rules around what, and how, public companies must disclose about their climate risk, including each company’s direct and indirect greenhouse gas emissions and how its valuation would be affected if climate change continues. Neither chamber has passed the legislation as yet, and it seems unlikely that the Republican-controlled Senate would approve such a bill — let alone that President Trump would sign it.

Speakers at the CleanTechIQ panel pointed out many other reasons for the general failure to incorporate climate risk into portfolios. For instance, Peters noted that profitability forecasts are typically based on old models and trend lines that may not remain accurate as the climate shifts.

Existing financial forecasts “look at past data. But they have very little information as to how things may unfold in a new environment,” Peters said. “We are in a new environment, one that’s completely uncertain in terms of climate risk and in terms of the energy transformation and what the energy mix will look like. Those two things are very critical to the whole equation going forward — and many, many analysts are getting it wrong.”

Similar words came from Bertrand Millot, head of investment stewardship at giant Canadian pension Caisse de dépôt et placement du Québec, or CDPQ. “Climate risk is complicated. It’s extremely complex,” Millot said. And because of the lack of relevant data and trend lines that Peters referenced, “People just don’t know how to look at this thing. The usual financial thinking does not lend itself to capturing climate risk.”

He added:  “We’ve been trained to think finance; we’ve been trained to think statistics. But the world is changing and you need to think differently.”

Elizabeth Yee, managing director for climate and resilience at The Rockefeller Foundation, agreed. “Modeling has also been a challenge,” she said. “Understanding what the climate risk is that we’re actually managing to — that’s a core piece of how we’re thinking and trying to figure out where we can also be impactful.”

The failure to incorporate climate risk could be systemic.

“Perhaps the upbringing through MBA programs and financial programs hasn’t opened the door to different types of concepts for thought,” Peters said. “You might have folks that only focus on the profit as they can extrapolate it now, rather than the myriad of qualitative factors that need to be brought into play, using something similar to an ESG lens.”

Whatever the cause, he added: “There clearly needs to be a broadening of perspectives, and different approaches, in order to look at the climate risk framework.”

Even for those investors and portfolio managers who are committed to integrating climate risk into their investment process, challenges persist. Chief among them remains getting solid, reliable data.

“We all know the data from existing sources is imperfect, in terms of its frequency and its completeness,” Peters said. “A very clear perspective on the data, how it’s assembled, and how it can be used, is really important.”

He’s somewhat optimistic on this point, in the longer term at least. “The data will continue to get better. It will be more timely, it’ll include inputs from other sources like social media or news, among others, and it will involve more real-time information as well.”

In the meantime, some investors, asset managers and consultants have developed their own methods to assess climate risk and its impact on investments. But it remains a work in progress.

CDPQ, for instance, has looked at transition risk — the risk that companies face from the uncertainties around a changing climate and a changing energy mix — but it hasn’t been too productive, Millot said. “It is so immensely complex. The little work we’ve seen done, by service providers and by ourselves, it depends on the assumptions, and the numbers are crude.” He added that, because of this complexity, it’s very difficult to tell if, say, ExxonMobil or Chevron is more at risk from climate change. “I’m not sure if they are even able to say.”

Until the data really improves, however — and even after — there are things that companies can and should do to improve the data, and to increase the integration of climate risk information.

“It’s critical for banks to start thinking about ESG and climate in the executive suite,” said Alzbeta Klein, director and global head of climate business at the International Finance Corp. “We need to take ESG out of the dusty corners and move it to the C-suite. That’s what always makes a difference. And we need to make sure that banks take ESG into account when making their investment decisions.”

Millot agreed. “It’s key, in the companies that we invest in, that ESG issues and carbon issues are talked about at the most senior level, and throughout the organization.”

CDPQ is positioning itself as a leader in the sector. It recently signed on as a founding member of the UN’s Net-Zero Asset Owner Alliance, which commits the pension to moving its investment portfolio to net-zero greenhouse gas emissions by 2050. In April, it said it would prioritize sustainability, and factor in climate change, in all of its investments.

The giant pension also has other ways to help ensure its managers and employees are thinking about climate risk. “You need to change people’s thinking,” Millot said. “In the various documents we send out, we include questions about climate risk, so that they have to at least think about it. That kind of gatekeeping helps focus the mind.”

And to ensure that the pension’s internal staff is also focused on climate risk, “We link bonuses, in a very significant way, to achieving our climate objectives,” Millot said.

While such carrots and sticks have helped push through some changes, there’s still a long way to go before most managers and investors truly take climate risk into account in their investment decisions.

“It’s amazing how some of these investment managers haven’t heard some of the [ESG] presentations,” Peters said. “There are some eyes that get opened when portfolio managers start to look at the data and start to really extrapolate along the dimensions of the science as opposed to the historical trend. We have seen changes being made.”

More changes are needed, of course, including improvements, and stability, in policies at all levels of government. That would go a long way toward making it easier for climate risk to be incorporated into investment portfolios.

“Public policy is key, and there is not enough of it,” Millot said. Carbon pricing is a great example of a crucial policy, he said. More generally, he added: “We need a policy framework that is stable, well-thought-through and based on science.”

He said there have been improvements in all these areas in recent years. “But more is necessary. ”



To learn more about how major institutional asset owners are managing climate risks and investing in the low carbon economy, register for the Managing Climate Risks Forum on Dec. 10 in San Francisco.

Hear speakers from San Francisco Employees’ Retirement System (SFERS), Sierra Club Foundation, Cambridge Associates, Mercer, Stanford University’s Precourt Institute for Energy, SASB, California Governor’s Senior Advisor on Climate & more!  Register here.

The key discussion topics include:

  • Identifying financial risk from climate change and recommended approaches for institutional investors.
  • How top investment consultants are working with asset owners to incorporate climate risks into portfolio construction and manager due diligence.
  • Divestment strategies and shareholder engagement on disclosing climate-related risks.
  • Emerging best practices in portfolio measurement and reporting on climate-related metrics.


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