Financial markets have not yet factored in a transition – either rapid or staggered – to a low-carbon world, according to the inaugural Russell Investments Taskforce on Climate-related Financial Disclosures (TCFD) global portfolio report.
The Russell TCFD analysis notes valuation of its sample portfolio (representing close to US$105 billion or almost half of the group’s assets under management) would fall by about 5 per cent under a delayed transition or a rapid shift to ‘net zero’ 2050 carbon targets.
“In [the net zero 2050 scenario, the economy undertakes a rapid transition to a decarbonised economy starting immediately. This rapid transition means that most of the financial impact stems from transition-related risks such as the introduction of a large and sudden carbon price,” the report says.
However, the Russell portfolio would fall by just 0.3 per cent if there are no changes to current climate policies leading to a so-called ‘hot house’ outcome.
“It is likely surprising to some readers that the transition scenarios (delayed transition and net zero by 2050) show greater financial impacts than in the hot house world scenario. Recall these scenarios involve more short- and medium-term risks (largely transition-related) and because risks are discounted back to present day, these shorter-term risks dominate the longer-term physical risks of hot house world scenario,” the Russell paper says.
“It is also important to note that this scenario analysis only extends to 2050 which understates the worst physical hazards in a hot house world which will materialise after 2050. The high magnitude of the valuation impact in transition scenarios suggest financial markets are not pricing in a transition. If they were, the expected impact on today’s prices would be closer to zero.”
Despite acknowledging data gaps and model sensitivity to underlying assumptions, the Russell TCFD report highlights “policies developed for formally and systematically addressing sustainability risks, and the practices we continue to evolve to integrate climate awareness into our investment process”.
Michelle Seitz, Russell chief, says in the introduction that the progress on climate change reporting among asset managers is “only the beginning of a long journey for our organisation and the global investment community at large”.
“Most immediate on our horizon is our commitment to the net zero asset managers’ initiative. Our commitment involves rapidly raising knowledge across teams, building new capabilities, and setting ambitious targets around what it means for our portfolios to be aligned to a net zero by 2050 objective, always with a client first, fiduciary focus,” Seitz says.
“We are also ramping up our coverage of active managers with a focus on climate considerations, and sustainable strategies more broadly. We continue to seek out data sets that provide valuable insight into the climate exposures of our portfolios, taking advantage of exciting improvements in the climate data landscape.”
Over the next couple of years most licensed NZ fund managers will be obliged to report to similar TCFD standards currently being developed by the External Reporting Board (XRB). The final draft XRB standards for the NZ climate-reporting legislation are expected to be in place by the end of this year.