Investors with ~US$8 trillion AUM engage sovereigns on climate change

A global collaboration of institutional investors seeking to engage with Australian governments on climate change risks and opportunities will expand to 25 organisations with approximately US$8 trillion (AU$12.2 trillion) in assets under management.

Investors launched the Collaborative Sovereign Engagement on Climate Change in September last year, with a pilot focus on Australia. The engagement is coordinated by the UN-supported Principles for Responsible Investment (PRI).

A further 18 investors will join the engagement in 2023-24, through which they aim to collaboratively support governments to take all possible steps to mitigate climate change in line with the Paris Agreement.

Investors are seeking engagement with sovereigns to reduce their exposure to risks associated with a failure to rapidly transition to a net zero global economy including:

  • The value of sovereign debt investments;
  • The continued competitiveness of national economies and investee companies; and
  • Systemic risks through exposure to the global economy.

Investors joining the engagement include: Achmea Investment Management, Ardea Investment Management, Brown Advisory, Candriam, Colchester Global Investors, Fidelity International, First Sentier Investors, IFM Investors, Insight Investment, Jupiter Asset Management, LGPS Central, Morgan Stanley Investment Management, Munich Re, Neuberger Berman, Pendal Group, QIC, Rest and Sumitomo Mitsui Trust Asset Management.

They will join existing members of the engagement’s Advisory Committee: Aviva Investors, BNP Paribas Asset Management, Brandywine Global, HESTA, Nordea, Robeco and Schroders.

Through collaborative sovereign engagement, investors are seeking sovereign climate change responses to:

  • Close the gap between current action and a Paris-aligned emissions reduction trajectory;
  • Establish detailed, credible, and economy-wide net zero transition plans with supporting policy mechanisms, budget expenditure and investment structures;
  • Build greater climate adaptation and resilience across the economy and community to avoid worsening disruption and damage from physical risks;
  • Improve disclosure of sovereign exposure to climate risks and opportunities consistent with international standards.

PRI Chief Executive Officer, David Atkin, said institutional investors understand that sovereign responses to climate change will be critical drivers of global action and capital allocators could be strong allies in helping accelerate the necessary economic transition.

Mr Atkin said at the same time the exposure of their sovereign bond holdings to climate change risks and opportunities was coming into sharper focus for investors and it was only natural for investors to reach for one of their strongest tools in engagement.

“Collaborative sovereign engagement is relatively new investor practice and PRI is excited by the growing signatory interest in joining this initiative,” Mr Atkin said.

“Engagement between sovereigns and investors can lead to mutually beneficial outcomes that will help accelerate the necessary transition to net zero emissions. Investors are using increasingly sophisticated measures to assess sovereign climate risk in their investments. Over time this may affect capital costs for sovereign and other issuers in relevant markets. 

Genuine, sustained and two-way engagement can help policymakers better understand the growing practice and expectations of international investors on climate change response.”

Advisory Committee member and Head of Engagement at Robeco, Peter van der Werf, said the group was heartened by the level engagement to date by Australian officials across different organisations and jurisdictions.

“As global investors we assess the climate performance of large economies, such as Australia, as these are critical factors in our assessment of government bonds. In addition, their performance plays an important role in our macro view that supports investment decisions in equities and corporate bonds that are exposed to these markets. The Robeco country sustainability ranking shows that Australia performs above average on social and governance factors, but it has underperformed other OECD countries significantly in terms of climate indicators that we measure in our ranking.”

“The engagement group has been encouraged by the clear sign of momentum since 2022 with the recent national and state-based policy advancements on climate change. Through ongoing engagement, we aim to contribute to this momentum by sharing the perspective of institutional investors on climate policy development in Australia to hold the Australian government to account for meeting its stated climate commitments.”

The expansion of the Australian pilot will allow for greater engagement activity across the initiative, including an increased focus on sub-sovereigns. PRI will consider the outcomes of the Australian pilot over the financial year as it assesses the potential to expand collaborative sovereign engagement to additional countries.

Daniela Jaramillo, Fidelity's Head of Sustainability commented that the firm was proud to join the collaboration. "Engagement is at the heart of our approach to sustainability and as investors in equities, bonds and sovereign bonds we're able to get a very broad investor view on climate issues. As active stewards of our investors capital we firmly believe we should be making a positive impact on those companies we invest in, both to help mitigate the risks of climate change and to maximise opportunities to invest in the transition."