The awareness of carbon emissions risks is rising among institutional investors. The fact that UN Paris meeting in December will have impact on the thinking of trading and pricing on emissions will lead to different outcomes to different companies and industry sectors. Institutional investors are now thinking how to avoid climate change related risks in portfolios, but on the other hand also how to benefit from the right options. Investor point of view is how to avoid the risks related for example to the time horizon.

Investors see different cap and trade -models in different countries and different renewables programms. Taxation, trading methods and pricing are some of the core elements, but they vary widely. One of the largest cap and trade -areas is EU, and the impact of the new pricing will be seen in the future. The economic slowdown has curbed the emission pricing and at the moment the system is not awarding companies to swift to renewables.

There are two kind of risks for investors related to CO2 emissions: income statement risk and balance sheet risk. Currently there is no or let´s say low CO2 price for companies. In the near future the repricing of emissions and taxation will impact the company profit and loss statements. The second risk area is the so called “stranded assets”. This means that fossil fuels companies are valued on their reserves, but on the other hand the companies cannot monetize all the reserves in their balance sheet because of the global warming and temperature increase.

Low carbon indexes
to hedge climate change

Investos have different strategies to reduce their climate change related risks in portfolios. Exclusion, engagement, hedging or all of them together.
One of the new low carbon indexes is MSCI Europe Low Carbon Leaders, which has been developed by Amundi Asset Management, the Swedish Pension Fund AP4 and the French Pension Fund FRR together with MSCI.

This index was launched September last year and by summer it exceeded its benchmark MSCI Europe index by nearly 200 basis points. The idea is that the most polluting companies are divested and the rest of the companies are weight again so that the exposure of stranded assets will be minimized. At the same time with this index it is possible to reduce the carbon footrpint of the portfolio, which is one of the issues for investors at the moment. For example in France the institutional investors are obliged to publish their portfolio carbon footprint.

Part of this development, Amundi and AP4 are also founders of the Portfolio Decarbonization Coalition (together with United Nations Environment Programme and its Finance Initiative and CDP, Carbon Disclosure Project) which aims to convene investors to reduce their portfolio exposure to GHG emissions. The target of this initiative is 100 billion dollars by the end of this year.

“China International Capital Corporation is committed to promote the decarbonization of investment portfolios and the use of low carbon indexes, particularly in Asia and in China, “said Chairman Jin Liquin in press release related to the support to Decarbonization Coalition.

” Portfolio decarbonization, I know that a Portfolio Decarboniation Coalition has been put in place and announced at the Climate Summit in NYC and that after only a few months of existence it has already received a 45 billion dollars committments. French actors are part of this mobilization, said the French President Francois Hollande.

After the launch, the members in the Coalition have increased and include also for example the Church of Sweden, Local Goverment Super,Mirova and Robeco SAM.

Päivi Härkönen

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