Addressing the climate emergency

This change is fueled (no pun intended) by many recent reports on the irreversible effect of the greenhouse gases (GHG) already emitted, and their predictable effect on global warming. It is also fueled by the fact that the effects of climate change (temperature rise, heavy storms, droughts) are becoming quite apparent in everyday life.

It is reflecting the fact that we need to step up our efforts to reduce greenhouse gas emissions before the effects become irreversible, which according to the IPCC report released in October 2018 will become a reality in less than 12 years. The social and economic effects will be devastating, I am convinced.

It is also in this light that in the Netherlands, the government and its social partners have come to a climate accord reflecting their efforts to reduce CO2 emissions in 2030 by 49% compared to 1990, and a final goal of 95% fewer CO2emissions in 2050. At the end of June, the Dutch cabinet presented the final framework. Both consumers and companies will bear the costs of the transition.

As of 2021, CO2 taxation for companies should lead to reducing emissions in line with the Paris Agreement to limit global warming to 2 degrees Celsius or less above pre-industrial levels. The price is set at EUR 30 per ton of CO2 emitted above their allowance, rising to EUR 125-130 in 2030. Out of the proceeds, subsidies will be paid for renewable energy and improving eco-efficiency in industrial sectors.

Other important aspects are the focus on (electric) mobility, sustainable agriculture and a preference for ’green’ solutions over carbon capture and storage solutions. However, half of the target for industry still needs to come from storage. In good Dutch tradition, the accord is based on the ’Poldermodel’ – reaching a compromise. For green parties and NGOs, it does not go far enough, but for rightwing and populist parties, there is no necessity to do anything. Personally, I am happy that the Dutch have come to an accord, and with all its pros and cons, will start working on improving our climate.

As an addendum to the Dutch climate accord, the country’s financial industry on 10 July signed a climate commitment in the presence of the Netherlands’ minister of finance. This obliges asset managers to make an effort to contribute to achieving the climate goals. Three points are key:

1. Asset managers will support clients in achieving their ambitions and obligations with regard to their climate impact. They can do this by actively entering into discussions with them, using their institutional knowledge, and coming up with proposals on how investments can contribute to the implementation of the accord. For example, they can actively enter into a dialogue with companies about limiting their impact on climate change.
   
   
2. Asset managers will help clients to create reports that make their climate impact transparent and measurable, based on global or European standards. As a global leader in the field of ESG integration, the Dutch asset management sector sees itself playing an active role in developing these standards.
   
   
3. Asset managers will work on investment strategies for clients that contribute to the goals of the accord.

Asset managers have committed to report on the progress made in these efforts in their annual reports, or on their websites.

Robeco has signed this agreement because we have long been committed to all forms of sustainable investing, including the fight against global warming. The accord does, however, leave a lot of responsibility with asset owners to give asset managers a clear mandate on this issue. We believe the asset management industry can go further than merely supporting clients on this issue.

Our current climate change policy already shows our commitment to achieving the Paris goals. And our commitment to the Task Force on Climate-related Financial Disclosure (TCFD) compels us to develop a climate strategy, have good governance around the topic, measure the risks involved and be transparent about the outcomes.

A joint Robeco and RobecoSAM climate change task force is currently working on fulfilling these requirements. With respect to climate risk, we have conducted stress tests, giving us an insight in the portfolio at risk under different scenarios for global warming; a 2-degree scenario analysis is being developed. But we want to go further, and we encourage other financial institutions to also work on the relevant next steps, which are:

1. Acquiring data on scope 3 emissions: currently the financial industry is using scope 1 (GHG emissions from own operations) and scope 2 (GHG emissions from energy purchased) data to assess the carbon footprint of portfolios. This data merely reflects direct emissions, and misses those made indirectly from products and supply chains. Taking scope 3 into account would put pressure on companies that have GHG-intensive supply chains (such as agriculture) and products (oil, cars, the internet). Because of the many assumptions underlying scope 3, it is difficult to get good-quality data.
   
   
2. Analyzing forward-looking risk characteristics: emissions data focuses on the past and the present, but what is more important is how companies are planning for the future. Which companies have credible climate strategies that can be implemented, and which don’t?
   
   
3. Finding adaptation data: in a ‘business-as-usual’ scenario, we will face higher temperature rises, with the resulting rises in sea levels, droughts, storms and changes in weather patterns. Transparency on how companies or countries are adapting to this is currently low. The financial impact of physical risks can be quite different if an asset is protected or insured, compared with outcomes if a company is not prepared at all.

In all instances, we therefore need to demand better disclosure from companies on their climate risks. However, we cannot wait for the data to be 100% correct, so we need to work with what we have so that we do not lose momentum.

Once a good analysis on portfolio climate risk has been made, it is up to the asset manager to decide on whether and how to reduce these risks. Next to the focus on risks, the financial industry should also focus on change. The industry is an important force for change, and the growing impact of (joint) engagement towards companies should not be underestimated. We see this Dutch climate accord as an essential starting point, and would like to encourage everyone in the sector to be more ambitious.