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Fossil Free SA trustee workshops on IPCC report: Fiona Reynolds, UN PRI
- 1. - R ES P O N S I B L E I N V E S T M E N T - Fossil Free South Africa Trustee Workshop Fiona Reynolds, CEO
- 2. Contents PRI WhatPRI is doing on climate change Where to start – trustee resources 2
- 3. PRI at aglance Launched in April 2006 at the NYSE, the Principles for Responsible Investment has: 2 2500+ 89+ 6
- 4. PRI’s signatory growthby region Annual growth over 12-month period through March 31, 2019 4 Rest of Asia: +21% Africa: +7% US: +28% Canada: +16% Latin America (ex. Brazil): +82% Australia & NZ: +9% Japan: +14%Middle East Brazil: +2% UK & Ireland: +29% Southern Europe: +37% France: +14% Germany, Austria & Switzerland: +21% Benelux: +23% CEE & CIS Nordic: +19% China: +175%
- 5. Contents PRI WhatPRI is doing on climate change Where to start – trustee resources 5
- 6. ESG issues impactinvestments ESG increasingly material in terms of impact and likelihood 6 Asset price collapse Slowing Chinese economy Chronic disease Global governance gaps Retrenchment from globalisation Extreme weather events Failure of climate change mitigation and adaption Natural disasters Data fraud or theft Cyberattacks Asset price collapse Retrenchment from globalisation Slowing Chinese economy (<6%) Chronic disease Fiscal crises Weapons of mass destruction Failure of climate change mitigation and adaption Extreme weather events Water crises Natural disasters Top global risks in terms of likelihood 201920092009 2019 Top global risks in terms of impact 1st 2nd 3rd 4th 5th The World Economic Forum 2019 Global Risks Report 1st 2nd 3rd 4th 5th Environmental Societal Geopolitical TechnologicalEconomic
- 7. 7 “Limiting warming to1.5°C is possibly within the laws of chemistry and physics but doing so would require unprecedented changes” - Jim Skea, Co-Chair of IPCC Working Group III For investors, the IPCC Special Report on 1.5C highlights significant changes needed across sectors and portfolios
- 8. The Inevitable PolicyResponse: Act Now A PRI perspective on the future launched in September 2018 8 The PRI is aware that the longer the delay in climate policy action, the more forceful and urgent the policy response will inevitably need to be. The PRI is supporting the development of a body of work on an inevitable, rapid and forceful climate policy response. This will help institutional investors take action and implement processes to build resilience across investment portfolios, now and into the future.
- 9. TCFD recommendations Core elementsof recommended climate-related financial disclosures Governance The organization's governance and climate- related risks and opportunities. Strategy The actual and potential impacts of climate- related risks and opportunities on the organisation's businesses, strategy and financial planning. Risk Management The processes used by the organization to identify, assess and manage climate-related risks. Metrics and Targets The metrics and targets used to assess and manage relevant climate-related risks and opportunities. 9
- 10. How have investorsbeen responding to TCFD? Number of responses to the PRI 2018 climate indicators - 480 investors representing US$42trn AUM 42 5 4 28 6 15 56 17 4 8 11 6 31 5 4 10 14 23 20 84 72 - 50 100 150 200 250 Signatories reporting on Climate Change CC-Responders Non-CC-responders In depth analysis of responses published in the PRI climate snapshot 10
- 11. Climate Action 100+ GOVERNANCE Implementa strong governance framework which clearly articulates the board’s accountability and oversight of climate change risk ACTION Take action to reduce greenhouse gas emissions across their value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2 degrees DISCLOSURE Provide enhanced corporate disclosure in line with the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) Investors engaging companies to: 11
- 12. What is aJust Transition? 12 Economy-wide process Lead to a future where emissions are at net zero, poverty is eradicated, communities are thriving and resilient Produces plans, policies and investments that are fair and green A Just Transition Part of the 2015 Paris Agreement
- 13. Investor Commitment toSupport a Just Transition on Climate Change Launched in September 2018 126 investors collectively representing USD $ 6 trillion of assets under management 13
- 14. Contents PRI WhatPRI is doing on climate change Where to start – trustee resources 14
- 15. 15 PRI asset ownerguidance ASSET OWNER MANAGER SELECTION GUIDE (MARCH 2018) ASSET OWNER STRATEGY GUIDE: HOW TO CRAFT AN INVESTMENT STRATEGY (MARCH 2018) INVESTMENT POLICY: PROCESS & PRACTICE – A GUIDE FOR ASSET OWNERS (OCTOBER 2016) STRATEGY POLICY MANAGER SELECTION
- 16. Investment Consultants 16 INVESTMENT STRATEGY Fiduciary obligations Investment principles Strategy formulation Investment policy and governance MANAGER SELECTION Mandate formation Research and long-lists Requests for proposal Screening and shortlist Appointment CONSULTANT’S ORGANISATIONAL APPROACH Firm structure Processes Training & resources Key advisers in responsible investment
- 17. 17 Responsible Investment ReviewTool A purpose built tool for Boards and Trustees A solution for asset owner boards to test and strengthen their responsible investment approach Less than 50% of PRI’s asset owners have a clear of understanding of how their RI approach is implemented 17 RI Review Tool
- 18. 18 Learning outcomes Researchon ESG issues and financial performance Explain why sustainability issues are important for pension funds. Ensure that your strategy is kept up to date. Establishing the purpose and values of your fund Setting your RI policy What does best practice public reporting on RI look like? Bringing it all together Includes: Discount available for entire board enrolments Course duration: 90 - 120 minutes Resources: supplementary readings Access: six months Language: English/Chinese Award: certificate of completion The Sustainable and Responsible Investment for Trustees course is a short 2 hour training course brought to you by the PRI Academy. It features content from leading international experts, real life and hypothetical case studies, financial modelling, and has been designed to help maximise your understanding and practical application of key ESG concepts in the shortest possible timeframe. The Sustainable and Responsible Investment for Trustees course provides you with the outlines on why responsible investment is important for trustee and board member and the steps involved to become a responsible trustee. The course sets out why sustainability or environmental, social and governance (ESG) - issues are relevant to you as a trustee or board member. PRI Academy
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Editor's Notes
- #2 Thank you for the warm welcome. Let me get straight to the heart of today’s session: Trustee boards and other asset owner governing bodies occupy an important place in the investment chain. Their actions on relevant environmental, social and governance (ESG) considerations ultimately shape actions taken further down the chain. The challenges facing trustee boards are numerous - clarity on underlying beliefs and levels of conviction, knowledge gaps on ESG issues, uncertainty about what is achievable, and pressures on board time. But in our view addressing ESG risks is critical: ESG risks can be financially material for long-term investors; taking appropriate account of them is fundamental to fiduciary duty and good governance Organisations may face significant reputational risks if ESG issues are not regularly considered Addressing ESG risks effectively requires that boards set their strategy and objectives in a sound manner and embed monitoring of implementation into their regular processes Now more than ever the trustee role is critical with the potentially dismal future outlined in the IPCC report.
- #3 Today I will cover three areas: A quick outline of PRI and who we are Cover the work that we doing to help trustees and asset owners address climate change Set out some resources that can help you in your day-to-day role as trustees
- #4 A quick update, on who PRI represents. The PRI is a global investor network with over 2,500 signatories to our six principles in 50 markets. PRI continues to add signatories at a rapid rate. Last year we added 350 net new signatories last calendar year and we are still growing at approximately a new signatory every day.
- #5 The number of signatories in Africa is continuing to grow, with 80 across the continent (about 60 of which are in SA) About 70% of African signatories are asset managers, so there is room for more AO participation That said, some of the largest institutional investors on the continent are committed to RI, including the GEPF (South Africa – the largest institutional investor on the continent), as well as the EPPF (SA) and the GIPF (Namibia) Might be worth noting that GEPF and EPPF were actually founding signatories – a reminder that Africa in general and South Africa in particular – are by no means laggards in the RI space
- #6 Table of content, if you decide to use this, please add one slide at the beginning of every section, with its title highlighted
- #7 The global risks are evidenced by the latest World Economic Forum report – which you can see here on your right highlights environmental issues as 3 of the top 5 risks in 2019 in terms of overall impact. This correlates with the chart on your left looking at the likelihood of risks. Again, environmental risks are 3 of the top 5 (in fact the top 3) risks. It's very interesting to contrast these themes with those shown a decade ago, when risks identified by investors were mainly economic. Climate is the number one issue the investors we work with at PRI are concerned about, and this trend is also evidenced here. It's interesting to note the complete absence in 2019 of economic risks in the top 5 in either impact or likelihood, doubtless reflecting the strengthening of the global economy since the global financial crisis.
- #8 To turn to investors, Investors are very concerned in particular at the urgency of climate change. It’s the ESG issue our signatories at PRI most commonly engage on. With this in mind, investor awareness of the IPCC Special Report published last year is growing. The IPCC report highlights the significant difference between 2C and 1.5C and that emissions need to decline by 45% before 2030, and renewable energy needs to supply 70-80% of power by 2050. For global investors, this means a transformation of the energy system, reaching across sectors including energy, transport, buildings, agriculture, and across asset classes including infrastructure.
- #9 We have become increasingly concerned that PRI signatories will need to prepare for an abrupt policy response to climate change. The globe’s current emissions trajectory is dangerously off track and longer this drift continues the greater the policy risk for investors, as governments may look to suddenly catch up with the objectives of the Paris Agreement. Moreover it is our view that this policy jolt is likely to happen in the next 6 years, which is within the capex cycle of many industries. You may not agree with this view. That’s fine. But we would encourage you, if you haven’t already, to develop your own climate-related view of the future and how you think this going to play out. For our part, the PRI has already published concept papers on the Inevitable Policy Response and together with our partners the Energy Transition Advisors and Vivid Economics will be publishing detailed technical analysis and an economic model to help investors understand what this might mean for their portfolio. The over-arching message being that climate change is a foreseeable risk, that can be mitigated by taking action now. Establishing governance structures, internal processes and a strategic vision of the future, as per the recommendations of the TCFD, of these risks and opportunities is a critical first step.
- #10 Financial markets do have the potential to improve our prospects for tackling climate change, but only if we make climate risks and opportunities more transparent. This is the reasoning behind the TCFD. It is a framework developed by the financial industry that will, over time, translate information about climate change into financial metrics. It is also a flexible framework, that recognizes that investors will have different starting points in their approach to climate-related risks & opportunities. We are encouraging companies and investors to implement the Task Force’s four recommendation areas covering governance, strategy, risk management, metrics and targets.
- #11 The Task Force has been influential. One measure of this has been the number of investors responding to the PRI climate indicators that are based on the TCFD recommendations. These were introduced in January last year. The indicators are not designed to replace TCFD. The opposite in fact as a means for signatories to get started, try climate related reporting the outputs from which – the climate transparency report – could be used in a public TCFD report. While these indicator questions were voluntary in 2018 & 2019, the responses did exceed expectations, with almost 500 investors, representing $42 trillion, reporting to the PRI at the end of March. This equates to 39% and 31% of the AO and IM signatory base. And the graph here shows the breakdown by country. In addition, there was actually several hundred more who started the indicators be didn’t submit. Whilst this was only a pilot year, it does provide an indication of who is thinking about climate risk and prepared to report to the PRI. We will in the next couple of months be publishing the stats from the 2019 reporting cycle, together with around 200 investors climate transparency reports who opted to make their responses to the indicators public.
- #12 Turning from disclosure to engagement, PRI is very pleased to be part Climate Action 100+. This is a five-year investor-led initiative to engage systemically important greenhouse gas emitters and other companies across the global economy that have significant opportunities to drive the clean energy transition and help achieve the goals of the Paris Agreement. Investors are engaging with the world’s largest companies on their governance and management of climate risks and pushing for enhanced corporate disclosures on these risks. In particular, investors are engaging companies to: Implement a strong governance framework which clearly articulates the board’s accountability and oversight of climate change risk Take action to reduce greenhouse gas emissions across their value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2 degrees above pre-industrial levels. Provide enhanced corporate disclosure in line with the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). CA100+ is having real success: Shell announced near-term climate targets; BP responded to a shareholder resolution filed by CA100+ members committing to release specific details about how its investments align with the Paris climate accord; Glencore Plc, one of the world’s largest suppliers of coal, said it will cap output of the fossil fuel because of global warming. The overriding message is clear: investor engagement can have a very real and meaningful impact on how a company engages on climate.
- #13 Another vital issues for investors is to connect the S with E of low carbon investing. Stranded assets could also lead to stranded communities. And there is a pressing to need to avoid siloed thinking and realise the objectives of the Paris Agreement with a just transition. This approach seeks to revitalise industrial communities affected by a low carbon transition through place based investing and a strategic dialogue with policy makers.
- #14 Since PRI launch its just transition in September last year over 126 investors, representing $6tr AUM have signed up. As the initial phase focused on agenda setting and awareness raising, the next phase will be focused on mobilising investor action. Our aim is to make just transition a consideration for all investors and we are assessing how future activities might bring our just transition thinking into PRI’s normative tools for responsible investment.
- #15 Table of content, if you decide to use this, please add one slide at the beginning of every section, with its title highlighted
- #17 a word on investment consultants. Globally, investment consultants advise on trillions of dollars of assets. They are in a privileged position as trusted advisors and important sources of knowledge. The PRI believes the full suite of investment consultants’ service delivery should incorporate ESG - financial evidence, regulatory requirements and overall client demand is sufficient enough that investment consultants should be incorporating ESG factors by default. This is particularly important with smaller and medium-sized asset owners might not have the right level of expertise and sophistication to understand ESG issues and investment consultants should advice them appropriately to meet their fiduciary obligations. We have produced a guide that offers insights to asset owners about the investment consultants own organisational approach, advise on investment strategy and policy as well as manager selection and appointment. Later editions will add guidance on more steps in the investment process. A quick note: last year, PRI conducted an AO roundtable and one of the things that came up more than once was that AO’s on the continent in general, but in SA in particular, have a tendency to trust their consultants implicitly. The general feeling is that the responsibility to ensure compliance of investments with Regulation 28 (i.e. to ensure that ESG is appropriately considered) falls to the consultants and to the managers – as opposed to the AOs. However, consultation with managers and consultants always ends with the same comment: “if its not in my mandate, I’m not looking at it”. So there is a definite responsibility of AOs to be much more explicit in their expectations of managers and consultants when it comes to RI. At the trustee level, I have had conversations where trustees (40% of whom are member elected, and almost 100% of whom are not trained in finance) freely admit that their own lack of confidence in their personal understanding of investments leads to a complete reliance on ACs when it comes to any and all investment decisions. If we can get the trustees in these workshops to understand that their responsibility trumps their perceived lack of ability, that would be a major win. They don’t have to know all the answers. But they do have to ask the right questions. And if they are not 100% satisfied that their consultants are doing what’s best for the sustainability of the fund, it is the trustees’ responsibility to act. There is an urgent need for trustees in this market need to acknowledge and accept this.
- #18 The RI Review Tool is a solution for asset owner boards to test and strengthen their responsible investment approach. Why? Effective implementation of your investment policy is an issue with many asset owners.. Despite setting an overall RI policy, less than half of PRI asset owner signatories include specific guidelines on environmental and social issues in their policies and, in many cases, investment mandates lack detail on asset owners’ specific ESG expectations of their managers. It examine their level of conviction and ambition in relation to responsible investment (RI) and how they translate these into actions. This quick and effective tool involves: A short survey designed to enable each board member to give their views on the current and potential future significance of ESG issues, and how their fund addresses them Board discussion of the survey results to identify areas of consensus and divergence, knowledge gaps and areas for attention as a group, and review of the survey findings against the fund’s current RI implementation Development of actions to further advance board practice of RI. It’s a service provided free PRI for signatories and has been road tested this with trustee boards with great results; it leads to action specific to your individual circumstances and needs. Nicole can provide you with more info. I would suggest that you stress that this is a facilitated workshop that is available at no cost to the fund.