The importance of being active on climate change

18.02.2021

Ms. Ipsaryaris, Mr. Stathers, why does Aviva Investors focus on climate?

Ipsaryaris: Global warming is the greatest challenge of the modern world. Under current global emissions trajectories, the planet is on track for appro­ximately 3°C of warming by 2100 - a path expected to result in tempe­ratures not seen in three million years.

It is the greatest long-term threat to the planet, and is why climate change was included as one of our steward­ship priorities in our annual letter to the chairs of companies we invest in.

We are aligned with the Inter­govern­mental Panel on Climate Change (IPCC) position that the world needs to limit the tempe­rature rise to no more than 1.5 degrees Celsius above pre-industrial levels.

We expect all companies to align with this ambition, and clearly arti­culate climate strategies and transition pathways that will deliver net zero emissions by the middle of the century. Climate plans must integrate biodiver­sity impacts and associated miti­gation strategies.

It is not only a stewardship priority, as we also invest in companies and assets that are driving funda­mental changes for a sustainable future by targeting opportu­nities that accele­rate, and benefit from, the transition to a low-carbon economy. Our dedi­cated equities and climate specialists work colla­bora­tively, blending an integrated research frame­work with strong in-house ESG exper­tise. Rick Stathers, our Climate Specialist and Senior Global Respon­sible Investment Analyst joined our Global Respon­sible Investment team in 2018, with a primary focus on climate change.

It is not a question anymore if we should be caring about our planet, the question rather is where we set the priorities, hence why climate change?

Ipsaryaris: As well as being the greatest long-term threat to the planet, climate change presents huge risks to investment portfolios. We believe that being passive against these risks is just not an option.

Being an active investor means thinking beyond fossil fuel exclusion or opti­mising a portfolio to focus solely on companies with low GHG emissions. Climate change will impact every actor in the global eco­nomy; a holistic approach is needed to under­stand both the risks and opportu­nities arising from the physical and policy impacts. We believe this is best achieved through a forward-looking, funda­mental investment approach, one that assesses risks and opportu­nities across corpo­rate value chains whilst also incorpo­rating environ­mental, social and governance (ESG) consi­derations.

Taking an active approach to climate change also involves company enga­gement. We believe changing the beha­viours of companies on climate change means reducing climate risk in our investments. Our philo­sophy is to be direct and visible in repre­senting our views on ESG issues across all of our investments, spanning every asset class.

The 2015 Paris Agreement was supposed to mark a historic turning point for combating climate change, setting forth ambitious limits on global temperature increases. What needs to be done?

Stathers: To stay within these limits, countries must set equally ambitious global green­house gas (GHG) emissions targets - aligning with these pathways requires unprece­dented and urgent change.

The change needed to transition to a low-carbon and climate-resilient world will impact every company around the globe. While for some companies the impact is clear, for others it is less apparent. As such, we believe that financial markets are not effi­ciently pricing the move towards decarbo­nisation - or the phasing out of fossil fuels - nor are they reflecting the physical risks from climate change. This under­scores the impor­tance of taking an active approach to iden­tifying those companies that are best orien­tating their business models for a lower carbon, warmer world - and miti­gating the associated risks.

GHG emissions: Where are we now and where do we need to be?

Stathers: Climate science has clearly linked the role of green­house gases to global heating. Most countries and companies look to the 2015 Paris Agreement when setting GHG emissions targets, as it sets forth clear limits on global tempe­rature increases. The Agreement seeks to limit the increase in global tempe­rature this century to well below 2°C above pre-industrial levels, and to pursue efforts to limit the increase even further to 1.5°C. After the Inter­govern­mental Panel on Climate Change (IPCC) released a 2018 report on the impacts of global warming of 1.5°C above pre-industrial levels, most are now focusing on this pathway when setting emissions targets.

However, in light of the current warming trajectory, closing the gap between where emissions are and where they should be will be a monu­mental under­taking. Current emissions commitments put the planet on track for a 2.8 - 3.2°C of heating by 2100 - well above the 1.5°C target.

What do you think about a shift to renewables as a solution to this problem?

Stathers: The key to achieving these emissions goals is decarbo­nising the global energy system with a signi­ficant shift in the energy mix towards rene­wable sources. Posi­tively, the global shift to rene­wable energy sources is already well underway. And, in some instances, rene­wables are now a cheaper form of electri­city than tradi­tional fossil fuel sources. Further progress in the global shift to green energy will require sizable government investment and accommo­dative policies.

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