RS Metrics Senior Advisor and Former European Pension Fund CEO Explains why Asset Owners need Asset Specific Climate Data

Climate change is happening and it brings along both significant risks for our societies and opportunities for us to act smart and just. The European Union’s policymakers have understood this and have been acting upon it in a meaningful way during the previous five years. Enterprises and investors have, for example, been made subject to more and more demands to up their game with regard to disclosure on climate risks and effects and how these are managed. Following the recent EU parliament election, there is a concern that the EU policymakers’ global leadership, with its flagship strategies Green Deal and Fit for 55, may change course and/or lower ambition levels. Time will tell us what the new EU parliament actually will mean for projects like the European Green Deal and Fit for 55.

In the meantime, climate change continues to affect our lives and societies. Asset owners are not immune to the on-going climate change and its vested risks and opportunities. For example, some recent climate events such as the unexpected flooding in Dubai and the negative influence of Cyclone Remal on communities prove the danger that it can bring. The risk-adjusted return of a portfolio is subject to the development of the global economy and societies while the global economy and our societies are subject to the climate. Hence, the material adverse effects of climate change pose now a tangible risk to asset owners’ portfolio performance. An asset owner needs to manage this risk adequately and this is already happening within the asset owner industry to a large extent.

The ongoing climate crisis is causing significant damage to physical assets, it disrupts supply chains, and reduces the value of investments in affected regions. For asset owners, this translates into increased volatility and potential losses in sectors such as real estate, agriculture, and infrastructure. The impact of these events can, more often than not, influence not only individual investments, but a portion or the entirety of an asset owner’s portfolio. The time aspect of the impact on the portfolio may vary materially. These extreme weather events and regulatory changes can cause sudden shifts in market sentiment, affecting asset prices and increasing the cost of capital.

It is important to understand that it is not sufficient for an asset owner to manage climate risk only from an individual asset perspective. An asset owner today must realize and mitigate the climate risk from a systemic risk point of view. Systemic climate risk refers to the possibility of a collapse in an entire market or segment. It arises from interconnections and interdependencies in the market system, where the failure of a single entity or a group of entities can trigger a cascading effect, potentially leading to widespread economic disruption. Climate change exacerbates systemic risk through its direct and indirect impacts on the global economy.

However, in order for an asset owner to adequately assess the climate change systemic portfolio risk, it is necessary to safeguard readily available, credible, and reliable asset-specific data on climate risks in order to achieve acceptable risk management of systemic risks emanating from the ongoing climate change. One such solution is RS Metrics’ ESGSignals® product which provides data that can help estimate the environmental, climate, and physical risk performance of assets around the world so portfolio managers can be strategic with their decisions. The tool uses another company product, AssetTracker, as its foundation to ensure that the environmental insights are linked to accurately drawn asset boundaries and contain current information about each asset’s ownership. The tool is available through Google Cloud Marketplace for customers who already get their data from the leading marketplace and it can be obtained as framework, app, or data, depending on the needs of each investor.

Asset owners that are perceived as failing to address climate change risks may suffer reputational damage, leading to decreased end-customers confidence and potential redirecting of capital. Failure to properly manage climate risk, directly or indirectly affecting the performance of an asset owner, carries also a potential legal exposure since it may constitute a breach of an asset owner’s fiduciary duty. That is why it is important to explore the market for reliable data solutions that can help asset owners make informed and strategic decisions and be more confident considering the various climate issues they are faced with today.

Magnus Billing has more than 20 years of experience from the international financial industry in different executive positions. He was previously the CEO of Nasdaq Nordics and most recently the CEO of Alecta. Alecta is one of the fifth largest pension funds in Europe. Magnus holds an LLM from Stockholm University, Sweden, and Executive Management from Stockholm School of Economics.