OECD-UNEP COP21 side event on Governance of Institutional Investments:
Fiduciary standards for addressing green finance and the portfolio impact of climate change
Opening remarks by Angel Gurría
Thursday, 10 December 2015
OECD COP21 Pavillon, Le Bourget
Distinguished Panellists, Ladies and Gentlemen,
It has become clear over the course of these past two weeks that we need everyone on board if we are to reach zero net emissions by the end of the century. This means governments at all levels, the private sector and not least institutional investors.
Institutional investors control over USD 93 trillion in long-term assets in OECD countries alone. They could play a decisive role in financing the transition to a low carbon economy. But while they hold an enormous amount of green investment potential, this potential remains largely untapped.
Rethinking fiduciary duty is one of the keys to unlocking such potential. There are two parts to the fiduciary equation: first, investors must put their clients’ needs before their own; second, they must ensure that assets are managed prudently with due care, diligence and effective risk management.
If we want to get serious about unlocking green investment, we need to get serious about systematically integrating climate risks into our understanding of fiduciary duty.
Getting fiduciary standards right matters for environmental investment!
We all know that investing in projects with associated climate risks is increasingly risky business. And climate change can impact portfolio investments more generally given transition and liability risks.
Even beyond any purely environmental and ethical considerations, fiduciaries need, from a financial point of view, to take into consideration climate-related risk factors in the investment decision-making process.
There is increasing agreement on this. Just last week, the Financial Stability Board Chairman, Mark Carney, announced the establishment of an industry-led task force on the disclosure of climate-related financial risks under the leadership of Michael Bloomberg, following a mandate from G20 ministers.
This is an opportunity that institutional investors must seize.
Climate change is already affecting investment performance. Fiduciaries need to integrate this reality into their investment decisions, to address climate-related risks and capture opportunities today and far into the future.
Many investors are already putting stewardship at the heart of their investment process. They have signed up to the UN-supported “Principles for Responsible Investment,” or PRI, which integrate environmental, social and corporate governance (ESG) factors into their investment decisions. Others have gone one step further to explicitly include climate-related factors in their analysis of portfolio risks and returns.
The G20/OECD High-Level Principles on Long-term Investment Financing highlight the need for the governing bodies of institutional investors to identify, measure, monitor and manage the long term environmental risks in their portfolios.
Our colleagues from UNEP released a report earlier this year on “Fiduciary Duty in the 21st Century” which goes in the same direction. Other OECD guidance, such as the Guidelines for Multinational Enterprises and the G20/OECD Principles of Corporate Governance, seeks to encourage proper risk management processes given environmental and social factors, while fiduciary duties are also part of our OECD Core Principles for the Regulation of Private Pensions.
National governments also need to play their part. National governments have an important role to play in empowering institutional investors to act, through the setting of standards and by putting the right framework conditions in place. In the US, for example, the Department of Labor guidelines confirmed this year that ESG factors are proper components of the fiduciary’s analysis.
Further progress will require much more systematic and forward-looking assessments.
Institutional investors need access to the right information and tools to carry out these analyses. This will call for better climate change disclosure – a topic for the next session. The issues of fiduciary duty in the context of climate risks and corporate climate disclosure are inextricably linked: we need firms and financial institutions to provide better, more reliable and comparable information about their emissions, their exposure to climate risks, and their efforts to manage these risks.
This might also entail adapting traditional modelling techniques to accommodate for the lack of historical data when analysing climate-related risks. Thus, investors would reconcile the different time horizons of beneficiaries, be it for instance pension plan members and beneficiaries or policyholders, while seizing the opportunities presented by the transition to a low-carbon economy. Only then can investors claim that their analyses do not overlook, or misprice, important information about their investment choices.
The OECD is already bringing a lot to the table on these issues:
Ladies and gentlemen,
The OECD will continue to deepen and broaden its work on this issue and counts on the support of UNEP and other relevant international organisations, as well as of many countries – both members and non-members – and of investors that have experiences and best practices to share.
Today’s meeting is an opportunity to have a frank exchange of views on the rationale and relevance of establishing transparent governance standards around climate and environment-related investment decisions.
I urge you to help us design, develop and deliver better fiduciary diligence work for a more sustainable world.