CFA Institute has released a report on climate change analysis, which includes a set of recommendations to help guide investors to incorporate it into their investment process.
Climate Change Analysis in the Investment Process examines the "issue of climate change", offers a discussion on the "physical and transition risks" caused by climate change and considers carbon markets, along with a set of current resources and best analysis practices available to investors and a series of case studies.
The report also included a survey answered by 2,913 CFA Institute members, which found that while 76% of C-suite executives believe it is important to have a "definitive view" on climate change to be able to effectively manage investments, only 40% of investors currently incorporate any form of climate risk analysis into the investment process.
Of those who do incorporate climate risk analysis, 75% cited "material risk" as the reason for doing so, 47% suggested client demand and a further 20% pointed to regulatory requirements.
The forms of climate risk that are analysed by investors are fairly evenly spread with 54% assessing physical risk, 51% transition risk, 45% credit risk impact, 44% stranded asset risk, followed by climate value at risk with 14%, while 20% of respondents analysed "other" types of climate risk.
Those who do not utilise climate risk analysis claimed a lack of measurement tools was the most common failing (57%), while 31% said there was no client demand and 26% suggested they did not do so because there is no regulatory requirement. A further 25% declared that climate risks are not a priority for their investments and 10% suggested that climate related risks are "too far in the future to be material".
Overall, the majority of respondents (55%) said they are not being asked to do more about climate change by their clients. Of those who are asked to do more, a greater provision of information and analysis is most requested (32%), while a demand for current products to have greater consideration of climate change is less apparent (15%) and new investable products which take climate change into account is less so still (12%).
Respondents want a variety of extra climate information to become available to them, with more climate strategy from companies (49%), disclosures from issuers on climate-related risks (49%) and scenario analysis (48%) the most cited, followed by disclosures from issuers about climate-related opportunities (39%) and price on carbon (33%).
Engagement is considered far more effective a solution to support a sustainable economy than divestment, with 57% preferring the latter to just 5% suggesting divestment is more effective, while 23% believe they are equally effective.
The report also laid out recommendations that the CFA Institute makes to investors and policymakers to help integrate climate change analysis, which includes a price on carbon and carbon price expectations to be included in analyst reports.
Increased transparency and disclosure on climate metrics is recommended, and CFA Institute noted that the industry seems to be coalescing around bout the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures standards for such disclosures.
Investors should engage with companies on the physical and transition risks of climate change but further education within investment management is also needed, according to the report.
Finally, investors should urge policymakers to craft new regulations to ensure they have the tools to enable "the efficient allocation of capital to help tackle the existential threat of climate change".