The Institute for Energy Economics and Financial Analysis (IEEFA) has highlighted the need for investment products prioritising long-term decarbonisation goals over short-term financial returns.
In its latest report, IEEFA called for the establishment of “systemic funds,” a new category of investment product designed to tackle systemic risks such as climate change, which are not being addressed adequately by current offerings.
Systemic funds would focus on concessionary returns in the short term, aiming instead to deliver long-term environmental benefits like decarbonisation. According to the report, these funds would play a crucial role in reducing systemic risks that threaten the global economy, such as climate change. It stated that legal discussions surrounding fiduciary duty have opened the door for asset owners to pursue these bold strategies without violating their obligations to maximise returns.
The report emphasised that asset owners, especially those with a universal ownership model, can further advance their decarbonisation efforts by collaborating with governments, promoting the adoption of carbon markets, and curbing the influence of climate lobbying. Given that many of the world’s largest carbon emitters are state-owned, engaging with sovereign stakeholders is seen as essential to fostering a more supportive environment for decarbonisation efforts.
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IEEFA also advocated for asset owners to leverage their relationships with financial institutions to discourage banks from financing fossil fuel projects. As shareholders and clients, universal owners have significant influence over banks, many of which continue to fund fossil fuel expansion.
Finally, the report encouraged asset owners to incorporate divestment as a stewardship tool. While often viewed as a binary choice between engagement and divestment, IEEFA argued that divestment, in some cases, can contribute to systemic change rather than merely reducing idiosyncratic risk.
“Enabled by an increasingly favourable legal discourse on the role of sustainability in fulfilling a fiduciary duty, systemic funds represent a potentially significant growth market and business opportunity for active managers,” said Alasdair Docherty, author of the report and a sustainable finance and data analyst at IEEFA. “By supplementing engagement with several key actions, universal owners can more realistically hope to move the needle on economy-wide decarbonisation.”
