Course 1: Climate Science, Risks, and Regulations

Module 3: Client Objectives

Lesson 1: Client Objectives
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Table of Contents
Module 3 : Client Objectives

Lesson 1: Client Objectives...................................................................................................................................4

Overview..............................................................................................................................................4

Client Ambitions on Climate.................................................................................................................4

Fiduciary Duty......................................................................................................................................5

Client Objectives: An Exercise.............................................................................................................5

Discussion by individual client type....................................................................................................10

Mutual funds and other retail vehicles.....................................................................................10

High Net Worth Individuals......................................................................................................10

Family office.............................................................................................................................11

Defined contribution (DC) pension scheme.............................................................................11

Defined benefit (DB) pension scheme.....................................................................................12

Pension fund Case Study: Denmark’s ATP.............................................................................12

Property & casualty (or general) insurer..................................................................................13

Life insurer...............................................................................................................................14

Endowment or foundation........................................................................................................14

Sovereign wealth fund.............................................................................................................15

Sovereign wealth fund Case Study: Singapore’s GIC.............................................................15

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 Lesson 1: Client Objectives
Welcome to Lesson 1 on Client Objectives! In this lesson, we will examine how various client types are inclined to
incorporate climate considerations into their investment strategies.

Let’s get started!

Overview

Clients differ. For ease, we classify clients into broad groups, but there is also notable variation within each of those
groups. Where clients can afford bespoke advice, investment advisers need to work closely with each client to understand
their particular investment beliefs and intent – including such key aspects as investment time horizon, tolerance for risk,
and appetite for illiquidity, as these will frame all investment decision making.

These aspects — investment time horizon, tolerance for risk, and appetite for illiquidity — are all highly relevant to the
client’s approach to climate risks and opportunities, but there is also value in the investment adviser (where there is one)
specifically exploring the client’s beliefs around climate change so that investment can be tailored appropriately. For
example, some long-time horizon investors with a significant appetite for illiquidity may favor investment into operating
renewables, others may prefer investment into nature-based solutions, and still, others may have a preference for new
technologies such as carbon capture.

The following discussion outlines how different clients are likely to approach climate. The perspectives of clients in
different categories will vary. Further, it is worth noting that the geographical base of a client will also be a significant
driver of their thought processes: Even among professional investment institutions, cultural and social norms differ across
geographies, including around climate change.

As noted, investment advisers can only explore individual investment beliefs and intent, including about climate, where
clients can afford to pay for advice. This will rarely be the case in the general retail investment market. The development
of robo-advice (technology platforms that help understand an individual’s preferences and channel them toward
appropriate investments) is intended as one way to close this gap, but generally the approach is different in this market:
making a range of options available from which the individual investor can choose, rather than the adviser actively
seeking to tailor the investment approach to the client’s beliefs and needs.

Client Ambitions on Climate

The key aspects of investment time horizon, tolerance for risk, and appetite for illiquidity, and clients’ differing beliefs will
lead to different investment approaches. These approaches will incorporate at least one of the following strategies for
climate-aware investment and are likely to include more than one:

Risk mitigation — recognizing the risks to future financial returns from climate change, both in terms of the risks of the
transition of the economy to a less carbon-intensive form, and in terms of the physical risks of climate change
which are already emerging but will become more intense over time. This approach often incorporates measures
of future risk, such as scenario analyses and stress tests.

Managing negative impacts — a focus on understanding the current footprints of portfolios and seeking to manage those
down, either immediately or over time. This approach tends to focus on measuring current impacts of the portfolio,
using carbon footprint or similar metrics, and may be delivered through investment portfolios that screen out
investments that are highly carbon intensive, either in terms of whole sectors or having high intensity in
comparison with a broader sector.

Seeking positive impacts — a focus on shifting investment into areas where negative impacts are reduced or positive
impacts enhanced. At its simplest, this might involve a shift of passive indexed portfolios to more climate-change-
aligned benchmarks.

Climate opportunities — seeking financial upside through direct investment into climate technologies or specific
opportunities. At its simplest and most established, this might be investment into infrastructure for renewable
power generation, but it also extends to more early-stage investment into emerging and potential clean
technologies, such as to decarbonize ongoing business activities or in carbon capture and storage.

Nature-based solutions — recognizing that the ‘net’ in net zero implies that the world economy will continue to produce
greenhouse gas emissions which will need to be offset by other activities, many of which will use the only proven
scale processes for carbon capture, i.e., natural carbon sinks such as peatland, forestry, etc. There are increasing
investment opportunities in these areas which offer institutions scope to have measured impacts in terms of
biodiversity gains and carbon capture as well as financial returns.

Stewardship — (activity which will almost always accompany one or more of the above investment approaches)
recognizing the role that an investor can play in encouraging changes to the approach of their investments to
climate change so that investments mitigate their own risks and rise to the opportunities that decarbonization
offers. Stewardship can often be seen as a focus for investments in public equity, because one of the most public
aspects of stewardship is voting at public company annual shareholder meetings, but it is a mindset and approach
that can be applied in appropriate ways across all asset classes.

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Fiduciary Duty

One key consideration in delivering for clients is the concept of fiduciary duty. Most clients will frame their approach to
investments through the lens of fiduciary duty, and most often the relationship between clients and their investment
managers will be shaped by the concept also.

Fiduciary duty is a term that is often used in the investment world, and sometimes the same term is used by different
people to mean very different things. In part, that is because the regulatory framework for fiduciary duty varies across
countries, so investors need to understand their local requirements.

In particular, it sometimes seems that when US investors discuss fiduciary duty they mean that they are obligated to
consider only those matters that have a purely and immediately financial impact. European investors tend to understand
fiduciary duty in a much broader way, as requiring the incorporation of all long-term factors (such as climate or other
environmental or social matters) that will impact value over a time horizon relevant to the client. This gap in understanding
is often apparent in dialogue (and contract negotiation) between European asset owners and their US fund managers.

As a result of the spread of understanding of this term, and the fact that legal definitions in different markets differ, the
following discussion is from first principles and avoids specifics. It should nonetheless be useful given the central nature of
fiduciary duty to all investment on behalf of others.

Fiduciary duty is the obligation — often broken into a series of separate obligations — that applies whenever one party
looks after assets on behalf of another. At its simplest, fiduciary duty means that the fiduciary — the party looking after the
asset — must act in the interests of the actual owner of the asset and cannot operate either as if they were the owner or
to the detriment of the owner. Fiduciary duty exists outside of the investment world; for example, company directors owe
fiduciary duties to their shareholders. Merely the control of something that belongs to another can create a fiduciary
obligation, and it is likely to if the controller claims a level of skill that the owner does not possess.

In some markets this simple assertion of fiduciary duty has been clarified by law into a series of separate duties, including
two primary ones: the duty of care and the duty of loyalty, sometimes supported by duties of good faith and confidentiality.
Even in those jurisdictions where these duties are not, or are not all, explicitly articulated, they provide a useful breakdown
of what fiduciary duty means in practice.

The duty of loyalty insists that the interests of the beneficiary(ies) come first: Decisions must be taken selflessly in their
interests and not to any personal benefit of the fiduciary (who must disclose any conflicts of interest and recuse
themselves from decision making if need be). The duty of care insists that the fiduciary follows due process, basing
decisions on appropriate information (and where appropriate, advice) and on sensible decision-making processes. The
duty of good faith requires the fiduciary to act openly and honestly, and not create undue conflicts of interest. The duty
of confidentiality reminds the fiduciary that information belongs to the beneficiary — in effect, it is another asset of the
beneficiary which the fiduciary is charged with handling with the same care as other assets.

While this theory of fiduciary duty (or duties) applying to any party looking after assets on behalf of another applies in the
investment world, in practice, the relationships — particularly the relationship between the investment manager and their
client — can be defined in contracts and constrained heavily by regulation so the obligations of the parties are often
narrowly and specifically defined.

Nonetheless, fiduciary duty does not mean that investment professionals can only consider financial matters defined in a
very narrow way. Rather, they must invest wisely and well — applying the duty of care — and taking account of the needs
and requirements of the client. Fiduciary duty is why understanding a client’s time horizon, tolerance for illiquidity, and
investment beliefs is so important to the investment professional: This understanding allows the duty of loyalty to be
applied. Rather than constraining investment professionals to a narrow financial understanding of the drivers of
investment performance, fiduciary duty calls on them to integrate all factors that are relevant to investment performance
over the time horizon that matters to the client. This will include factors such as climate (both risks and opportunities)
because — as we have already seen in this chapter — climate change will certainly impact investment performance over
time.

It is worth noting that fiduciary duty doesn’t mean take as little risk as possible. In particular, the requirements of the duty
of care have seemed on occasion to discourage different decisions from the bulk of the market. But we know as
investment professionals that returns come from taking risks, and that investment opportunities can be found by avoiding
the market consensus. So sensible risk-taking is required of investment fiduciaries and it may be a breach of fiduciary
duty to try to avoid all risk or to simply crowd alongside the rest of the market.

Fiduciary duty means act in the interests of those whose money you are responsible for. If it is right to take a risk on their
behalf, do so, but do so following a thoughtful process.

The duty of care’s focus on following due process and considering appropriate information can nonetheless be helpful to
investors in considering climate change. As it becomes normal to incorporate climate change considerations into
investment approaches across increasing numbers of investment institutions, the understanding of the duty of care
expectations will shift so that it will be normal fiduciary practice to incorporate climate factors. Certainly, it will become
much harder to challenge fiduciaries who do choose to incorporate climate when such significant portions of the market
already do so.

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Because the investment world is framed by the real world, increasingly large investment institutions recognize the need to
participate actively in public policy debates and/or the development of best practices by industry bodies to help create a
positive framing for the investments that they need to make. This too is a reflection of fiduciary duty, particularly for long-
term minded institutions, enabling them to have sufficient certainty about the future investment environment that they can
deliver long-term investment with positive returns for their beneficiaries.

Client Objectives: An Exercise

The following table is aimed at helping you to think about the main drivers of client investment approaches to climate risks
and opportunities. Using your experience and general knowledge, use the information in the table to investigate aspects
of the investment approach that impact the considerations of different client groups concerning climate matters.

Once you have done so, you can explore perspectives on these issues.

Beyond this exercise, we will further explore the likely considerations of each of the broad investor types.

Client Types and Climate Investment Approaches

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Investor Mutual funds High Net Worth Family office Defined contribution Defined benefit (DB) Property & casualty Life insurer Endowment or Sovereign
and other retail Individuals (DC) pension scheme pension scheme (or general) insurer foundation wealth fund
vehicles

Investment time 1–50 years 20–50 years 50-150+ years 10–70 years 10–70 years 1–2 years 10–50 years 50–250+ years 30–150+ years
horizon

Tolerance for Variable Usually high High Variable Variable None Usually high High High
illiquidity

Explanations Individuals may Individuals will be The family office DC pensions must DB pensions must While insurers are Life insurance Individual Sovereign
be investing for considering not structure is consider investment consider investment often the most business is much endowments and wealth funds
any period within only their own explicitly over the working lives over the working lives thoughtful institutions longer term than foundations will have very
their own financial well-being intended to get of members, and also of members, and also about climate change P&C, with have a wide range different intents,
lifespan – from but also that of their beyond thought the period of the period of the (particularly its contracts fixed over of very different depending on
the short-term to children and grand- processes about retirement when the pension in payment. physical risks) on the lengthy periods of intents, depending the aims of
the very long- children. Estate the current pension pot is being While the retirement liabilities side of the time and often a on the wishes of government that
term. Some may planning will be a generations and drawn down. While phase may well be business, the linkage between their creators, but establishes
be willing to factor in decision- to look out these investments are provided through contractual nature of insurance and typically they aim them, but
tolerate making. Most will further into the for the long-term, and annuities or other P&C insurance is that savings products. to assure the long- typically they
significant tolerate significant future. This so should facilitate products from other the assets side of the Life insurers are term life of an aim to postpone
investment investment means that illiquidity tolerance, the financial services business turns over also the prime activity, far beyond current high
illiquidity; many illiquidity, but some tolerance for regulatory framework providers, trustees within short periods, providers of any individual’s life- levels of
will need full may have shorter- investment and cultural approach should still have an as most insurance annuities, which span. Their long prosperity –
liquidity at all term needs and illiquidity will be facilitates this more in eye to the relevant contracts are only pay DB pensions in time horizons and which may arise
times. expectations high. some markets than time horizon. While annual in length and retirement; this freedom of from relatively
depending on their others. these investments subject to regular may involve buy-in investment action short-lived
own life-stage and are for the long-term, renewal. This short of part or buy-out typically imply a assets such as
that of other family and so should time horizon means of all of mature DB substantial appetite fossil fuels –
members. facilitate illiquidity there is no tolerance schemes. The long for illiquidity. multiple
tolerance, as DB for illiquid investment. time horizon and generations into
schemes mature, and large investment the future and
particularly as they pools usually limiting the
move towards buy-in facilitate significant distortions to the
or buy-out illiquid investments. current
transactions, the The key constraint economy. Their
appetite for illiquidity on this can be long time
may reduce regulatory: some horizons and
substantially prudential freedom of
(sometimes to zero). regulation regimes investment
require higher action typically
levels of liquidity imply a
than strict financial substantial
analysis would appetite for
imply was needed. illiquidity.

Main framing for Contract Personal Personal Fiduciary duty Fiduciary duty Contract Contract Founding terms Founding terms
overall investment preference preference
approach

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Main reason(s) to Personal Personal approach Personal Fiduciary duty Fiduciary duty Awareness of the Long-term Long-term Long-term
take account of approach to to climate risk and approach to financial impacts of investment investment investment
climate climate risk and opportunity climate risk and Long-term investment Long-term investment climate change perspective perspective perspective
opportunity opportunity perspective perspective
Long-term Reputational risk Reputational
investment Long-term Personal perspectives risk
perspective investment of beneficiaries Investment
perspective consistent with
founding or
charitable aims

Explanations Though retail A HNWI will have There will Pension funds operate Pension funds (If there is any driver Fiduciary duty will The terms on The terms on
investors will clear personal inevitably be a to deliver in the best operate to deliver in to consider climate play a part in which the which the
choose their preferences with dynamic of interests of their the best interests of issues). Given the investment endowment or sovereign
investment fund regard to climate different beneficiaries – hence their beneficiaries – short time horizon of considerations – as foundation was wealth fund was
based on risks and opinions within fiduciary duty being hence fiduciary duty P&C insurance cover with all investment created will be the created will be
personal opportunities. The any family but the main driver. being the main driver. – typically no more professionals, main driver of the main driver
preferences, investment adviser the aggregated Trustees (and/or other Trustees (and/or than a single year there is a need to decision-making. of decision-
from the will need to explore personal views leadership of the other leadership of rolling period – and be driven by the Increasingly, the making. Its time
perspective of and understand of those with scheme) will reflect the scheme) will the asset classes best interests of trustees (or other horizon will tend
the fund and its these early in the decision-making their understanding of reflect their invested in as a result the customers – oversight body) of to draw
investment relationship, if they authority will the implications of understanding of the (usually cash and but life insurance these funds are attention to
adviser what are not made dictate the climate change to implications of near cash such as (and any considering how long-term risks
determines its explicit otherwise, approach to financial returns, and climate change to short duration associated savings they might reflect and
approach to and then ensure climate change the wider best financial returns, and commercial paper) product) is first and the aims for which opportunities
climate issues that they are (as to other interests of the the wider best typically there will be foremost a it was created also such as climate
can only be the appropriately issues, including beneficiaries, in their interests of the limited attention to contractual product in the investment change, but
terms of the reflected in time horizon and decision-making. In beneficiaries, in their climate matters. and so the terms of process, but this those with
contract – the investment appetite for DC schemes, there is decision-making. DB Regulatory the agreement must also be within oversight roles
agreed decision-making. illiquidity). scope to take some schemes will often be requirements strongly between the the context of the will be
investment cognisance of the expected to be frame this market, but parties must be the founding terms. constrained by
approach, personal preferences cognisant of the it is possible to primary driver of Similarly, while the the terms on
usually framed of beneficiaries – views of the imagine a P&C what should be personal views of which the fund
by local certainly in the sponsoring company, insurer deciding there encompassed in beneficiaries and was established
regulatory provision of the range in part because it was a commercial investment others may have and the
standards and of possible investment may give an advantage to decision-making. some influence investment
requirements. options available to indication of the marketing its (e.g. the students parameters set.
them, but also within perspectives and approach to investing of universities who
the default fund. There understanding of the in a climate positive campaign about
can also be some beneficiaries; way. If that marketing fossil fuel
commercial drivers for increasingly, some elicited a positive exposures in their
decision-making in DB trustees are response from the endowments), it is
markets where seeking to explore market, then the through moral
individuals have how they might insurer might align suasion rather than
flexibility in their choice understand, and more of its investment anything else.
of DC provider. perhaps reflect, the book to investments
personal preferences with a more climate
of beneficiaries. friendly profile.

Table 1

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Discussion by individual client type

What are they likely to be seeking by way of climate investment approach?

Mutual funds and other retail vehicles

Investment time horizon: 1–50 years

Tolerance for illiquidity: Variable

Main framing for investment approach, including to climate: Contract

Main reason(s) to take account of climate: Personal approach to climate risk and opportunity

Risk mindset: Loss aversion

Discussion:

Individuals have a huge range of investment needs. In the mass retail market (as opposed to the high net worth field), they
may be investing for any period within their own lifespan — from the short term to the very long term — for expected or
unknown future expenditures. Often the timing and scale of those expenditures is unknown and therefore the tolerance for
illiquidity may be limited — though some individuals may be willing to accept lengthier lockups. Evidence shows that most
feel a significant sense of loss aversion with regards to their own money, and so there is a tendency to invest
conservatively, often more conservatively than a professional would advise.

But few mass retail investors receive professional advice. The scale of their investable assets typically makes it
uneconomic for them to pay for individualized advice. The emerging market of robo-advisers (automated tools that provide
semi-tailored offerings on the basis of a broad-brush assessment of the individual’s characteristics and perspectives) tries
to fill this gap somewhat, but most investors will receive nothing but the most informal, sometimes inappropriate, advice
from nonprofessional sources.

This means that the investment world cannot tailor its offerings to the client. Instead, it must offer a wide range of options
from which the retail investor will choose. In this case, the framing of the relationship between the parties is based on the
contractual terms of the product that is bought and the regulation that applies to that contract. If the contract encompasses
climate-related matters then the investor will necessarily reflect those in its actions; otherwise, such matters will be
captured by the usual assessments of what will drive financial performance over the time horizon pursued in the
investment fund in question.

Implied favored climate-aware investment approach: Thematic and/or screened funds, integration of climate risk and
opportunity

High Net Worth Individuals

Investment time horizon: 20–50 years

Tolerance for illiquidity: Usually high

Main framing for investment approach, including to climate: Personal preference

Main reason(s) to take account of climate: Personal approach to climate risk and opportunity, long-term investment
perspective

Risk mindset: High tolerance for illiquidity and (typically) risk

Discussion:

High net worth individuals also clearly have a wide range of investment needs and will invest over a wide range of
timelines. The scale of their assets will usually imply a longer-term investment horizon — a significant focus will be estate
planning to ensure that their family inherits significant sums. This will usually enable high levels of illiquidity (though the
individual’s age and some forms of estate planning in some geographies may mean this is less tolerated). Most
significantly, the scale of their assets allows them to afford tailored investment advice and investment approaches that fully
reflect their personal needs and beliefs. On occasion, the personal beliefs of the individual’s heirs may also be taken into
account in the investment approach (at least with regard to a portion of the assets).

This more personalized investment approach should enable an appropriate incorporation of the implications of climate
science, to the extent that the personal beliefs of decision makers allow. As well as incorporating an understanding of
climate change-related risks, there should also be scope to consider the opportunities offered by the carbon transition.

Implied favored climate-aware investment approach: Scope for targeted climate investment (e.g., renewables
infrastructure), integration of climate risk and opportunity, perhaps some exclusions

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Example and further reading: Switzerland’s UBS (one of the world’s largest wealth managers even before its takeover of
Credit Suisse) has established a set of climate change commitments as a company and as an investor
(https://www.ubs.com/global/en/ubs-society/our-stories/2020/climate.html)

Learners are particularly encouraged to note:

• the language on the page: ‘Why are we getting involved?’,

• the sections of the Climate Policy on ‘Protecting our clients’ assets’ and ‘Climate-related opportunities’
• the section of the 2020 white paper for the World Economic Forum discussing the needs of Private Wealth
Investors, especially the output of UBS’s survey of them

Family office

Investment time horizon: 50-150+ years

Tolerance for illiquidity: High

Main framing for investment approach, including to climate: Personal preference

Main reason(s) to take account of climate: Personal approach to climate risk and opportunity, long-term investment
perspective

Risk mindset: High tolerance for illiquidity and (typically) risk

Discussion:

The creation of a family office structure is explicitly intended to look further into the future, beyond the needs of the current
generations. The aim is to preserve and enhance wealth far into the future, so that unborn generations can benefit from it.
Thus the time horizon for investment is by definition long-term and generally the tolerance for investment illiquidity will be
high.

This ought in itself to lead to a full incorporation of the implications of climate science into the investment approach, though
in some cases the personal beliefs of the family decision-makers may militate against this. In other cases, family members
may be passionate in their approach to climate change and influence an investment approach that more broadly takes
climate considerations into account. In many cases, this will have an eye as much to the opportunities offered by the
carbon transition as to the risks of climate change.

Implied favored climate-aware investment approach: Scope for targeted climate investment (e.g. renewables
infrastructure), integration of climate risk and opportunity, some exclusions; active stewardship, particularly of directly
owned assets

Example and further reading: https://www.cofraholding.com/en/ethos/impact/#Climate-strategy

Defined contribution (DC) pension scheme

Investment time horizon: 10–70 years

Tolerance for illiquidity: Variable

Main framing for investment approach, including to climate: Fiduciary duty

Main reason(s) to take account of climate: Fiduciary duty, long-term investment perspective, personal perspectives of
beneficiaries

Risk mindset: Long-term perspective should permit higher risk tolerance; where individual beneficiaries are permitted to
switch providers or stop contributions, greater risk aversion than time horizon might otherwise imply

Discussion:

Defined Contribution funds are pension schemes and inevitably have decades-long investment horizons, incorporating
both the working lives of their members and the period of retirement when the individual pension pot is being drawn down.
The nature of DC schemes, whereby funds are individual rather than risk being shared across a group of individuals,
reduces some flexibility in investment approaches — notably for those markets where investment is in practice restricted
to funds with daily dealing so that any buying and selling by individuals can always be seen to be fair between them.
Further, the regulatory regime in some markets may reduce the scope for truly long-term and illiquid investments; others
(perhaps most notably Australia and Canada) are more open to illiquid investments. In markets where individuals can stop
making contributions or where they can switch providers, there may be some desire by those providers to demonstrate
short-term positive performance (or at least avoid short-term underperformance), which may limit the scope for fully long-
term investment approaches.

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Despite these constraints of regulation and market practice, DC pensions are long-term investors and therefore often seek
to incorporate climate change issues into both their investment and stewardship approaches. Fiduciary duty will typically
be seen by the trustees of such schemes as constraining them to do so, as they need to reflect their understanding of the
risk and return implications of climate change into their investment approaches. This will be done either within the default
offering (which a majority of beneficiaries invest most of their money into due to a lack of interest and inertia) or in other
funds which individuals may actively choose. Further, the trustees’ approach on climate change may be bolstered by their
understanding of the views of beneficiaries, which may be actively sought on these matters.

DC schemes may also accompany and reinforce their approach with active participation in public policy debates and the
development of industry best practices.

Implied favored climate-aware investment approach: Making thematic funds available, potentially some exclusions, and
integration of climate risk and opportunity in default fund, alongside active stewardship

Example and further reading: https://www.australiansuper.com/investments/how-we-invest/climate-change

Defined benefit (DB) pension scheme

Investment time horizon: 10–70 years

Tolerance for illiquidity: Variable

Main framing for investment approach, including to climate: Fiduciary duty

Main reason(s) to take account of climate: Fiduciary duty, long-term investment perspective

Risk mindset: Long-term perspective should permit higher risk tolerance, but aversion to sizeable deficits sometimes
promotes a more conservative approach to risk and choice of asset classes than time horizon might otherwise imply

Discussion:

Defined Benefit pensions as long-term investment institutions should consider investment over the working lives of
members and the period of the pension in payment. While the retirement phase may well be provided through annuities or
other products from other financial services providers, trustees should still have an eye to the relevant time horizon. Where
they have these long-term investment horizons, there can and should be a willingness to take on illiquidity and to invest for
long-term returns. However, in many markets, DB schemes have been closed to new members and new contributions for
some years now, meaning that schemes are rapidly maturing. This means that their investment horizon is closer than it
once was, and investment approaches are becoming increasingly risk averse and conservative. This is particularly true if
the DB scheme is moving toward a buy-in or buy-out transaction (whereby the DB scheme hands over the responsibility of
paying the liabilities to a life insurer), and the appetite for illiquidity may reduce substantially.

As trust-based institutions, DB schemes must always have in mind the best interests of their beneficiaries and apply the
constraints of fiduciary duty. Trustees (and/or other leadership of the scheme) will reflect their understanding of the
implications of climate change to financial returns, and the wider best interests of the beneficiaries, in their decision
making. DB schemes will often be expected to be cognizant of the views of the sponsoring company, in part because it
may give an indication of the perspectives and understanding of the beneficiaries. Increasingly, some DB trustees are
seeking to explore how they might understand, and perhaps reflect, the personal preferences of beneficiaries (while
recognizing that there is a danger of self-selection bias, with those most likely to express views being those who hold
those views most strongly rather than necessarily being representative of beneficiaries as a whole).

DB schemes may also accompany and reinforce their approach with active participation in public policy debates and the
development of industry best practices.

Implied favored climate-aware investment approach: Integration of climate risk and opportunity, alongside active
stewardship

Example and further reading: https://www.omers.com/climate-change

Pension fund Case Study: Denmark’s ATP

ATP is a state-founded scheme with a role to supplement the state pension. This supplement is called the ATP Livslang
Pension (Lifelong Pension), reflecting the basic aim that it provides basic financial security through lifelong guaranteed
pensions that preserve their real value over time. In addition to this core pension role, it also carries some responsibilities
regarding benefit payments during individuals’ working lives. It states that “We must earn the trust of Danes every day,
and this means we must have high standards for decency, transparency and, not least, sustainability in our work.”

To see in full: https://www.atp.dk/en/dokument/report-responsibility-2022

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Stated sustainability beliefs

Among ATP’s stated purpose and targets are the following: “ATP acts as a responsible investor, and within this framework
must invest its assets so as to best safeguard the interests of its members. The objective for investment of the assets is to
maintain their real value.”

“Responsibility is usually the precondition for long-term, sound earnings — and thus for the preservation of the real value
of the investments.”

“The aim of ATP’s Policy for responsibility in investments is to protect the value of ATP’s investments.”

“ATP’s work with responsibility includes a broad range of socially relevant issues within environment and climate, social
issues and governance.”

Implementation of these beliefs

ATP states the following by way of seeking to implement these beliefs: “ATP makes an ongoing effort to integrate
sustainability-related and broader responsibility considerations in the day-to-day investment processes in line with
considerations for other business conditions and risks. . . ATP considers the analysis of companies’ ESG conditions to be
an important and relevant element in ATP’s risk management, and, in ATP’s experience, it is also possible to identify
investment opportunities based on these efforts.”

In practice, this has translated into being Denmark’s largest green investor, recognizing the opportunity to generate good
returns for members while contributing to the global green transition. The fund has thus set an ambition to invest DKK 100
billion in green investments by 2025, and another DKK 100 billion by 2030. It has established 2050 as its timeline to have
a carbon-neutral investment portfolio, with a 2030 staging post by which it aims to reduce carbon emissions from its
investment portfolios by 70 percent. In order to facilitate the measurement of this, it requires all companies it invests in be
able to report on their Scope 3 emissions by 2025.

Among other steps, in 2021 ATP already transitioned its corporate bond portfolio to include only 100 percent green bonds
— applying its own standard that goes beyond the recommendations of the Green Bond Principles. These form more than
DKK50 billion of the fund’s total reported DKK65.6 billion in green investments in 2022. It is also active in integrating
climate concerns into its property portfolio, both in the construction phase and in operation.

It reinforces its approach through its work as an active steward of its investments, seeing this as a key lever to deliver real
world change. It also has a particular focus on increasing the climate reporting transparency from the unlisted companies
in its portfolio.

Property & casualty (or general) insurer

Investment time horizon: 1–2 years

Tolerance for illiquidity: None

Main framing for investment approach, including to climate: Contract

Main reason(s) to take account of climate: Awareness of financial impacts of climate change

Risk mindset: Severe loss aversion

Discussion:

While on the liability side of their business, property and casualty (P&C) insurers are some of the most exposed to the
developing physical risks of climate change — directly seeing the costs of the increasingly frequent floods and fires that
are the markers of this stage of the climate crisis — and are becoming better at pricing these risks (or, in many cases,
avoiding them altogether by withdrawing from offering some insurance), these asset owners do not generally reflect this
understanding in their investment approaches. This is because their investments are largely short term; typically, P&C
insurance is renewed annually (allowing the insurer to reprice the risk regularly, and the customer to shop around) and
regulation requires the firms to have readily available cash to pay claims. Thus the firms’ investment approaches need to
be in short term and highly liquid markets that are close to cash, squeezing out much of the opportunity there might be to
invest with climate change in mind.

It is possible to envisage a P&C insurer that saw a business opportunity in offering climate-aware customers the promise
that its investment book would operate conscious of the climate crisis, but there do not appear to be mainstream offerings
of this sort yet. Such an insurer would still be constrained by the short-term nature of the market to invest in cash and
near-cash instruments so the contractual agreement with customers would be likely to require that the portfolio of such an
insurer would be screened to avoid investments in commercial paper issued by fossil fuel companies and the like.

Implied favored climate-aware investment approach: None (likely at most some climate tilt in choice of near-cash
investments)

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Life insurer

Investment time horizon: 10–50 years

Tolerance for illiquidity: Usually high

Main framing for investment approach, including to climate: Contract

Main reason(s) to take account of climate: Long-term investment perspective

Risk mindset: Long-term perspective typically permits higher risk tolerance, but prudential regulatory requirements may
constrain this.

Discussion:

Life insurance companies often benefit in the same way as pure property and casualty (P&C) insurers do: from direct line
of sight of the negative consequences of the climate crisis on people and the capacity of the planet to sustain life and
business as usual. They have often, therefore, been some of the earliest adopters of climate-aware investment
approaches. This is facilitated by their long-term investment horizons and their ability to be flexible and innovative in their
investment approaches, including tolerating significant illiquidity.

In some jurisdictions, however, regulatory considerations — particularly prudential constraints and requirements — have
tended to militate somewhat against these natural drivers to build climate awareness into the investment approach. Most
notable of these has been the EU’s Solvency II prudential regime for insurers, which is intended to safeguard consumers
and ensure that insurers are able to pay liabilities as they fall due. One consequence has been a more conservative and
shorter-term investment approach than the actual shape of the liabilities might imply. It has not prevented EU insurers
from taking account of climate change, but it may have blunted some of the approaches.

Life insurers may also accompany and reinforce their approach with active participation in public policy debates and the
development of industry best practices.

Implied favored climate-aware investment approach: Integration of climate risk and opportunity, alongside active
stewardship

Example and further reading: https://www.dai-ichi-life-hd.com/en/sustainability/environment/climate.html

Endowment or foundation

Investment time horizon: 50–250+ years

Tolerance for illiquidity: High

Main framing for investment approach, including to climate: Founding terms

Main reason(s) to take account of climate: Long-term investment perspective, reputational risk, investment consistent with
founding or charitable aims

Risk mindset: High tolerance for illiquidity and short-term underperformance

Discussion:

Endowments and foundations are pots of money set aside for a specified purpose, often a charitable or educational one
(some of the best known are those attached to US Ivy League universities). Their aim is to provide a cashflow for that
purpose and to at least maintain the real value of the fund itself. They often seek to maintain that real value into perpetuity.

By their nature, endowments and foundations are subject only to the principles and expectations on which they were
founded, and by whatever cashflows those foundation documents (as interpreted by whoever oversees the paying out of
funds from time to time) expect to be made available. Beyond that, their investment approach is for the most part
unconstrained. This largely unconstrained nature, combined with the lengthy horizon that is typically implied by their
creation (such foundations and endowments are typically created to enable long-term funding for some activity or purpose
for years far beyond individual lifetimes), tends to enable such investment institutions to make long-term and illiquid
investment decisions. In the case of a number of university endowments, this has enabled impressive returns.

This ability to invest with the long-term in mind is in many cases reinforced by the underlying purpose of the foundation. A
number of foundations are now considering how their investment approach can be used to reinforce the purpose of the
foundation, so that it is not just a source of funding but itself supports those foundational aims. For some nature-related
charities or for some health and inequality targeting foundations, this is leading to real-life discussions about how the
investment approach can more fully deliver on the need to address climate change. While the students of many
universities have in recent years campaigned to reduce the fossil fuel exposures of their institutions’ endowments, their
influence is, for the most part, by way of persuasion rather than themselves being direct beneficiaries.

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It is worth noting that some foundations have in recent times asked themselves whether they should persist or whether the
purpose for which they were created, and the interests of their intended beneficiaries, might be better served by the fund
being wound up and disbursed over a shorter-term time horizon. Such a mindset will inevitably require a short-term
investment approach and a move to cash and cash-like instruments over an accelerated period. This is true of a minority
of such institutions, but it is worth noting that there may be some exceptions to the long-term mindset that is usually
assumed of endowments and foundations (for example, 1).

Implied favored climate-aware investment approach: Exclusions likely, to ensure investment is consistent with founding or
charitable aims; integration of climate risk and opportunity.

Example and further reading: https://investments.yale.edu/2020-update-on-climate-change

Sovereign wealth fund

Investment time horizon: 30–150+ years

Tolerance for illiquidity: High

Main framing for investment approach, including to climate: Founding terms

Main reason(s) to take account of climate: Long-term investment perspective, reputational risk

Risk mindset: High tolerance for illiquidity and short-term underperformance

Discussion:

Sovereign wealth funds are, by their nature, political bodies and strongly reflect the politics and mindset of the
governments and nations that create them. Most are created to postpone the financial benefits of short-term resource
exploitation, for example, the exploitation of fossil fuels, to avoid distortions to the local economy — sometimes referred to
as the Dutch disease after the challenges faced by the economy of the Netherlands as it exploited its newfound fossil fuel
resources in the 1960s and 1970s. Given this strategy, many sovereign wealth funds feel constrained from taking too
strident an approach to climate change. This is explicitly not the case for NBIM, the Norwegian sovereign fund, whose
funding comes from that country’s oil and gas exports, but it is for a number of others.

This means that the long-term time horizon that is part of the essence of a sovereign wealth fund does not always
translate into investment that is conscious of risks such as climate change, which have impacts over the long term.
Nonetheless, such institutions can invest for the long-term and make significantly illiquid investments, usually with very
limited constraints, so they do have scope to reflect the implications of climate change and other risks.

Because of their nature as government-linked bodies, most sovereign wealth funds avoid participation in public policy
debates and best practice development. Some even avoid active involvement in stewardship of individual investments for
fear of their actions being seen as political or as some effort to exert national influence.

Implied favored climate-aware investment approach: Integration of climate risk and opportunity into mainstream funds;
time horizon and lack of liquidity constraints mean scope for targeted climate infrastructure investment; some exclusions
possible.

Example and further reading: https://www.nbim.no/en/responsible-investment/2025-climate-action-plan/

Sovereign wealth fund Case Study: Singapore’s GIC 5j

GIC sets out a clear objective of preserving and enhancing the international purchasing power of the reserves under its
management over the long term. This is a long-term role: The aim is explicitly to preserve and enhance value for the
benefit of future generations, not just the current ones.

To see in full: https://www.gic.com.sg/how-we-invest/investing-sustainably/

Stated sustainability beliefs

Among GIC’s beliefs are the following statements: “Sustainability is fundamental to the long-term health of the global
economy. It is integral to GIC’s mandate, which is to preserve and enhance the international purchasing power of the
reserves under our management.”

“We believe that companies with strong sustainability practices offer prospects of better returns over the long term, and
that this relationship will strengthen over time as market externalities get priced in and incorporated into the decisions of
regulators, businesses, and consumers.”

1
The LanKellyChase Foundation. (2023). www.lankellychase.org.uk.

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“GIC is committed to enabling the global transition to a net-zero economy, through our investments and operations. We
believe it is more constructive to support companies in their transition towards long-term sustainability, than to
mechanically divest from certain industry sectors. To do this, we have begun to step up active engagements with portfolio
companies on their climate transition plans, and fund the adoption and scaling-up of green technologies.”

Implementation of these beliefs

GIC talks about its investment implementation under two banners: capturing opportunities and protecting their portfolio. It
also aims to deliver sustainability through carbon efficiency within its own operations, under the banner of pursuing
enterprise excellence.

Capturing opportunities includes thematic investments through its Sustainable Investment Fund (SIF) and through focused
teams within asset classes, including: in public equities, investing into climate mitigation and adaptation; seeking
sustainability opportunities in fixed income and multi-asset; and a specific private equity portfolio seeking exposure
to early-stage energy transition opportunities. In addition to these specific vehicles for investment, GIC requires its
broader investment teams to integrate climate change into their investment decision making. This includes, for
example, “our investment groups examine the carbon intensity of companies in the energy sector relative to their
peer group. For significant positions, they may also conduct carbon price stress-testing against GIC’s set of
climate scenarios.”

The Sustainable Investment Fund is a global all asset class portfolio.

Engagement and responsible voting are also part of the broader sustainable investment approach.

GIC also sets similar standards for the external investment managers that it appoints: “We also engage with
external fund managers and general partners on their sustainability policies and practices, and ensure our
investments with them are managed in a manner consistent with GIC’s sustainability approach.”

Protecting our portfolio includes regular screening of GIC portfolios for material sustainability risks, and additional due
diligence on companies and assets that are exposed to greater sustainability risks — and where appropriate
adjusting long-term valuation and risk models.

On climate matters specifically, protecting their portfolio entails stress tests on the portfolio and on significant
holdings. These stress tests deploy both a range of climate scenarios and carbon price projections.

Among the climate-related organizations of which GIC is an active member in order to reinforce its work in the area are:
Asia Investment Group on Climate Change (AIGCC), CDP, and Climate Change 100+. It produces a TCFD report.

Up Next

You have now completed Lesson 1, where you gained and understanding of client objectives.

You should now be able to understand how various client groups approach climate risks and opportunities in their
investment strategies.

In the next lessons you will explore "Regulatory Responses."

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