We are now truly witnessing the devastating effects of the climate crisis. Heat waves, droughts, floods and violent storms are occurring more frequently and intensely, with the US experiencing one of the worst hurricanes in recorded history last week.
This year has also seen increased urgency of climate action, from the Glasgow COP to the US passing the Inflation Reduction Act – a bill that will invest $369 billion in climate solutions and environmental justice. There has also been a rush of demand for sustainable products from consumers and investors, with a 71% rise in searches for sustainable goods in highincome countries over the past five years.
In response, many mainstay financial institutions such as BlackRock and Vanguard have announced major climate commitments and net-zero investment targets. Such financial firms can play a critical role in redirecting financial flows towards greener investments, boosting low-carbon industries and funding research in emerging technologies. But are these commitments backed by real shifts in investment outlook, or are they empty claims to capitalise on greener consumer preferences?
Has institutional investment behaviour really changed?
12 months ago we found a sample of 60 institutional investors from mainstream Australian investment organisations were not prioritising climate risk compared to more traditional financial metrics such as CEO performance and capital management. We recently repeated this survey to see if corporate strategy had changed over the last 12 months in this influential cohort of Australian investors.
To carry out this survey, we partnered with interactive market insights company MarketMeter and sustainable finance library Altiorem. Our sample this year included 115 institutional investors and equity analysts from major Australian financial institutions.
Institutional investors continue to downplay climate risk
We asked investors to score and prioritise a list of 27 corporate performance metrics including ESG, financials, management, strategy and shareholder engagement criteria. We found some noteworthy shifts, for instance culture and conduct had increased from 19th to 7th most-important priority.
This change might reflect the increased reputational risk businesses face following the recent #MeToo and Black Lives Matter movements. In Australia there has also been broader discussion on sexism and workplace culture, sparked by an inquiry into sexual harassment and bullying in Australia’s parliament. However despite the increased urgency of the climate crisis and major climate announcements by financial firms, climate risk remained close to the bottom in terms of investment priority.
Our research shows that institutional investors are stuck in the void between climate ambitions and climate actions
What’s behind the commitment – action gap?
We wanted to unpack the gap between corporate climate commitments and real action when it comes to investment decisions. We asked a series of open-ended questions about how institutional investors factor climate risk into their investment decisions. Three themes emerged.
Qualitative themes and insights from institutional investors
There is a lag between investor attitudes and actions
The results of our survey suggest a disconnect in how investors acknowledge value in incorporating climate risk but don’t prioritise it. They believe markets are responding fast enough, despite energy stocks increasing in value as temperatures soar and wildfires burn.
In addition, the focus on the Russia/Ukraine war highlights how immediate concerns can overshadow perceived long-term concerns around climate change. From the quantitative data, we also see that global social movements can affect the perceived value of companies, yet climate change movements have yet to manifest in greater prioritisation of climate risk in the same way.
Regulation is catching up with the greenwashers
Investors also told us that substantive action cannot be substituted with greenwashing. Yet our study finds evidence that the increased climate announcements by major firms might reflect a change in rhetoric rather than real action. Our previous work showed greenwashing can effectively mislead consumers into believing firms are green, especially consumers who are concerned about the environment. A number of large financial firms including BNY Mellon and Goldman Sachs have recently made headlines for engaging in financial greenwashing.
The financial industry should take note, as anti-greenwashing regulation is gaining pace both at home and abroad. Both the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have recently announced a focus on corporate greenwashing, including investment products and their advertised ESG credentials. Financial institutions will need to ensure they invest in the resources required to properly integrate climate change risk management into their investment frameworks, or risk punitive action.
Bold action is needed
Our research shows that institutional investors are stuck in the void between climate ambitions and climate actions. They could take inspiration from Patagonia CEO Yvon Chouinard’s recent move to give away the company to fight climate change! As bold climate action gains momentum, it would be great to see the finance industry step up to the challenge.
Our report on green pensions has several suggestions for how behavioural insights can help investors and fund managers make greener investment decisions. Get in touch with us if you want to help your organisation take action.