The International Atomic Energy Agency estimates that between now and 2050, USD 44 000 billion of investments, or USD 1.3 trillion a year, will be required to launch an energy transition towards a new economic system.
By way of comparison, according to the EFAMA, in 2014 the European asset management industry managed a total of USD 20 trillion, while asset managers worldwide managed USD 55 trillion. In this context, the financial sector has a leading role to play in mobilising the long-term financial assets needed to finance the energy transition.
How should assets be allocated to best tackle climate change?
According to the consulting firm Mercer, given that 90% of the variation in a portfolio’s returns can be attributed to asset allocation, the current situation is worrying because traditional asset allocation approaches are not capable of factoring in climate risk.
The Institutional Investor Group on Climate Change (IIGCC) suggests two courses of action to deal with this situation and integrate climate risk into investment decisions on a permanent basis:
1. Climate risk management, which involves measuring portfolios’ carbon intensity and reducing investments in those sectors and assets which are highly impacted by major climatic events and strengthening environmental regulation.
2. Increasing investment in sectors with a strong environmental impact, such as renewable energy infrastructure, energy efficiency and forestry, and developing appropriate investment vehicles such as green bonds, private equity and environmentally-themed funds.
BNP Paribas Asset Management (BNPP IP) believes that green bonds are a key tool for driving changes in the allocation of capital. We see these instruments as serving the interests of our clients. For these reasons, it is our goal to significantly increase the amount invested in these instruments as part of our strategy for combating climate change.
Fiduciary duty and support for the green bond sector
We are thus aware of the importance of green bonds as a crucial facilitator of a new asset allocation better aligned to the risks and opportunities of climate change. BNPP IP is moving in this direction as part of its “2°C” strategy.
Firstly, the size of BNPP IP’s bond management activity represents a significant driver. The EUR 217 billion we have invested in global fixed income markets, for example, enables us to leverage support for the sector and give our clients access to diversified green bond exposure, covering corporate bonds, project bonds, local and regional authority bonds, as well as asset-backed securities, covered bonds and sub-sovereign, supranational and quasi-government bonds.
In addition, we are committed to improving practices within the sector. In December 2015, BNPP IP supported the “Paris Green Bonds Statement”, an appeal to institutional investors representing more than USD 11.2 billion of managed assets, aimed at encouraging issuers to work towards better harmonisation of standards in this sector.
Lastly, BNPP IP participates via the European Commission and the Energy Efficiency Financials Institutions Group (EFFIG) in working groups whose objective is to overcome obstacles to the mass development of green bonds related to the lack of an aggregation mechanism for energy efficiency projects in the European property and manufacturing sectors.
It is our fiduciary duty to ensure investments' sustainability and manage the associated risks. In this, the Paris Agreement “post-adoption” period, this translates into support for the green bond sector and increased exposure to products with a positive environmental impact.