The science is clear : the Earth is warming at an unprecedented rate and carbon emissions are the main cause. The likely impacts of climate change are well documented, and ultimately the fabric of society may be tested in the coming decades. The challenge is humbling, but AXA acted early by ending business and investment ties with the coal and oil sands industries, setting itself an ambitious green investment target, and supporting the Taskforce on Climate-Related Financial Disclosures (TCFD).
However, the Paris Agreement’s call for “making finance flows consistent” with a low carbon economy also requires understanding the “climate dynamics” of our investments. This concept - striving to align investments with the “2°C” trajectory that science and the Paris Agreement are calling for - forms the core of the TCFD guidelines.
This report, building on our first two Climate reports, presents our most advanced efforts in this area. It seeks to model both the impact that climate-related risks may have on our investments (what we have termed the “cost of climate”, expressed in financial terms) and conversely the impact that our investments (ie. the businesses and governments we finance) may have on the climate (what we have called here the “warming potential”, expressed in “temperature”). This year we have extended the scope of our analysis to our sovereign debt portfolio, measured more types of risks for our Corporate assets, expanded our work on the forward-looking “warming potential” metric, and commissioned our external auditors to audit the report.
What have we found?
Translating international climate objectives into quantitative investment metrics is a new and complex risk modelling exercise; some experimental tools and metrics are available and will require improvements over time. Nevertheless, despite its evolving nature, we believe the “warming potential” to be a relevant contribution to the climate finance debate, helping to raise awareness on the need to factor “transition” pathways into climate risk analyses.
Our current modelling reveals that AXA’s investments has a “Warming potential” below a widely used market reference of 3.7°C and various “BAU” projections in excess of 4°C.
This means that most investors operate in a business environment which is not fully “Paris-aligned”, and where mainstream investment strategies can only lead to a world which is far above 2°C. Even though “climate-conscious” investors can proactively reorient some capital flows to improve marginally their warming potential, they remain largely constrained by a broader industrial context trapping economies into carbon intensive pathways.
We believe that AXA’s experience both with climate-related asset reallocation and with forward-looking risk metrics provides us with a legitimate voice in the climate finance debate. Our conviction is that tackling climate change requires a broad transition effort that investors alone cannot achieve. All sectors and companies have a responsibility to evolve while factoring social and business impacts, and it is the responsibility of investors to identify and support, for example through engagement, relevant “transition” strategies while factoring financial risk.
In short, financial stability that delivers sustainability is an opportunity for all market participants, including policy-makers, to rise to a challenge that is worthy of our best efforts. The transition to a low-carbon economy requires “transition-minded” investors and businesses working together on new solutions to achieve the “2°C” world that science and society are calling for.