Effectively decelerating climate change will require transparency in the valuation of climate risks and innovative, new financial tools to accelerate the transition to a sustainable, low-carbon world.
Original text published on March 19, 2021, in the article «Nachhaltig investieren» of the Swiss business newspaper Finanz und Wirtschaft.
Author: Daniel Gussmann, Chief Investment Officer of AXA Switzerland
Like many others, AXA has signed the Paris Agreement and is pursuing the goal of limiting global warming to below 1.5°C by 2050.
However, to effect positive change, the impact of climate change must be made transparent, risks correctly classified, and the effect of measures taken reasonably assessed. Only that which can be measured can also be managed appropriately.
The framework agreement of the Task Force on Climate-related Disclosure (TCFD) has been established in the area of finance as a globally authoritative reference for climate risks, and a majority of Swiss financial institutes have undertaken on their own accord to report their climate-related financial risks according to TCFD principles. In practice, however, there are significant differences in the implementation and how advanced this disclosure is. Better comparability of the disclosed information would be very desirable here in order to create greater transparency and clarity.
And the question of how to measure and assign a value to progress also remains unanswered. Thus the conventional valuation using the carbon footprint, for example, is a static indicator that only refers to the current status and excludes the future. A better, more forward-looking indicator is therefore the global warming potential of investments. It is for this reason that since 2019 AXA Group has used a climate model developed by the Swiss fintech company Carbon Delta and later taken over by MSCI. The model enables users to assess the climate effects of individual companies as well as sectors and to show the gap between their performance and the climate goals of the Paris Agreement.
At the end of 2019, the global warming potential of AXA’s investments was 2.8°C, a decline of nearly 0.2°C compared to 2018 and, above all, significantly below the market average of 3.6°C. The carbon footprint of investments was also reduced by 31% between 2014 and 2019. These are encouraging signs and show that our strategy is following a clear direction. But our assessments also show that additional efforts must be made to limit global warming potential worldwide to below 1.5°C.
Over 40% of all emissions worldwide continue to be the result of coal. This makes it absolutely necessary to stop the use of coal-powered energy and to significantly reduce dependence on oil and gas.
As early as 2015, AXA was the first major insurance company to announce a gradual exit from the coal industry, in terms of both investments and insurance cover. It will have exited coal completely in the OECD and EU countries by 2030 and worldwide by 2040. With carbon-intensive companies, in particular, it is imperative to support decarbonization projects, as a considerable reduction in global carbon emissions can be achieved in this way. For example, by enabling the transition from coal to gas as an intermediary step on the way to switching completely to renewable energies, which must be financed accordingly.
The interest in so-called green bonds has risen significantly in recent years and the market has since grown to a volume of over USD 500 billion. Nevertheless, green bonds are not suitable for such decarbonization measures since they only finance projects that can already demonstrate a positive effect for the climate and the environment. For this reason, supporting carbon-intensive companies that are actively working on their decarbonization, but that do not yet qualify for green bonds, requires additional new financial tools.
That is why in 2019 AXA developed a new asset class, so-called transition bonds, to support important decarbonization projects.
Even though society has adopted the course of reducing carbon emissions, current efforts will not be enough in the short and medium term to cover global energy requirements and at the same time achieve the goals of the Paris Agreement.
Transition bonds close this gap between green projects that are suitable for green bond financing and those that are not, but that are nonetheless important for decarbonizing the economy.
Only with innovative financial tools, an adequate valuation of climate risks, and the collective pressure of political decision-makers, authorities, companies, and consumers will we succeed in effectively decelerating global warming. The insurance and financial industries can take on an important role here as a catalyst.