Empowering change: the role of institutional investors and climate risk

In today’s world, the perception of climate risk has evolved from being solely an environmental concern into a recognised financial risk. This has become so widespread that it has been incorporated into the regulatory frameworks of most developed nations. However, the real game-changer lies in the active involvement of institutional investors in the battle against climate change.

Governments across the Globe have come to realize that their efforts alone are insufficient to effectively combat climate change. To meet ambitious net zero commitments, they require the private sector to step in and assume a pivotal role. This is where institutional investors come into play, armed with significant influence and capital, capable of driving change at scale and pace.

JANA Investment Advisers, Australia’s largest independently owned investment advisory firm, has been partnering with institutional investors for over three decades to deliver superior long-term investment results. As our social and physical environment grapples with unprecedented change, investors are increasingly searching for innovative and collaborative sustainability solutions. These solutions aim to shift the focus from merely considering Environmental, Social, and Governance (ESG) factors as a means of risk management in investment decision-making to actively pursuing real-world outcomes.

To achieve this ambitious goal, JANA collaborates closely with investors to integrate climate considerations into their investment strategies. This integration involves the incorporation of climate-aware capital assumptions and climate change scenario modelling. These efforts form a system-wide stewardship approach, ensuring that the interconnected aspects of the environment and society are considered alongside the pursuit of strong investment returns.

The crux of this approach lies in leveraging influence and capital while reviewing investment portfolios to protect ecosystems, biodiversity, and local communities. JANA’s approach comprises two fundamental strategies:

Influence: Institutional investors act as stewards of their entire portfolios, assessing the impact of companies from multiple angles, including climate, biodiversity, and human rights. Engagement with these investors becomes pivotal to elevating their ambitions across these various areas simultaneously. This process typically begins by addressing issues within sectors where more sustainable practices are readily available, such as the energy and mining sectors.

Capital: The focus is not merely on designating a small portion of the portfolio as “impact investments”. Instead, investors are encouraged to embed impact investments across all asset classes, making leaning into climate solutions a standard practice rather than a niche aspect of the portfolio.

The critical minerals industry is a notable example of where this comprehensive approach can be applied. This industry is set to play a central role in the transition to net-zero emissions and support Australia’s renewable energy journey.

As the world increasingly shifts toward cleaner and more sustainable energy sources, addressing climate change and achieving net-zero emissions remain paramount concerns for both the public and private sectors. However, the conventional approach of tackling climate change in isolation has limitations. It tends to ignore the adverse impacts on the very systems that need protection, including ecosystems, water resources, and local and First Nations communities. This compartmentalised approach also fails to capitalize on the opportunities for accelerated progress that could be harnessed by addressing these issues collectively.

By focusing on the responsible stewardship of the critical minerals industry, institutional investors have the capacity to demand a holistic consideration of the environmental, social, and cultural systems within which it operates. This ensures that the development and expansion of the critical minerals industry do not come at the expense of the nation’s biodiversity, freshwater resources, ecosystem health, or cultural heritage.

Conclusion

The fusion of financial acumen and environmental consciousness serves as a powerful catalyst for change in today’s world. Institutional investors, in collaboration with organisations like JANA Investment Advisers, are spearheading a transformation that goes beyond financial gains. It aspires to foster a harmonious coexistence between economic progress and ecological well-being, with an eye on the long-term sustainability of our planet and the prosperity of its inhabitants.