All good money managers expect to outperform their benchmark, and by one such metric the French insurer and investor Axa SA recently scored a market-beating success. Not by delivering higher returns, but by generating a lower level of global warming.
If human activity is driving carbon emissions and temperatures to dangerous highs, then a giant asset owner like Axa with a 650 billion-euro ($790 billion) horde of stocks, corporate bonds and sovereign debt is one of the principal proprietors of climate change. In theory, that means every investment portfolio can be evaluated for the “warming potential” of its underlying assets.
After a painstaking process of self-evaluation that took two years, including a significant shift away from heavy polluters, Axa concluded its assets would warm the planet by 0.8 degrees Celsius less than if it held all the companies in major global stock and bond indexes. That was good news for an early adopter of portfolio-warming metrics.
The bad news: Axa’s portfolio implied a temperature increase of almost 3°C above pre-industrial levels by 2100. At that level, scientists warn of mass extinctions of animal species, large parts of the planet becoming uninhabitable due to extreme heat, rising sea levels swallowing up coastal cities, and lush rainforests turning into savannas. It also would put Axa, despite its climate-conscious efforts, on the wrong side of the 2015 Paris Agreement in which every nation agreed to limit warming to 2°C.
“You can try to drive your portfolio to a cooler temperature, but when you have to operate in an investment universe that is really trapped in a rising carbon footprint, you will encounter strong limitations on what you can do,” said Ulrike Decoene, Axa’s head of corporate responsibility. “We’re not seeing the broader economy decreasing its warming potential and that’s worrying.”
And it’s not only Axa that’s taking the temperature of its assets. U.K. insurer Aviva Plc and Japan’s $1.7 trillion Government Pension Investment Fund have published data on warming potential. New York-based BlackRock Inc., with $8.7 trillion of assets, plans to do the same for some of its funds. The practice is likely to spread in the years ahead.
There’s big promise in taking warming potential seriously. The world’s largest money managers, with holdings in every major company, might be better suited than a single government to gauge the rate at which businesses are warming the planet. These temperature readings can then help giant investors prod the companies to cool things down more quickly, fulfilling the promise of the sustainable investing movement.
But the process of avoiding the apocalypse can look quite alarming, especially when those managing trillions in assets discover they own a 3°C future. If even climate-conscious pools of capital are flashing such doomsday warnings, can this kind of data really help avoid catastrophic warming?
The dire outlook has prompted hundreds of banks, insurers and other corporations to unveil net-zero emissions targets as concerns about the environment breach the walls of the capitalist establishment and force companies to change the way they conduct their business. Paris-based Axa has done more than most in the financial-services industry to reckon with its impact on the planet.
Ranked among Europe’s largest insurers, Axa stopped underwriting certain new coal projects in 2017 and last year committed to wind down its existing coal insurance contracts by 2040. At the same time, the company has been divesting its coal and oil sands holdings since 2015 and pledged two years ago to put 24 billion euros into green projects by 2023. Perhaps most ambitiously, Axa has committed to reduce the warming potential of its portfolios to 1.5°C by 2050.