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Investor Disconnect on Climate Risk

Executives reveal mismatch between reality of climate risks and corporate reputation

It is widely recognised that the world must swiftly cut fossil fuel use if it is to avert catastrophic climate change. Institutional investors play a crucial role in this transition due to their vast financial leverage and as the principal owners of some of the world’s biggest fossil fuel companies. Climate risks also have significant potential impacts on investments and portfolios, and the stability of economies. Recognising this, many big-name institutional investors have signed up to initiatives like Climate Action 100+, the Net Zero Asset Managers initiative (NZAM), Net Zero Asset Owner Alliance (NZAOA) and Principles for Responsible Investment (PRI).

However, the extent to which the frameworks developed by these groups are genuinely integrated into real-world investment processes remains unclear, with institutional investors frequently engaging in actions that appear to contradict them. Previous research1 has found that while investors recognise the importance of climate risks, integrating them at a practical level across the industry is still in its infancy. Market Forces sought to build on this research to better understand how climate risk considerations are currently being applied by institutional investors in practice, and the key barriers to further integration.

In September to November 2023, Market Forces conducted an online survey of 150 investors at some of the world’s biggest financial institutions across the UK, USA, Singapore, Japan, Australia, Hong Kong and Belgium, delivered in partnership with NewtonX. Participants were senior decision makers within their company, working at ‘c-suite’ level – chief executive officer (CEO), chief investment officer (CIO), etc. – through to investment analyst/strategist level (see Methodology for details). This report outlines the key findings from the research.

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This is an important topic which seemed to be losing traction and media attention. The inflationary environment coupled with cost pressures have contributed to waning interest and discouraging investors, governments and public to tackle this important topic as a priority it deserves.

– C-suite respondent, bank, UK

Summary of key findings

1. Investors are more concerned about reputational risk to their company than the social and environmental impacts of the companies they invest in – Respondents indicated that reputational risk to their company and client returns influenced their investment decision making the most, while environmental performance and climate change impacts of investee companies were amongst the least influential considerations.

2. Investors are overlooking scope 3 emissions as a key indicator of regulatory and reputational risk – A large proportion of respondents indicated they largely disregard scope 3 emissions when evaluating investments and respondents were overall far more concerned about government regulation and reputational risk. Scope 3 emissions – those that a company is indirectly responsible for up and down its value chain – are a key indicator of material regulatory and reputational risks, especially for upstream fossil fuel companies. By overlooking scope 3 emissions, investors are failing to fully consider exposure to risks they are most concerned about.

3. The overwhelming majority of investors are personally concerned about climate change – 84% of respondents were moderately to extremely concerned, although significantly less so amongst US respondents.

4. Investors’ personal views on climate change appear to influence their investment decision making – Respondents with the lowest levels of personal concern about climate change were also the least likely to incorporate climate risk factors, beyond government regulation, in their evaluation of investments. This suggests some investors are allowing personal bias to dictate their investment decisions by ignoring what is objectively a profound risk to their investments.

5. Investors are overwhelmingly relying on internal modelling/analysis and investee disclosures when assessing climate risk. By contrast, the International Energy Agency (IEA) and Intergovernmental Panel on Climate Change (IPCC) scenarios modelling and analysis are disregarded by most investors.

6. Of those relying on IEA scenarios, investors’ base case forecasts were most likely to reflect the Sustainable Development Scenario. This is consistent with a rapid energy transition that limits the global temperature rise to 1.65°C by 2100 at a 50% probability.

7. Greenwashing and inadequate information from companies on their climate management plans are the main barriers to investors incorporating climate risk more effectively.

8. Investors are equally as willing to use engagement and divestment as tools for responding to climate risks. About equal proportions of respondents would opt to engage with the investee and to reduce their investment if an investee was found to be facing a high level of climate risk.

Key findings

1. Investors are more concerned about reputational risk to their company than the social and environmental impacts of the companies they invest in.

Respondents were asked about the extent to which different factors, such as anticipated returns and ESG personnel, influence their investment decision making (Figure 1). The results clearly show that investors are generally attune to climate change risk when evaluating investments, with three in five (57%) respondents indicating it had a ‘high’ or ‘very high’ influence on their decision making. However this only refers to climate risk to the investor’s own company; the climate change impacts of the investee’s activities (such as a coal miner or oil and gas producer) rank much lower as a concern, with just half of respondents viewing it as highly influential. Furthermore, reputational risks (to the investment company and its clients) and anticipated returns to clients still outweighed either of the climate-related factors by a significant margin.

Climate risks are largely irrelevant in the HF [hedge fund] investing process save for the opportunities and risks created by the legal, regulatory and political environment around these policies. Fund managers are less concerned about climate risks than they are political/activist pressure. This is almost entirely because climate risks have very little impact on asset performance.

– Fund/portfolio manager, hedge fund, USA)

Figure 1: Influences on investor decision making when evaluating investments
Stacked bar chart showing the extent to which different factors influence respondents' investment decision making.
Asset management respondents were more likely than bank respondents to be influenced by climate risk, though the difference was marginal (Figure 2). By contrast, asset manager respondents were significantly more likely to be influenced by the investee’s human rights performance, as well as by the ESG personnel at their client’s company, compared to bank respondents.

Biggest challenge is tying work to financial performance. Shareholders number one priority is returns.

– Investment analyst/strategist, bank, USA

Figure 2: Factors with a ‘high’ or ‘very high’ level of influence on investor decision making
By company type
Dot plot chart comparing influences on investment decision making, split by respondent company type.
By region
Dot plot chart comparing influences on investment decision making, split by respondent region.
By job role
Dot plot chart comparing influences on investment decision making, split by respondent job role.

Note: Results for ESG / responsible investment should be treated with caution due to a small sample size.

By climate concern

Dot plot chart comparing influences on investment decision making, split by extent of personal concern about climate change.

Any organisation that adds ESG to audit and consulting touch points is considered valuable as they can take a holistic approach

– C-suite respondent, asset management, Australia

2. Investors are overlooking scope 3 emissions as a key indicator of regulatory and reputational risk

Results suggest a large proportion of investors are disregarding scope 3 emissions when evaluating investments – one quarter (25%) of respondents reported they ‘never’ or ‘rarely’ consider scope 3 emissions when evaluating an investment, while 37% said they only sometimes did this. Just 38% of investors said they consider scope 3 emissions ‘often’ or ‘always’. Yet three quarters of respondents (75%) reported they frequently consider government regulation (Figure 3), indicating this is a major concern for investors, alongside reputational risk (as per Figure 2).
Figure 3: Climate risks considered by investors when evaluating an investment
Stacked bar chart showing the extent to which respondents consider different climate risks when evaluating an investment.
By region

Stacked bar chart comparing the climate risks considered, split by respondent region.

By company type
Stacked bar chart comparing the climate risks considered, split by respondent company type.
By job role
Stacked bar chart comparing the climate risks considered, split by respondent job role.
By climate concern
Stacked bar chart comparing the climate risks considered, split by respondents' extent of personal concern about climate change.
Similarly, when asked what factors indicate a high level of climate risk to an investment, ‘insufficient plans to reduce scope 3 emissions’ was reported by just 27% of respondents (Figure 4).
Figure 4: Factors that investors consider ‘high climate risk’ in an investment they are evaluating
Bar chart showing the most to least frequently-reported factors that for respondents, indicate a high level of climate risk.
By region

Bar chart comparing the different factors that indicate a high level of climate risk, split by respondent region.

By company type
Bar chart comparing the different factors that indicate a high level of climate risk, split by respondent company type.

By job role
Bar chart comparing the different factors that indicate a high level of climate risk, split by respondent job role.

Note: Results for ESG / responsible investment should be treated with caution due to a small sample size.

By climate concern
Bar chart comparing the different factors that indicate a high level of climate risk, split by respondents' extent of personal concern about climate change.
Scope 3 emissions – those that a company is indirectly responsible for up and down its value chain – are a key indicator of regulatory, market, reputational and thus material financial risk. Product end-users will be looking to minimise their emissions in response to government regulations and changing market trends as economies decarbonise. By overlooking scope 3 emissions, investors are failing to fully consider exposure to risks they are most concerned about.

3. The overwhelming majority of investors are personally concerned about climate change.

Overall, 84% of respondents indicated they were moderately to extremely concerned. Just 3% of respondents were ‘not at all concerned’ about climate change (Figure 5).
Figure 5: Investors’ personal concern about climate change
Column chart showing extent of respondents' personal concern about climate change.
Levels of concern about climate change were considerably higher amongst respondents in the UK and Asia-Pacific (APAC), where at least half indicated they were ‘very’ or ‘extremely’ concerned compared with just one third (32%) of respondents in the USA (Figure 6).
Figure 6: Investors’ personal concern about climate change – by region
Three donut charts comparing extent of personal concern about climate change, split by respondent region.
Respondents from banks were more likely to indicate they were ‘very’ or ‘extremely’ concerned about climate change (49% of respondents), while those working in asset management firms were more likely to be concerned to a moderate degree (55%) (Figure 7).
Figure 7: Investors’ personal concern about climate change – by company type
By company type
Two donut charts comparing extent of personal concern about climate change, split by respondent company type.
By job role
Five donut charts comparing extent of personal concern about climate change, split by respondent job role.

Note: Results for ESG / responsible investment should be treated with caution due to a small sample size.

4. Investors’ personal views on climate change appear to influence their investment decision making.

Respondents who indicated less personal concern about climate change also indicated climate risk had little influence on their investment decision making, and vice versa (Figure 8).
Figure 8: Influence of climate risk on investor decision making – by extent of personal concern about climate change
Dot plot chart comparing influences on investment decision making, split by extent of personal concern about climate change.
Similarly, those with the lowest levels of concern for the climate were also less likely to take into account the full range of climate risks as part of their evaluation of investments (Figure 9). This suggests some investors are allowing personal bias to dictate their investment decisions by ignoring what is objectively a profound risk to their investments.

‘Government regulation’ is a notable deviation from this trend, with even the least climate-concerned investors still clearly worried about the risk this poses to their investments.

Figure 9: Climate risks ‘often’ or ‘always’ considered by investors when evaluating an investment – by extent of personal concern about climate change
Dot plot chart comparing the climate risks that were 'often' or 'always' considered, split by respondents' extent of personal concern about climate change.

Whether an individual believes in it or not, climate change has an effect on the economy on a global scale. The amount of capital being funnelled into organizations that integrate solar, wind, and other alternative forms of energy is growing on a year-to-year basis. Not only are massive asset managers growing their ESG investing capabilities, but they are also being conscious of their own carbon footprints and taking measures that align with a greener future internally.

– Investment analyst /strategist, private equity, USA

5. Investors are overwhelmingly relying on internal modelling/analysis and investee disclosures when assessing climate risk.

Respondents were most likely to rely on their company’s internal modelling and analysis (69% of respondents) and investee disclosures (56%) to assess climate risks and opportunities (Figure 10). Relatively few respondents utilised IEA and IPCC scenarios modelling and analysis (29% and 17%, respectively). It is important to note, however, that some of these resources may be incorporated into the internal modelling and analysis used at respondents’ companies.
Figure 10: Resources currently used by investors to assess climate risks and opportunities
Bar chart showing the most to least frequently reported resources used by investors to assess climate risks and opportunities.
By region
Bar chart comparing the different resources used, split by respondent region.
By company type
Bar chart comparing the different resources used, split by respondent company type.
By job role

Bar chart comparing the different resources used, split by respondent job role.

Note: Results for ESG / responsible investment should be treated with caution due to a small sample size.

By climate concern
Bar chart comparing the different resources used, split by respondents' extent of personal concern about climate change.

Quantitative, issue specific, sector analysis from NGOs is most influential especially with regards to energy transition and climate policy/regulation risk assessment, or in areas (biodiversity) where data is generally unavailable

– ESG / responsible investment specialist, asset management, Japan

6. Of the IEA’s climate scenarios, investors’ base case modelling is most likely to reflect the Sustainable Development Scenario

Almost one third of respondents indicated they use IEA scenario modelling and analysis when assessing climate risks and opportunities (Figure 9). Of these, nearly half said they consider the IEA’s Sustainable Development Scenario (SDS) to be most aligned with their own base case forecasts (Figure 11). This shows many investors are already ‘pricing in’ a rapid acceleration of the energy transition. The SDS scenario is consistent with limiting the global temperature rise to 1.65°C by 2100 at a 50% probability. It is “based on a surge of clean energy policies and investment”, whereby “all current net zero pledges are achieved in full and there are extensive efforts to realise near-term energy reductions” (IEA, World Energy Outlook 2021, p. 95).

It should be noted that the IEA has stopped using the Sustainable Development Scenario in its World Energy Outlook analyses. The Announced Pledges Scenario (APS) is now the most similar scenario in terms of its assumptions and outcomes (IEA, World Energy Outlook 2022, p. 107).

Figure 11: The IEA climate scenarios most in line with the base case forecast used by investor companies
Bar chart showing the most to least frequently reported IEA climate scenarios used at respondents' companies.

Degree figures in parentheses are average global temperature rise by 2100 that could be achieved under the scenario at a 50% probability – IEA, World Energy Outlook 2021. Results are only for the 44 survey respondents who indicated they use IEA scenarios in their investment analysis.

By region

Bar chart comparing the IEA climate scenarios used at respondents' companies, split by respondent region.

Note: Degree figures in parentheses are average global temperature rise by 2100 that could be achieved under the scenario at a 50% probability – IEA, World Energy Outlook 2021. Results are only for the 44 survey respondents who indicated they use IEA scenarios in their investment analysis. Results for individual groupings should be treated with caution due to their small sample size.

By company type

Bar chart comparing the IEA climate scenarios used at respondents' companies, split by respondent company type.

Note: Degree figures in parentheses are average global temperature rise by 2100 that could be achieved under the scenario at a 50% probability – IEA, World Energy Outlook 2021. Results are only for the 44 survey respondents who indicated they use IEA scenarios in their investment analysis. Results for individual groupings should be treated with caution due to their small sample size.

By company type

Bar chart comparing the IEA climate scenarios used at respondents' companies, split by respondent company type.

Note: Degree figures in parentheses are average global temperature rise by 2100 that could be achieved under the scenario at a 50% probability – IEA, World Energy Outlook 2021. Results are only for the 44 survey respondents who indicated they use IEA scenarios in their investment analysis. Results for individual groupings should be treated with caution due to their small sample size.

By job role

Bar chart comparing the IEA climate scenarios used at respondents' companies, split by respondent job role.

Note: Degree figures in parentheses are average global temperature rise by 2100 that could be achieved under the scenario at a 50% probability – IEA, World Energy Outlook 2021. Results are only for the 44 survey respondents who indicated they use IEA scenarios in their investment analysis. Results for individual groupings should be treated with caution due to their small sample size.

By climate concern
Bar chart comparing the IEA climate scenarios used at respondents' companies, split by the respondent's extent of personal concern about climate change.

Note: Degree figures in parentheses are average global temperature rise by 2100 that could be achieved under the scenario at a 50% probability – IEA, World Energy Outlook 2021. Results are only for the 44 survey respondents who indicated they use IEA scenarios in their investment analysis. Results for individual groupings should be treated with caution due to their small sample size.

7. Greenwashing and inadequate information from companies on their climate management plans are the main barriers to investors incorporating climate risk more effectively

According to respondents, the biggest barriers to investors effectively incorporating climate risk into their investment decision making are 1) a lack of information from companies about their climate management plans (51% ) and 2) greenwashing by investees (50%) (Figure 12).

A lack of knowledge and skills around how to apply climate scenario modelling and analysis, alongside a lack of sufficiently granular data in the scenarios were the next most frequently reported barriers. This is a well-known problem – for instance, the IEA does not include regional pathways in its Net Zero Emissions by 2050 scenario, making it difficult to incorporate into most valuation models.

Figure 12: Key barriers to investors incorporating climate risk assessment into investment decision making
Bar chart showing the most to least frequently reported barriers to respondents incorporating climate risk assessment into their decision making.
By region
Bar chart comparing the barriers to incorporating climate risk, split by respondent region.
By company type
Bar chart comparing the barriers to incorporating climate risk, split by respondent company type.
By job role
Bar chart comparing the barriers to incorporating climate risk, split by respondent job role.

Note: Results for ESG / responsible investment should be treated with caution due to a small sample size.

By climate concern
Bar chart comparing the barriers to incorporating climate risk, split by respondents' extent of personal concern about climate change.

8. Investors are equally as willing to use divestment and engagement with investees in response to climate risks

Remarkably, when it comes to managing any identified climate risks, investors are largely neutral on the respective benefits of engagement and divestment; about equal proportions (roughly 40%) would opt to engage with the investee (directly and/or collectively) and to reduce their investment (Figure 13). Nearly one-fifth are prepared to divest entirely, while just 5% of respondents indicated that they would not take any action if an investee faced a high level of climate risk. Guidance from major responsible investment initiatives commonly recommend investors address climate risk at investee companies by escalating active ownership interventions – such as direct engagement, filing shareholder proposals, or voting against directors – and considering divestment where a company fails to adequately respond.2
Figure 13: Actions investors would take if an investee company was found to be facing a high level of climate risk
Bar chart showing the most to least frequently reported actions respondents would take if an investee company was found to be facing a high level of climate risk.
By region

Bar chart comparing the actions respondents would take if an investee was facing a high level of climate risk, split by respondent region.

By company type
Bar chart comparing the actions respondents would take if an investee was facing a high level of climate risk, split by respondent company type.
By job role
Bar chart comparing the actions respondents would take if an investee was facing a high level of climate risk, split by respondent job role.

Note: Results for ESG / responsible investment should be treated with caution due to a small sample size.

By climate concern
Bar chart comparing the actions respondents would take if an investee was facing a high level of climate risk, split by the respondent's extent of personal concern about climate change.

What would help investors in high-risk companies engage more effectively?

Respondents were asked to describe what would help them to engage companies on climate risk more effectively. Better quality, more granular data and information stood out as a clear theme (42 comments), with investors wanting an authoritative, objective and standardised body of data they could draw on to quantify risks and impacts, and inform their arguments. This includes data that better quantifies reputational and regulatory impacts.

A more prevalent and well informed, granular body of data that is recognised as authoritative, across the investment industry

– Executive / Managing Director, bank, UK

Climate risk is still not a widely adopted and standardized risk topic. Unfortunately there is a lack of consistent data across market caps and industries. As with any investment, there is a high [degree] of subjectivity, so until that risk can be pretty accurately (and universally agreed upon) quantified it will be difficult to get the industry to agree.

– Executive / Managing Director, bank, UK

Better and more compelling data and information that climate risk reduction is good for the bottom line.

– C-Suite respondent, asset management, USA

Other themes included:

Government support and regulation (27 comments): More consistent regulation across jurisdictions, stricter regulation, clearer/more detailed regulations and more clarity from governments on likely future developments regarding regulation.

“If we had more defined frameworks and regulations it would be easier to hold them accountable because we would know the anticipated action for not managing this risk.” – C-suite respondent, bank, USA

Standards and standardisation (21 comments): More/better industry standards around climate risk, a transparency standard, standard assessment and benchmarking tools, standardised disclosures/reporting from companies, standardised metrics.

“Clear standards such that greenwashing is called out and frowned upon whereas now the focus is often on virtue signalling” – Investment analyst /strategist, insurance company, Belgium

“Verifiable and standard, transparent assessment and benchmarking tools vs peers, industries and geographic regions” – Executive / Managing Director, asset management, UK

“Reporting and especially standardized measurement and metrics remain an area of significant improvement” – C-suite respondent, bank, UK

Benchmarking (17 comments): More benchmarking data and information (comparing across peers, industry and region), better ESG ratings/scoring.

Better communication and engagement with companies(14 comments): Engaging companies on specific issues, collaborating with companies on target setting, offering support to companies, better access to and engagement with the C-Suite and Board.

Greater transparency / better information from companies (13 comments): Greater transparency in company reporting, greater disclosure from companies on their ESG performance, greater use of independent assessments.

Collective engagement / collaboration (10 comments): Collective engagement with other shareholders, collaboration with other stakeholders to engage companies, supportive networks, utilising regulator shareholders to exert pressure.

Methodology

This research comprised an online survey of 150 institutional investors from more than 100 companies in the USA, UK, Singapore, Japan, Australia, Hong Kong and Belgium. The survey was designed by Market Forces and delivered by market research agency NewtonX during September to November 2023. Rather than using an existing B2B research panel, participants were recruited using NewtonX’s ‘AI-powered’ recruiting process, whereby potential participants were targeted through existing networks, email campaigns, industry groups and digital advertising. A screening questionnaire was used to ensure participants met the needs of the research based on the following criteria:

  • Company type
  • Location
  • Company assets under management (minimum of $20 billion)
  • Role within the company
  • Level of seniority
  • Decision making authority

Soft quotas were applied to the latter three criteria to ensure a good spread of respondents across these groupings. For example, a quota of roughly 25% respondents was applied to the target role groupings (fund/portfolio manager, investment analyst/strategist, c-suite and executive/managing director combined with ESG/other respondents). Previous research on investor engagement with climate risk indicated a bias of survey respondents working in ESG/responsible investment, perhaps due to the nature of the topic and the recruitment methods used. For this reason, we applied an additional limit to respondents working in this field (a maximum of 30 respondents overall), though the survey achieved well under this number (eight respondents).

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Respondent profile

Company type
Bar chart showing the proportion of respondents for each company type.
Respondent location
*Excludes three respondents from Belgium.
Company assets under management
Role within company
Level of seniority
Decision making authority

1  Krueger et al. 2020; Christophers 2019.

2. See, for example, the Institutional Investors Group on Climate Change’s (IIGCC) Net Zero Stewardship Toolkit, PRI’s A practical guide to active ownership in listed equity, the Paris Aligned Investment Initiative’s Net Zero Investment Framework Implementation Guide, the Investor Agenda’s Investor Climate Action Plans (ICAPs) – Guidance on using the Expectations Ladder and SBTi’s Financial Sector Science-Based Targets Guidance.

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