Climate change, human rights and institutional investors Climate change, human rights and institutional investors Climate change, human rights and institutional investors

​Disruptive and destructive weather events over the past few years have demonstrated the severity of climate change impacts, from crop-destroying rainstorms in Sub-Saharan Africa to heat domes in western Canada. As climate impacts and public pressure to take action increase, institutional investors have begun integrating climate risks into their asset allocation models and investment decisions. Climate change impacts are also profoundly human in nature. Beyond the personal challenges and tragedies people face due to climate change, the impacts on people will result in socio-economic disruptions due to the rise and fall of climate impacted sectors and projects.

Climate change impacts extend beyond the physical and regulatory environments. Climate change affects human rights, including the rights to life, food, water, housing, health, and work. The increased severity of storms will displace people from their homes drought and heat will make it more difficult for farmers to work their fields and turn a profit warming and acidifying oceans will disrupt marine life, impacting a key source of protein and livelihoods workers in carbon-intensive industries will lose their jobs. Unfortunately, the most vulnerable groups tend to also be the most impacted by climate change because of their more tenuous living and working situations.

Market risks: Impacts to human rights inevitably result in impacts to markets, companies and investors, resulting in a range of economic and investment risks. Particularly relevant to institutional investors are the systemic risks that could manifest at a commodity, sector or regional scale, such as reductions in agricultural productivity, increased illicit activities as established industries are disrupted, or changes in demand for climate-impacted products. As an example, agricultural labour productivity in India may have already declined by 10% as a result of global warming.¹

Legal risks: Both climate and human rights litigation are growing fields. A successful case against an oil major for historical emissions included wording in the judgment about human rights and the "duty of care" the company owed to a nation's citizens impacted by climate change. Costs related to legal risks are passed on to investors through various means such as reduced profitability and future cash flow. While direct litigation against investors is not as common, the potential exists. Recently, a major financial institution entered a mediated process through an OECD National Contact Point related to its historical emissions and environmental impacts and subsequently agreed to align its lending portfolio with the Paris Agreement and set and publish intermediate goals.

Most climate-related judgments and settlements have resulted in the defendant committing to climate action, such as setting meaningful emissions reductions targets.² While it can be challenging to assign blame for any specific climate impact due to the diffuse nature of emissions, the science of attribution is advancing. Investors who are not meaningfully incorporating climate change risk into their investment strategies may be exposing themselves to increased litigation risk.

Regulatory risk: The rise of human rights on the investor and corporate sustainability agenda is partly driven by regulatory developments. The UK, France, California and Australia have passed modern slavery and supply chain due diligence acts, and the EU is planning a mandatory human rights and due diligence law, likely forthcoming in 2022. Companies – and investors – will be expected to establish a human rights policy, conduct due diligence of activities and investments, and establish systems and measures to avoid and address negative impacts.

Disclosure and reputational risk: Disclosure expectations continue to grow, with securities regulators planning to implement requirements in line with the Taskforce for Climate-related Financial Disclosures (TCFD). Additionally, in response to a growing number of lawsuits related to insufficient disclosure of climate-related risks, organizations are enhancing their climate capabilities and related disclosure plans. With new regulatory ESG mandates expected to become effective later this year, companies and investors will face more legal and reputational risk as well as additional scrutiny from overinflating their climate actions (i.e. greenwashing).

There are significant actions investors can take to limit further climate change impacts and support the mitigation of existing climate change impacts through their investee companies.

What can and should institutional investors do?

• Commit to aligning with science-based emission reduction targets to reduce current and future impacts
• Identify opportunities to reduce emissions through "green" investments
• Develop strong human rights assessment and management practices
• Integrate human rights into climate change scenarios, risk assessments, asset allocation frameworks and investment decisions, considering systemic and operational-level risks
• Establish a strong stewardship practice to ensure investee companies align with climate and human rights policies and practices
• Provide quality disclosures on the management of climate-related risks, impacts and opportunities, including those tied to human rights