Approaches in equity capital markets focus on thematic funds, which do not cover all sectors, or on low-carbon indexes, which are more focused on mitigation. Green bonds have been the main climate finance solution for debt capital markets. However, the instruments do not consider exposure to climate risk and opportunities from the viewpoint of an issuer’s entire balance sheet.
In September 2020, AIIB and asset manager Amundi launched the AIIB-Amundi Climate Change Investment Framework (CCIF). The framework offers a potential solution by translating the three key objectives of the Paris accord into fundamental metrics essential for investors to select climate champions. The assumption is that these eventual policy actions will incentivize climate winners and disincentivize climate losers. If the solution catches on, financial markets will be doing their part to support our climate goals.
"This project emphasizes the commitment of AIIB and Amundi to climate-focused investing and reflects an emphasis on long-term value making that takes into account the sustainability of future generations. The benefits may not be immediately apparent, but we believe that it is important to make a conscious decision to support sustainable development and influence a shift in the market. Only collective action can help us reach our Paris Agreement commitments," said AIIB Principal Investment Officer Stefen Shin.
Endorsed by the Climate Bonds Initiative, the CCIF translates the three key objectives of the Paris Agreement into fundamental metrics, equipping investors with a tool to assess an issuer’s level of alignment with climate change mitigation, adaptation and low-carbon transition objectives.
Investors can expect portfolios aligned with the CCIF to have potential financial impact by benefiting from any future repricing of climate change risks and opportunities in the capital market. The framework allows investors to measure issuer performance against the three objectives of the Paris Agreement and to systematically include in their investment portfolio A-list issuers (those already performing well on all three objectives) and B-list issuers (those moving in the right direction but not yet A-list issuers). An investment strategy targeting A- and B-list issuers is more resilient to climate change risk and more exposed to opportunities not yet priced in by the market.
The CCIF delivers an extrafinancial impact as it is designed to encourage the integration of climate change risks and opportunities into business practices by targeting the engagement of B-list issuers to help them transition to A-list credentials.
- A-list issuers (climate champions). Issuers fully aligned with and rating highly on the CCIF’s three variables
- B-list issuers (future climate champions with effective engagement). Issuers moving in the right direction toward the three variables and showing significant effort to improve (currently mitigating physical and transition risk and transitioning to a low-carbon and climate-resilient business model)
- Ineligible issuers. Issuers not aligned with or rating poorly on the CCIF’s three variables
The CCIF provides investors with a practical tool to select and, therefore, differentiate the pricing of climate champions. Differentiation will result in a positive incentive system, motivating issuers to accelerate the achievement of the three Paris Agreement objectives.
Climate change is one of the biggest long-term threats to investments. Fittingly, AIIB has set its mission as financing Infrastructure for Tomorrow—sustainable infrastructure that faces financial, social and ecological impacts such as climate change. Encouraging climate champions to report key achievements according to the CCIF’s variables will contribute to a positive cycle of good action, good disclosure, better data and better investor recognition, possibly creating a positive cascade effect in capital markets and incentivizing companies to go green.