Asset management companies missing climate risks in their portfolios

India’s largest Asset Management Companies (AMCs) are ignoring climate risks in their portfolios and no AMC has conducted climate-related scenario analysis or stress testing of their portfolios, according to think tank Climate Risk Horizons.

In a first-of-its-kind analysis, the group assessed the climate-preparedness of India’s top 12 AMCs, which collectively managed around $5.33 trillion in mutual funds for FY24.

It found that most AMCs still don’t have exclusionary policies to end investments in the coal sector and do not disclose the amount of carbon emissions they directly finance. Kotak Mahindra Asset Management Company is the only one that excludes coal from its ESG scheme.

Similarly, only Nippon Life India AMC has adopted a target to transition to low-emission portfolios. While a couple of AMCs are at the nascent stage of prioritising climate risks through emissions reporting, almost all report an “active ownership” approach wherein they engage with investee companies on ESG issues.

The study scores AMCs on ten criteria such as Responsible Investment, Board Oversight, Coal Policy, ESG Integration, Stewardship and Net Zero Targets to find that Asset Management Companies in India are not yet playing a meaningful role in India’s transition to a low-carbon economy.

Less than half of the AMCs have established formal organisational structures to oversee climate issues, while two-thirds offer ESG or sustainability-themed mutual funds. A majority of the 12 AMCs assessed are signatories to the United Nations Principles for Responsible Investment (UN PRI).

“Asset Management Companies must treat climate risk as the core financial challenge it is by strengthening Board oversight, stress testing, and meaningful disclosures. There is a need to expand sustainable investment products to address both sides of the gap,” said Sagar Asapur, co-author of the report.

Despite these initial steps, most AMCs act only on criteria that are mandated by SEBI and limit their climate-preparedness efforts to ESG-specific funds.

“Today’s retail investors are highly exposed to climate risks through equity schemes. Sectors like transportation and construction are vulnerable to physical risks from extreme weather events, while investments in the auto and power sectors are exposed to transition risks amid changing policies,” said Ritaj Kalaskar, co-author of the report.

For India to meet its climate and sustainability goals, the mutual funds industry needs to ensure that these assets are wisely invested such that its portfolio is compatible with a Net Zero future, noted the report.