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New Report: Investment Managers Still Lagging in Response to Climate Change Risks and Opportunities
Nearly half of money managers surveyed ignoring climate risks, considering it 'non-material'Download Full Report
January 06, 2010
BOSTON
- Although there is overwhelming scientific consensus that climate
change is underway and governments are imposing regulations to curb
greenhouse gases, the vast majority of the world's largest investment
managers are not factoring climate-related trends into their short- and
long-term investment decision-making, the result being significant
'hidden risks' in the trillions of dollars of investment portfolios
they are managing.
This is the key conclusion of
a new Ceres report released today that surveyed leading assets managers
in 2009 on their responses to the increasing business risks and
investment opportunities associated with climate change. The survey was
sent to the world's 500 largest asset managers, according to the
Pensions & Investments Global 500 Survey.
"Despite
the growing recognition of the far-reaching impacts climate change will
have on the global economy, only a handful of asset managers are
integrating climate risks and opportunities throughout their investment
practices," said Mindy S. Lubber, president of Ceres and director of
the Investor Network on Climate Risk. "These findings make clear that
the investment community is overly focused on short-term performance
and ignoring longer-term business trends such as climate-related risks
and opportunities. The recent subprime mortgage meltdown is a painful
reminder of the fallout for investors who ignored 'hidden' long-term
risks."
The survey results, collected in early
2009, highlight the lag of major financial markets to deal with climate
change, even as strong state and national climate policies are being
adopted globally, Lubber said.
The survey was
done at the request of the Investor Network on Climate Risk, a network
of 80-plus pension funds and other institutional investors who rely on
asset managers to manage their investment portfolios. Eighty-four asset
managers managing $8.6 trillion in assets completed the survey,
including 66 in the P&I top 500 list and 18 others who
responded at the specific request of INCR client members.
The
report shows that while a large number of asset managers are in the
preliminary stages of including climate risks in their due diligence,
only a small percentage are considering a broad range of climate risks,
such as regulatory, litigation, physical and competitive risks, as part
of their due diligence process for evaluating companies. Nearly half of
the respondents - 44 percent - said they do not consider climate risks
at all because they do not believe that climate change is financially
'material' to investment decision-making.
A key
problem identified in the report is that asset owners, such as pension
funds and other institutional investors, are either not asking their
asset managers to include climate risk and opportunity analysis, or are
only beginning to raise the subject. This is hugely important because
nearly half of the respondents - nearly 49 percent - said they did
not analyze climate risks because their investor clients did not ask
them to. Another shortcoming identified in the report: incentive
structures and benchmarks that asset owners use for evaluating asset
managers are heavily weighted towards short-term performance focusing
primarily on quarterly returns where climate risks are far less likely
to show up.
The report recommends that
institutional investors push harder to get asset managers, consultants
and others in the investment community to boost their attention to
climate-related issues. The report suggests that this be done through
requests for proposals (RFPs), other hiring procedures or as part of
managers' performance reviews. Today, in an effort to do just this, a
leading INCR member, the California State Teachers' Retirement System
(CalSTRS), announced it will engage its active equity managers on their
climate risk analysis. Specifically, CalSTRS will highlight the need
for each manager to have expertise in climate change and other
sustainable investment analysis and to adapt their corporate governance
voting practices to address climate risks.
"As a
long-term investor, CalSTRS wants to invest in well-managed companies
that can address the physical risks of climate change and adapt to the
changing regulatory and market realities of a carbon-constrained
economy," said Jack Ehnes, chief executive officer of CalSTRS, the
nation's second largest public pension fund, with more than $130
billion of assets under management. "Our asset managers need to ask the
right questions and critically evaluate how companies are positioned so
that we’re sure that our investments will produce outstanding
risk-adjusted returns for our members."
The
report, "Investors Analyze Climate Risks and Opportunities: A Survey of
Asset Manager Practices," highlights a handful of asset managers - MFS
Management and F&C Management Ltd., among those - that are
integrating climate risks and opportunities throughout their investment
practices, including asset allocation, portfolio valuation and overall
due diligence. "Like companies that are rethinking and retooling their
business strategies in response to climate change, these asset managers
are positioning themselves to capture the opportunities and understand
and manage the risks of climate change across their portfolios," the
report said.
“To achieve the climate
change goals necessary to avoid catastrophic climate change, companies
will need to reduce their own greenhouse gas emissions and develop
products and solutions to help the world shift onto a low-carbon growth
path," said Alexis Krajeski, associate director of Governance &
Sustainable Investment at F&C Management Limited. "As long-term
global investors, we want to invest in companies at the forefront of
that change and view those lagging behind with caution. To make these
assessments, we have developed requisite expertise and processes to
incorporate climate-related risks into our investment
decision-making. In time, we believe such enlightened
investment thinking will lead to better investment performance and
support the growing demand we see from clients.”
Other report highlights include:
- Nearly
three-quarters of asset managers do not expressly consider climate
risks in their overall due diligence.
- Firms
offering "green" investment opportunities are more likely to analyze
climate risks for all their investments than their traditional
counterparts.
- Half of all asset managers
believe that some sectors have significant exposure to climate risks,
yet nearly half of those do not conduct climate risks analysis in their
due diligence process.
- Less than one-third
of asset managers incorporate climate risk into their corporate
governance analysis. Even in sectors where asset mangers believe that
climate risk may be important, three-quarters have not changed their
analysis of governance to include that risk.
- Less than one-third of asset managers have proxy voting policies for
scrutinizing climate-related shareholder resolutions filed with
companies.
Download a copy of the full survey report here: http://www.ceres.org/pub/assetmanager
About Ceres & INCR
Ceres
is a leading coalition of investors, environmental groups and other
pubic interest organizations working with companies to address climate
change and other sustainability challenges. Ceres also directs the
Investor Network on Climate Risk, a network of more than 80
institutional investors with collective assets totaling $8 trillion
focused on the business impacts of climate change. For more details,
visit http://www.ceres.org or http://www.incr.com.
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