As awareness of the reality of climate change grows among governments, businesses and consumers, asset managers too are warming to the subject. Christine Senior reports

If there is one outstanding theme that had its profile raised sky-high recently in the world of responsible investing it is climate change. Perhaps this is only to be expected: Al Gore's An Inconvenient Truth, his award of the Nobel Peace Prize, together with the UN's Intergovernmental Panel on Climate Change, and the Stern Report for the UK government mean climate change has never been far from the headlines. And investment managers have embraced the theme with the launch of funds angled towards both saving the planet and making money doing it.

Climate change funds have been launched by Schroders and F&C, Jupiter has its Climate Change Solutions fund and, in the wake of its new Global Climate Change index in September, HSBC launches its climate change fund, run according to active quant principles by specialist Sinopia last month. State Street also plans a climate change fund later this year.

Bill Page, head of ESG investment at State Street, thinks this approach will take off: "I really think climate change legislation is gong to unlock great investment opportunities."

F&C's fund, launched in September, has a different twist to other funds, according to Karina Litvack, head of governance and sustainable investment. "Our fund looks at both adaptation and mitigation - the mitigation being how we reduce our emissions through innovative technology, be that renewable energy or innovative materials or any number of things. At the same time we are looking at how people are going to make money because of changing climate conditions such as insurance products, flood prevention, wind storm prevention. We are taking more of an entrepreneurial approach and saying there are opportunities to make money because of climate, and regulation and customer demand related to the climate are changing."

Richard Stathers, SRI manager at Schroders, highlights a divergence between these funds and traditional ‘green' funds: "One of the selling points of the Schroder Climate Change Fund is that it's not run in the same manner as an SRI or green fund. We are very pragmatic about what climate change means to the future. We will invest in companies which might not be held in SRI funds, such as nuclear power, because we believe nuclear power can benefit from the need of society to respond to climate change."

The responsible or sustainable investment issue has also been driven up the agenda for asset management companies by the UN Principles for Responsible Investment (PRI), launched last year. Their high-profile launch, and the number of influential asset owners and investment managers that signed up to them, meant they were bound to cause a stir and bring the principles to the notice of the wider investment community.

In just over a year since the principles were launched, the number of signatories has risen from 65 to more than 200; by mid-2007 they represented more than $9trn (€6.2trn) of assets under management.

The knock-on effect has been that requests for proposals from institutions increasingly include asking potential investment managers about whether they are signed up.

"We notice an increase in the number of clients or RFPs asking if we are signatories to the UN PRI," says Stathers. "That is partly driven by one of principles being to promote acceptance and implementation within the investment industry, so anyone who is a signatory will make sure they are asking other fund managers if they are signatories as well."

This rolling stone is gathering momentum and even more converts as time goes on. Because many high-profile, large organisations have shown their eagerness to embrace responsible investment principles, they are tending to set a standard for others. This is particularly true in Norway, where the Government Pension Fund is something of a role model, with other organisations following its lead.

"In Norway the Government Pension Fund has a list of SRI criteria on its investments," says Julie Andersland, acting head of responsible investments at Storebrand. "Because of that lots of other pension funds and also other investors have looked at what they do, and it may become a sort of minimum standard. They make public all the companies they avoid investing in, and when they do that it's popular for the media to look at whether any other investors have been investing in those companies. We see a growing number of investors and asset managers following their black list."

In the Netherlands the controversial investigative television programme Zembla whipped up quite a storm in March with its findings about the investments of some leading Dutch pension funds. Funds like PGGM, ABP, the Dutch Railway scheme and the Shell scheme, previously regarded as having unblemished records as responsible investors, were caught out with shares in companies involved in the production of cluster bombs and landmines. This has had a major effect on pension funds in the country (see page 5).

Another trend is that environmental, social and governance analysis is moving away from the sidelines of investment analysis and policy and into the mainstream. No longer regarded as marginal issues, ESG factors are taking their place beside more conventional financial factors addressed by broker research into companies.

Allan Emanuelsson, SRI analyst at DnB NOR comments: "Integrating ESG criteria into more mainstream investment processes and risk analysis has been something of a hot topic in the last year or so. And sell-side brokers are increasingly employing SRI analysts and SRI teams and including ESG criteria in their analysis. That's one way the market has responded to the demand. We are in different ways integrating these criteria into more mainstream processes."

 Also evident has been more scrutiny on how pension funds and asset managers actually carry out their duties as responsible investors. In the UK two recent surveys have been published. The Fund Manager Responsibility Survey from FairPensions focused on how far fund managers disclose their policies on issues such as climate change and human rights, while a report from the UK Social Investment Forum analysed whether the pension funds of companies listed in the FTSE4Good UK index were themselves investing responsibly.

In Europe institutional investors are increasingly adopting international norms like the Universal Declaration of Human Rights and the International Labour Organisation core labour standards as a basis for their engagement policies. But they still need guidance on how to implement that engagement. Products like EIRIS's Convention Watch are proving useful tools.

"The popularity of Convention Watch has increased among institutional investors who find the philosophical debate about what is ethical and what isn't can run and run," says Steve Waygood, head of SRI engagement at Morley Fund Management. "What they find useful about third-party standards is they can use them to guide their work. We have seen a number of product providers like EIRIS and Innovest provide a service that helps fund managers and pension schemes track which companies are complying with norms."

The future looks bright for environmental, social and governance based investments. If anything they are likely to gain even more importance. Andersland thinks other kinds of funds will emerge, still linked to the theme of climate change. "When it comes to future trends on SRI products, I think there will be an even greater focus on issues related to climate change; for instance, funds with a lower carbon footprint or even funds that are carbon neutral."

Waygood, on the other hand, expects to see the arrival of more funds that focus on corporate governance, both activist funds and those that are less activist.

"I'd expect to see more of that kind of fund emerge," he says. "Funds that seek to take a more activist stance, like the Hermes funds that invest in undervalued poorly governed companies with the express intent of improving their governance and realising that value is one approach we'll see more of. We'll also see more funds that are less activist: they look to bias their portfolio to companies that are better governed and against those that are not, but otherwise maintain a lower tracking error than an activist fund might, seeking to use the information advantage on governance."

Engagement with companies rather than exclusion has in recent years been the preferred way of implementation of responsible investment policies, but it now looks as though investors could be on the point of taking this one stage further. If engagement over a long period has failed to change companies' unacceptable unethical practices, investors may now be prepared to disinvest. Their patience is running out.

Litvack sees evidence of changing attitudes. "In those cases where the situation is very extreme - for example, there is evidence of extreme pollution or systematic use of unacceptable labour practices - and we have given a real try over a sustained period but the company has not budged, then some clients are prepared to divest. It hasn't happened yet, but that is where I think this is heading because, judging by conversations we are having with clients, they want to demonstrate they are prepared to put their money where their mouth is."