UK/GLOBAL – Climate change is becoming a major risk management challenge for institutional investors, suggests a discussion report commissioned by the London Investment Office and the Universities Superannuation Scheme into the implications for long term investors, in particular pension funds, of corporate performance on social, environmental, ethical and governance issues.

If climate change begins to have a negative impact on world economic development, then pension funds and other institutions may not be able to fully carry out their objectives and make expected returns.
The report believes that action to reduce risk should be taken now, providing it does not involve disproportionate costs, and as such has drafted a ten point action plan.

One point suggests that cost effective energy conversation strategies could be adopted alongside investment in more climate–friendly buildings when looking at direct property portfolios, since this is the most likely asset class to be affected by climate change.

In equity portfolios the report says the simplest way to address climate change risks is for investors to look more closely at investee companies to ascertain their level of exposure to climate change risk areas.

Investors should also draw up statements of good practice codes for climate change policies to keep their funds consistent and transparent to investee companies.

Furthermore, stock analysis and valuation procedures need improving so climate change sensitive stocks and sectors can become more easily identified, as some economic sectors are more likely to be exposed to risk areas than others.

The report concludes by saying that investors and governments need to talk more and work together on how to make climate-friendly investments from a political perspective. At present, it argues, investors are not getting enough long-term positive signals from governments.

Information on the report can be obtained from Dr Raj Thamotheram, senior adviser, socially responsible and sustainable investment