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Special Report

Impact investing


ESG roundup: Climate change risks, Towers Watson's 'extreme risks', CDP Water Report, Social Investment Research Council

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UK pensions minister Steve Webb has warned pension funds of the growing financial risks of climate change.

Speaking at the launch of ’The Green Light Report: resilient scenarios in an uncertain world’ by charity ShareAction, he said: “Those who at least question the valuation of firms, question what the firms are doing to diversify and question what the firms are doing to mitigate the carbon implications of what they’re doing may well be ahead of the curve and have a competitive advantage.”

He continued: “Simply upgrading our electricity infrastructure alone will require more than £100bn of capital investment between now and 2020. These sorts of issues are not marginal or niche. They’re absolutely mainstream and substantive, and some of the biggest pension funds in the land are having to grapple with them.

”Ten or 15 years ago, if you’d have invested in coal-fired power stations, you would have thought we were going to need electricity forever. Here we are now, following EU-wide emissions legislation, shutting down coal-fired power stations. The people who spotted that coming years ago were ahead of the curve. There are huge opportunities in this whole agenda.”

Webb dismissed the idea that considering climate change falls outside trustees’ legal responsibilities, saying it reflects “too narrow” an understanding of fiduciary duty.

He welcomed the Law Commission’s provisional conclusion that fiduciaries such as pension scheme trustees may take into account factors relevant to long-term investment performance, including environmental factors and wider systemic considerations.

Green Light is a new multi-year initiative from ShareAction that seeks to support pension funds in becoming more climate-conscious, recognising and acting on the investment implications of climate change for savers’ best interests.

A copy of the report can be found here


Elsewhere, Towers Watson has warned institutional investors that a food/water/energy crisis is top of the risks they should be worried about, ahead of stagnation and global temperature change.

While food/water/energy crisis (previously known as resource scarcity) rose 10 places to take the top slot in the consultancy’s extreme risks ranking.

Other extreme risks that have also risen up the ranking this year are global trade collapse and global temperature change, which are up four and three places, respectively.

Depression loses the top spot for the first time since the research began in 2009, while sovereign default and insurance crisis have both fallen five places.

Tim Hodgson, head of Towers Watson’s Thinking Ahead Group, said: “There has been a high level of turnover in the top 15 this year. This is largely due to our expanding our research into the non-financial extreme risks so we now have a full list of 30.

”This illustrates the challenge facing institutional investors, of how they should actually adapt to changing assessments of extreme risks. We would suggest time should be spent on pre-mortems, which are about trying to determine in advance what could, colloquially, kill you – that is, permanently impair an investor’s mission.”

According to the research, such pre-mortems should identify which extreme risks matter and which can be ignored.

For the former, Towers Watson asserts that the right thing to do is to pay up for the insurance, if available and affordable, given that the prioritisation exercise has shown the investors cannot afford to self-insure.

Then an investor should do the simple things: ensure the portfolio is as diversified across as many return drivers as possible, diversify within asset classes and create a strategic allocation to cash to provide optionality.

Thereafter, it suggests adding long-dated derivative contracts in a contrarian manner – that is, when they are cheap rather than popular.

The top 15 extreme risks now for the first time include stagnation, health progress backfire, nuclear contamination, extreme longevity and terrorism, while those that have dropped out of the top 15 this year are euro break-up, hyperinflation, political crisis, major war, end of fiat money and killer pandemic.


Towers Watson Extreme Risks 2013


Resource scarcity*





Sovereign default



Global temperature change


Excessive leverage



Banking crisis

Currency crisis


Global trade collapse

Currency crisis

Banking crisis


Banking crisis

Climate change

Sovereign default


Sovereign default

Political crisis

Climate change


Currency crisis

Insurance crisis

Political crisis




Insurance crisis


Health progress backfire

Euro break-up



Nuclear contamination

Resource scarcity

Disunity in Europe


Extreme longevity

Major war

End of capitalism


Insurance crisis

End of fiat money

End of fiat money



Infrastructure failure



Infrastructure failure

Killer pandemic

Killer pandemic


In other news, the 2013 CDP Global Water Report has found that a misguided approach to water-related risk management has become business as usual at the world’s largest global companies.

It revealed that corporate focus is too often directed at reducing water use, which is an inadequate response to increasingly immediate substantive water risks, threatening shareholder value. 

The key findings of the report – entitled ‘A need for a step change in water risk management’ – are:

  • Water presents substantial risk, threatening profitability and shareholder security, primarily in the energy, materials and consumer staples sectors. Each company in the sample faces an average of seven water-related risks, with three-quarters (70%) stating that water presents substantive risk to their business. Half have already experienced detrimental business impacts in the past five years.
  • Water risks are increasingly immediate. The percentage of risks that companies expect to impact their business within five years (64%) has increased by 16% in the space of one year, and the majority of risks identified in direct operations (65%) and supply chains (62%) are near-term. The most widely identified near-term water risk is water stress or scarcity, followed by flooding and rising compliance costs. Declining water quality, higher water prices and reputational damage are among the other reported risks expected to impact within five years.
  • Corporates wrongly believe water usage is the primary risk driver. One-quarter (23%) of companies do not know if water presents risk to their supply chains.

CDP, formerly known as the Carbon Disclosure Project, is calling on investors to take a leading role in guiding companies on this issue. 


Finally, a Social Investment Research Council has been set up in the UK aiming to help advance the UK social investment market through consolidating research efforts to generate powerful and practical insights for the benefit of social sector organisations and investors.

Nick O’Donohoe, chief executive at Big Society Capital, said: “The council will focus on projects with a potential to transform the social investment market, working in partnership to help understand what information is needed and ensure those needs can be met.

”There is a lack of information in the market about how to deliver the right kind of investment products to attract investors, and the industry must work together to commission research to help us meet this challenge.”

The council’s founding members are Big Lottery Fund, Big Society Capital, Citi, The City of London Corporation and the Cabinet Office

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