Investors act on climate change

On 14 September, in the New
York offices of investment bank
JP Morgan, around 200 institutional
investors, financial analysts and
government officials gathered to hear
the results of the third Carbon Disclosure
Project (CDP) questionnaire.
Speaking were luminaries including
Margaret Beckett, the UK’s secretary
of state for the environment; Jim
Rogers, the CEO of major US utility
Cinergy; and New York State Comptroller
Alan Hevesi.
Launched at the end of 2000, the
CDP is an unprecedented collaborative
initiative by investors concerned
about the possible impacts of climate
change on the planet – and on their
It involves sending the chairmen of
the world’s 500 largest companies (the
components of the Financial Times
Global 500 index) a short questionnaire.
This contains nine ‘investment
relevant’ questions, put on behalf of
the signatories, covering the degree to
which climate change poses risks or
presents opportunities to the company
in question, and how its management
is addressing the issue.
The rising importance of climate
change as a concern for investors is evidenced
by the dramatic growth in the
number of investment companies that
are signatories to the CDP questionnaire,
and the size of the assets they collectively
manage. The first questionnaire
was backed by 35 investors, controlling
assets of around $450bn
(€368bn). CDP3 was signed by 155
investment companies, managing a
staggering $21trn in assets.
The risks, these investors believe, are
real. These can be broken down into
two categories: those arising from
changes to the global climate, affecting
companies’ markets, supply chains
and, with increasingly severe extreme
weather events, companies’ very infrastructure;
and those from government
actions to reduce greenhouse gas emissions,
such as carbon taxes and emissions
trading schemes.
Conversely, while destroying value in
some sectors, the climate change issue
will create value in others. Alternative
energy stocks are expected to soar, as
the world moves to less-polluting
power sources. Patterns of agriculture
will change, as the environment costs
of air transport make ‘food miles’
increasingly expensive. And financial
institutions are eyeing carbon
allowance markets as offering potentially
lucrative new lines of business.
In terms of the growing number of
corporate responses that the CDP is
generating, it seems that the managers
of the world’s largest companies are
waking up to the issue. Only 47% of the
companies contacted for CDP1
responded with complete answers,
although 78% made some response,
such as directing the CDP to environmental
reports, or to their websites.
For CDP3, these figures had jumped
to 71% and 89%, respectively.
So far, so good. Innovest Strategic
Value Advisors, a New York-based
investment research firm, has analysed
each series of responses, and has produced
in-depth reports that tease out
indicators and trends from the wealth
of information disclosed.
Innovest notes, with approval, the
dramatic rise in signatories putting
their names to CDP3, and the steadily
climbing response rate among companies.
But it also observes that disclosure
is no substitute for action – and finds
that corporate action on climate
change is not taking place fast enough.
For example, while more than 90% of
respondents acknowledged that climate
change presented risks and/or
opportunities, only 51% of those same
companies have implemented programmes
to reduce their greenhouse
gas emissions, and only 45% have set
themselves reduction targets.
Moreover, there is as yet little evidence
that corporations are rising to
the challenge of reducing their emissions
of greenhouse gases. Innovest
found that only 13% of the 500 firms
reported a reduction in emissions in
the period between the second questionnaire,
sent out in 2003, and their
responses to CDP3, while 17%
reported an increase.
Such limited progress is not particularly
surprising. While many governments
are increasingly stressing
the importance of tackling climate
change, policy responses have, to date,
been limited and halting. The very
public split between the Bush administration
and the EU over the efficacy of
the Kyoto Protocol on climate change
has given pause to companies considering
radical action – as has continuing
bluster from climate change sceptics in
the scientific community, despite their
growing isolation.
But, as climate science becomes ever
more compelling, such foot-dragging
is putting considerable shareholder
value at risk. It is likely to take several
decades to begin to put the global
economy on a low-carbon path. Given
the long lifetime of many investments
– particularly in infrastructure – companies
that fail to act soon risk seeing
considerable amounts of capital locked
up in stranded assets.
This is where the investment community
comes in. Many in the socially
responsible investment world have
long argued that so-called ‘mainstream’
institutional investors are
matching, or even exceeding, the management
of the companies in which
they invest, in terms of their inaction
on this key issue.
It is particularly incumbent upon
pension funds and insurance companies,
as long-term investors, to begin
shifting capital away from the heavilyemitting
industrial sectors of the past,
and towards those of the future, they
This is, of course, easier said than
done. Refusing to invest in airlines, say,
or the oil and gas sector, because of
their impacts on the climate, would put
investors at risk of seriously under-performing
their benchmarks, in the
short-term at least. Conversely, there is
simply not a sufficient number of solar
power companies, or makers of hydrogen-
powered fuel cells, to absorb a
sudden shift in the allocation of capital
– certainly not without a dangerous
investment bubble forming.
Investors have often tied these arguments
to their fiduciary duties to
their beneficiaries, arguing that to
take account of climate change issues
could undermine the returns they generate,
rather than protect them. Many
in the SRI community have also
accorded a great deal of blame here to
the investment consultants, arguing
that these ‘gatekeepers’ have persisted
with a conservative view of the issue
that has retarded action by their trustee
In August, however, one of the leading
firms in this area, Mercer Investment
Consultants, authored a report
for the Carbon Trust, a UK-government
funded company dedicated to
promoting a low-carbon economy.
That report, ‘A Climate for Change’,
crucially makes the case that it is, in fact,
the fiduciary duty of the trustee to
address the climate change issue.
“The materiality of climate change as
outlined in this document clearly
shows that climate change risk could
have the potential to impact a fund’s
investments over the long term,” it
“In addition, we suspect climate
change risk is neither fully known nor
understood and that it is not yet properly
managed by the various groups
involved in the ongoing management
of pension scheme assets. In line with
these definitions of fiduciary responsibility,
we suggest that it is consistent
with fiduciary responsibility to address
climate change risk.”
The report then sets out a ‘toolkit’ for
trustees to employ. This covers such
uncontroversial suggestions as assessing
their portfolios to evaluate the
extent of climate risks they contain,
and ensuring that external fund managers
are cognisant of the issue.
It also suggests that investors should
“behave as active owners” and engage
with the companies in which they
invest to encourage them to improve
their performance. Importantly, it suggests
that investors should participate
in the public policy debate. This is crucial.
Companies, typically, lobby in the
often narrow interests of their particular
shareholders. As institutional
investors tend to be ‘universal
investors’, with financial exposure to
entire economies, they are in a position
to take the wider view that will be necessary
to address climate change.
But it also suggests that investors
might consider placing a portion of
their assets in “strategies that specifically
incorporate elements of climate
change analysis in their investment
philosophies (and which would benefit
from the shift to a lower-carbon
economy)”. These might include specialist
funds, energy-efficient property,
alternative investments such as ‘carbon
funds’, or in ‘clean technology’ private
equity firms.
The increasing buy-in of the investment
community into initiatives such
as the Carbon Disclosure Project is to
be applauded. But in the same way that
the disclosure of corporate emissions
levels is no substitute for actually
reducing them, collecting information
is no substitute for acting on it. Tackling
climate change has the potential to
generate one of the most profound
shifts in capital that the global economy
has ever seen. It is vital that the
owners and managers of that capital are
at the vanguard.
Mark Nicholls is editor of
Environmental Finance magazine in

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