UK – Investors who fail to pay attention to climate risks in their asset allocations are putting themselves in danger of financial risk – so says a report by the institutional investor-backed Carbon Disclosure Project.
The project – backed by 35 European institutional investors – has released a report called “Carbon Finance and the Global Equity Markets”. It reveals the significance of taking climate change into account in the stock selection process.
Carbon risk is two-tiered, explained Martin Whittaker, managing director at Innovest Strategic Value Advisors and co-author of the report at a news conference. Climate change leads to weather-related issues for many companies. Droughts, hurricanes and other weather anomalies are becoming increasingly frequent as a result of global warming, and affect earnings of companies worldwide in sectors such as transport, insurance, gas, oil and semi-conductors.
Market and regulatory risks are also a bi-product of climate change. Emissions limits, taxes, current and future environmental regulations all incur costs which must be considered when choosing investments.
Says the report: “Investors failing to take account of climate change and carbon finance issues in their asset allocation and equity valuations may be exposed to significant risks, which, if left unattended, will have serious investment repercussions over the course of time.
“The fact that it takes several years for companies to put effective risk management strategies and operating systems in place militates in favour of immediate action.”
UK corporate governance expert Derek Higgs told the news conference about the “knowledge deficit” among investors about climate change. Tessa Tennant, chair of the project, added that the financial consequences were almost certain to grow, and that the information deficit for investors would prove costly.
The need to build awareness may result in a new “environmental” ratings agency or the current ratings agencies may have to take environmental issues into greater consideration, said one speaker.
The report summarises the findings of a questionnaire sent to the chair of the board of each company in the FT500. The questionnaire and accompanying letter was sent on the behalf of 35 institutional investors, including pension funds, fund managers and insurance companies which jointly represented 4.5 trillion dollars in assets.
Signatories included Allianz Dresdner Asset Management, Sweden’s AP2 and AP3, Baillie Gifford, Credit Suisse Group, Henderson Global Investors, ING, Insight, Jupiter, Pension and Investments Research Co., Merrill Lynch Investment Managers, Morley Fund Managers, Societe Generale Asset Management, Storebrand, Swiss Re, Threadneedle, UBS and the University Superannuation Scheme.
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