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Investors who ignore ESG at risk of breaching fiduciary duty – Al Gore

Investors should consider the impact of a “meaningful” carbon price on investments to better identify risks and opportunities, a paper by Al Gore’s Generation Foundation has urged.

The white paper praised companies assessing investments using a shadow carbon price, as there is currently no single framework for the cost of carbon – despite recent moves by China and the US that will see around half of emissions priced by the end of 2016.

“The reality, however, is that carbon largely remains an un-priced externality in financial markets today,” the report says.

“Although it is impossible to know the exact timing of the prospective tipping point when financial markets will fully internalise carbon risk, it is critical for investors to prepare for its inevitable impact over the next five years.”

In ‘Allocating capital for long-term returns’, the foundation, funded by Generation Investment Management, also warns that investors risk breaching their fiduciary duties if they fail to consider environmental, social and governance (ESG) matters during the investment process.

The view will be one shared by the Asset Owners Disclosure Project, which recently launched an initiative that could see members sue pension funds where they perceive them to be ignoring environmental risks

Gore, who co-founded Generation IM three years after his unsuccessful US presidential campaign, was adamant sustainability should be taken into account.

“The importance of sustainability to business and investing has intensified as financial markets are forced to address challenges posed by the realities of natural resource scarcity, the effects of unabated carbon emissions, rapid urbanisation and widening wealth inequality, to name just a few,” he said.

The paper further pointed to the importance of considering sustainability factors, such as human capital management, supply chain concerns and resource management, when assessing the value and success of a company.

“Analysing a company’s attitude to these factors can often provide insights into a company’s long-term vision, its strategy for implementing that vision and the probability of its success,” it says.

Carbon prices, or a greater number of emissions trading schemes, have long been a demand of various investor groups calling for regulation to mitigate climate change, including the Institutional Investor Group on Climate Change.

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