June 02, 2009
Investors Must Lead Efforts to Reduce Climate Change Risks
by Robert Kropp
Report by the United Nations Global Compact finds opportunities in a transition to a low-carbon
economy to be challenged by the urgency of climate change risks.
The International Energy Agency (IEA) estimates
that in order to achieve a stabilization level of 450ppm CO2 by 2030, investment of $10 trillion
will be necessary. But according to a report recently published by the United Nations Global Compact, "such large sums of money
are within the long-term capacity of the financial sector, as long as the appropriate public policy
incentives are in place."
The report was authored by the Principles for Responsible Investment (PRI).
entitled Investor Leadership on
Climate Change, notes that low-carbon investment opportunities are plentiful, so much so that
in 2007, $204 billion was invested in various renewable energy projects. With a focus on equity
investment, the report speculates that for such long-term institutional investors as pension funds,
"the fiduciary case for action on climate change is compelling."
A spokesperson for PRI
said, "The UN Global Compact wanted its series of reports on climate change to include one that
focused on investors. The PRI author found several examples of best practice that investors can use
in developing their own climate change investment strategies."
Warning against the
inclination of investors to wait for policies that would create incentives for investment in
low-carbon opportunities, the report details a number of problems associated with such an approach.
Assumptions on the part of investors that effective policies can be easily accomplished in a
diverse geopolitical arena, and that capital markets will act efficiently in addressing climate
change, are far from foregone conclusions. Instead, the report finds, investors must take a
leadership role in reducing the risks of climate change.
"There are enormous activities in
the climate change space," the PRI spokesperson said. Citing a study that failure to address
climate change risks effectively could wipe out 20% of gross domestic product (GDP) globally, the
spokesperson added, "Investors who believe that climate change risks are not part of their
fiduciary duty fail to address the long-term risks to which they subject their investments."
When they are supported by carbon pricing, investments in low-carbon technologies "can deliver
the kind of risk-adjusted returns that make them attractive," according to the report. Yet many
investors have yet to take advantage of such opportunities. Furthermore, the current financial
crisis has reduced the flow of capital at a time when increased investment in low-carbon energy
supplies is critical.
However, the report cites a recent survey of 100 institutional
managers and asset owners, in which half indicate the intention to increase their investments in
renewables. And if carbon prices rise to the level of $180 per ton of CO2 that the IEA estimates to
be required by 2030, then investments in low-carbon technologies will become increasingly
Noting that the "recent financial crisis has thrown a spotlight on how
investors make decisions," the report argues that asset owners in particular have a responsibility
to insure that on their behalf, asset managers are incorporating climate change risks into the
investment process. Among the practical steps that investors can take is to use their influence to
encourage companies to improve their climate change disclosures. Investors should also encourage
investment research analysts to undertake research on climate change.
As shareowners of
the companies that are the largest sources of greenhouse gas (GHG) emissions, investors have a
responsibility to guide the companies in which they invest on a course to successful climate change
mitigation, according to the report. Shareowners can accomplish this goal by such means as
insisting that companies improve their climate change disclosures, adopt strategies that address
the risks of climate change, reduce costs through energy efficiency, and refrain from intervening
in the adoption of climate change legislation.
The PRI spokesperson said, "Large
institutional investors have enormous impact, and those that have large and diversified holdings
tend to take an active interest in the health of the economy as a whole."
institutional shareowners have such a significant influence, the report recommends that shareowner
resolutions be employed to engage companies in the development of climate change strategies.
Investors should also join forces through such initiatives as the PRI and the Investor Network on Climate Risk (INCR) to increase their influence
Arguing that "the investment community cannot afford to assume that
international negotiators have the capacity" to enact such mandates as global targets for GHG
emissions reductions and expanded carbon markets, the report recommends that the investment
community speak with a united voice on matters of climate change legislation whenever possible.
Such action is critical in the international sphere, where the importance of successful
negotiations on climate change treaties cannot be underestimated.
The report concludes
with several recommendations to help investors be successful in their role of supplying much of the
capital required for the enactment of a global low-carbon economy. Investors must work with
governments to ensure passage of effective climate change legislation, and institutional investors
must be ready to respond to such legislation with the effective allocation of capital. Such
allocations must take into account long-term carbon price risks in order to serve the interests of
institutional investors and their clients and other beneficiaries.
Finally, the report
asserts that failure to meet emissions stabilization levels will increase the risk of a dangerous
outcome and undermine the ability of long-term investors to deliver adequate returns on their
investments. "It is firmly in the interests of investors that they help avoid this outcome," the
report concludes, "And devote the resources necessary to rise to the challenge of leadership."