January 07, 2010
Despite Improvements in Corporate Disclosure and Regulatory Oversight, Many Asset Managers Still Do Not Consider Climate Change in Analyses
by Robert Kropp
A survey of asset managers by Ceres finds that nearly half believe that climate risk is not
material to their investment analysis, despite their fiduciary duty to evaluate risk as part of
their due diligence review.
Despite the growing certainty that investment risks and opportunities associated with climate
change will increase, few asset managers are including such risks and opportunities in their
investment analysis, according to a survey conducted by Ceres, a national coalition of investors and others working with
companies to address sustainability challenges.
The results of the Ceres survey are
incorporated in a report published this week, entitled Investors Analyze Climate Risks and Opportunities: A
Survey of Asset Managers’ Practices. The survey was sent to the 500 largest investors, as
identified in a 2008 survey conducted by Pensions and Investments. Eighty-four asset managers responded.
According to the report, Ceres found that 44% of asset managers do not consider climate
risks at all in their investment analysis, because they do not believe the issue is material.
According to Ceres, such a stance “stands in stark contrast from the increasing number of
corporations who are identifying climate issues as material risks in their required financial
The Ceres survey was completed in early 2009, before the report of the Asset Management Working
Group (AMWG) of the United Nations Environment
Program Finance Initiative (UNEP FI), entitled Fiduciary Responsibility: Legal
and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional
Investment (Fiduciary II), was published. Therefore, the findings of the Fiduciary II report
were not incorporated into the Ceres report.
However, the findings of Fiduciary II sent a
quite explicit warning to asset managers who do not incorporate such environmental, social, and
governance (ESG) criteria as climate change into their investment analysis, stating, “Advisors to
institutional investors have a duty to proactively raise ESG issues within the advice that they
provide, and that a responsible investment option should be the default position.”
Furthermore, according to Fiduciary II, investment advisors that fail to incorporate ESG issues
into their investment services face “a very real risk that they will be sued for negligence;”
therefore, “ESG issues should be embedded in the legal contract between asset owners and asset
In its report, Ceres answered the assertion of those asset managers who do not
consider climate change to be material with the statement, “The very core of fiduciary duty is that
the fiduciary primarily consider the tradeoff between risk and return… investors and their asset
managers must seriously consider climate risks as part of their due diligence review of their
According to Ceres, “A key purpose of this report is to catalyze a closer
dialogue between asset managers and other players in the investment community – the companies they
own, their institutional investor clients, the SEC and others – to develop best practices for
corporate disclosure, Wall Street analysts, rating agencies and other key market drivers.”
Of the 84 respondents to the Ceres survey, 14 reported that they manage a green investment
fund, defined by Ceres as “a fund with a strategic priority related to climate change.” Ceres found
that while managers of green investment products were more likely to analyze climate risk for all
their investments, one-third did not necessarily do so. The survey also found that 20% of
respondents who did not offer green investments assessed climate risk.
In stark contrast
to the Fiduciary II recommendation that asset managers proactively address such ESG considerations
as climate change with their clients, Ceres found that 60% of respondents did not do so. Of these,
49% said they did not because investors did not ask for them.
Adding to asset managers’
disinclination to address climate change in their investment analysis, according to Ceres, is the
fact that “Incentive structures and benchmarks that asset owners use for evaluating asset managers
are heavily weighted toward short-term performance focusing primarily on quarterly returns where
climate risks are far less likely to show up.”
But as one respondent noted, “Climate
change, along with the governmental response to it, will fundamentally reshape valuation for a
broad selection of the global economy.”
When climate risk is incorporated into investment
analysis, it is most often done so in response to regulatory or litigation risk, both of which were
cited by two-thirds of respondents. Half of the respondents incorporated competitiveness for
products and services relating to climate change. Only one-third cited the more long-term
considerations of physical risk or greenhouse gas (GHG) emissions management as factors.
On the basis of its survey findings, Ceres provided a number of recommendations for asset
managers. It recommended that asset managers assess climate risk for all investments, include a
statement about climate risks and opportunities in their policies, and include climate risk in
their evaluations of corporate governance.
Ceres also recommended that asset managers
adopt proxy voting policies on ESG considerations, including climate change. Its survey found that
only 29% of respondents have proxy voting policies for shareowner resolutions on climate change at
present, and the report includes as an appendix a sample proxy voting policy.
Ceres recommended that asset owners engage with the Securities and Exchange Commission (SEC) and
policymakers to encourage full corporate disclosure of climate risks and opportunities. As Ceres
noted in its report, the SEC is currently considering investor requests that it offer interpretive
guidance on corporate reporting of climate risks and opportunities, and has already issued guidance
to make it easier for investors to file shareowner resolutions relating to climate change.
In its recommendations for institutional investors, Ceres also advised engagement with the SEC
and policymakers. It also recommended that institutional investors analyze climate risks in their
investment portfolios, train staff and managers to identify best practices in corporate governance
relating to climate change, and adopt sustainability policies to provide guidance for advisors and
Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk (INCR), a network of investors
promoting better understanding of the financial risks and opportunities associated with climate
change, said, “These findings make clear that the investment community is overly focused on
short-term performance and ignoring longer-term business trends such as climate-related risks and
opportunities. The recent subprime mortgage meltdown is a painful reminder of the fallout for
investors who ignored ‘hidden’ long-term risks.”