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June 15, 2011
Report Surveys Climate Change Strategies of Global Investors
    by Robert Kropp

Three investor networks collaborate on a new report that details the different approaches to climate change among investors in North America, Europe, and Australasia.

Earlier this year, Mercer published a groundbreaking report warning that the economic cost of climate policy could lead to as much as a 10% increase in portfolio risk in the next 20 years.

"Institutional investors must develop new tools to more effectively model systemic risks such as climate change," the report stated.

This week, the results of a survey conducted by Mercer of 44 asset owners and 46 asset managers with collective assets totaling more than $12 trillion were published, detailing the investment practices of the respondents. The resulting report, entitled Global Investor Survey on Climate Change, was commissioned by the Investor Network on Climate Risk (INCR), the Institutional Investors Group on Climate Change (IIGCC), and the Investor Group on Climate Change (IGCC).

"European investors have been doing this report for a while, but this is the first time there has been international collaboration," Chris Davis, director of Investor Programs at Ceres, told "The number of investors who are integrating climate change into their practices is increasing. Awareness of the issue is increasing also, although not as rapidly as we would hope." INCR is a project of Ceres, while IIGCC is based in Europe and IGCC in Australia.

"The report Mercer did over the winter recommending asset allocation steps to mitigate risk and take advantage of opportunities, together with this report, make the issue material for mainstream investors," Davis continued.

The new report reveals that among the respondents, 87% of asset managers and 98% of asset owners consider climate change to be a material issue across their investment portfolios. Furthermore, "More than 80% of asset managers and 57% of asset owners make specific reference to climate change risk in their investment policy," the report states.

"The report may not be reflective of the larger market," Davis warned. "The report suggests that a lower percentage of mainstream investors are taking these steps." Indeed, Mercer's research indicates that only 10% of global investment managers integrate environmental, social, and corporate governance (ESG) into their investment processes.

Even though respondents were members of collaborative networks for which climate change is an issue of critical importance, the number of asset owners "that have developed a formal process to assess prospective managers' climate efforts" remains small, totaling about 18% of survey participants. Considering that the landmark Freshfields and Fiduciary II reports emphasized the fiduciary duty of asset managers to proactively raise ESG issues with their clients, this would seem an area ripe for further progress.

"Asset owners are the drivers of what asset managers do on climate change, although there's room for the asset managers to be more proactive," Davis said. "But at the end of the day, asset managers tend to do what their clients ask them to do. This report points out that there's been limited use of investment management agreements and contracts to mandate integration of climate change. It's generally been handled somewhat more informally. Making it a specific requirement would enhance the practice."

The report does point out that "A growing number of asset owners (70%) ask investment advisors and consultants to consider climate change in the advice they provide."

"Investors sometimes seem more enthusiastic about telling companies what to do than telling their portfolio managers what to do," he continued.

In fact, corporate engagement via the submission of shareowner proposals is one of the few areas described in the report where the efforts of US-based investors were found to be especially noteworthy. "In 2010, 101 climate and energy related shareholder resolutions were filed in the US and 51 were withdrawn by agreement…Investors feel that they increasingly get access to senior management or the board when engaging on climate issues as these issues move up the corporate agenda," according to the report.

"In the US, investors have done more on certain aspects of climate change integration like shareholder activism and active ownership, pushing policy initiatives like SEC disclosure," Davis said. "But in terms of really integrating it into investment decision-making, we have our work cut out for us at INCR."

While the report finds that a majority of respondents report on their climate change-related activities, "Public reporting on ESG issues is not as advanced in the North America as it is in Europe," Davis said. Expressing the hope that the report would provide a measure of benchmarking for future reporting efforts by asset owners and managers, he continued, "We very much believe in disclosure as a driver of activities and performance" at Ceres and INCR.

Despite such successes as the engagement with the Securities and Exchange Commission (SEC) to which Davis referred, requiring climate risk disclosure by companies, investors in the US continue to face an uncertain regulatory environment that lags far behind that of Europe and Australasia. Without a price on carbon or clear policies on climate change mitigation, "It makes the materiality argument far more difficult here, and it's probably holding back US investor focus on climate change," Davis observed.

"The regulatory environment is definitely lagging here in the US," he continued. "A major cause, but not the only one, is the policy environment. We don't have a national price on carbon, and don't have comprehensive greenhouse gas (GHG) regulation. Europe does, and Australia seems to be moving in that direction."

The report also studies asset allocation toward climate change, finding that listed equity continues to be the asset class in which investors most often consider climate change issues. Analysis of climate change issues continue to lag for investments in hedge funds, government bonds, and commodities.

As for thematic investments, Davis said, "The effort in the report to quantify the amount of thematic investment that is climate-focused was sobering. Globally, it's well under one percent. We have a ways to go in funding solutions for climate change." The report defines thematic investments as funds that are specifically focused on climate change.

As global government policies relating to climate change evolve, they are "expected to increase the investment appetite for low-carbon technologies and other climate change themed funds," according to the report.

"Despite policy limitations, investors have made headway in addressing climate change issues in their investments," the report concludes. "But there is still scope for improvement. It is recognized that given the lack of clear signals from policy makers, investors are exposed to considerable risk and any leapfrogging developments by investors in this area in the future will be driven by policy settings."


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