Ready For The Future – Investors And Climate Change

[Derek_Parkinson]

The failure of the Copenhagen Climate Change Conference to agree a binding agreement in December 2009 may lead some companies to believe that there is not now an urgent need to address the issue of monitoring and reducing greenhouse gas (GHG) emissions. Such a belief would be mistaken: it is likely that regulations will still be introduced, not necessarily as a result of international agreements, but arising from national or regional initiatives or from clients.

This article argues that pressure to reduce emissions will increasingly come from investors, who recognise that it is in their own interests to ensure that investee companies are reducing GHG emissions, and will put in place measures that are encouraged by – and encouraging of – regulation.

There have already been indications that decision makers other than national governments are taking a lead in requiring emissions reductions. This includes emissions regulations introduced by various US cities and the state of California – effectively one of the world’s ten largest economies. There have also been nascent moves by some companies to use their own buying power to influence suppliers to reduce emissions, e.g. recent decisions by US companies Whole Foods Market and Bed Bath & Beyond to avoid suppliers that source fuel from Canada’s oil sands.

Reducing exposure to risk

While pressure to reduce emissions from investors is likely to grow, it is not new: investors have been taking an interest in climate change for some years. This interest has been partly due to the recognition of the case made most famously by Nicholas Stern, that the costs to the economy of not addressing climate change far outweigh the costs of addressing it; and partly in recognition that there will, sooner or later, be regulatory penalties for emissions that companies need to anticipate.

The expectation of regulation, and the desire for clarity on regulation, has been demonstrated in the policy statements of investor groups such as the Institutional Investors Group on Climate Change (IIGCC), which, among other initiatives, works to “encourage public policy solutions that facilitate the move to a low carbon economy”.

There is also a growing trend towards investors recognising that the physical, financial and regulatory risks of climate change present a strong argument for measuring and reducing the exposure of portfolios to GHG emissions. This has been the impetus behind the Carbon Disclosure Project, which has mobilised hundreds of investors to successfully prompt companies to reveal emissions data. There are already service providers such as Trucost, who measure the emissions not only of companies but also of portfolios; and large investors, such as Australia’s VicSuper, which now disclose portfolio emissions and have in place strategies to reduce them.

There are also signs that the number of investors willing to actively engage with companies to secure reductions in GHG emissions, or use emissions as a factor in investment decisions, is increasing. FairPensions’ survey of 100 fund managers Preparing for the storm? UK fund managers and the risks and opportunities of climate change found that 29% of respondents now make use of climate change data in all companies where data is available, and 81% of respondents who undertake engagement ask companies for an action plan to reduce emissions. Perhaps surprisingly, 72% of participating fund managers also stated that they would welcome regulatory requirements on companies to reduce emissions.

There are also signs of asset owners beginning to take action on climate change. FairPensions’ study of the UK’s 30 largest pension funds Responsible pensions? UK occupational pension schemes’ responsible investment performance 2009 found that three schemes now assess fund managers’ capacity to engage with companies on climate change issues, while four require fund managers to consider climate change in investment decisions.

Shareholder engagement growing

Current campaigns also point to a growing willingness of investors to be assertive on climate change issues: FairPensions has this year co-ordinated a coalition of investors to file shareholder resolutions to both BP and Shell’s AGMs, questioning their development of oil sands projects. Oil sands have attracted widespread controversy over their GHG emissions which are much higher than those of conventional oil and therefore potentially much more costly. This coalition follows soon after an open letter to oil companies on the issue, signed by investors with combined assets of $3 trillion. Aside from oil sands, there have been other recent initiatives from investors engaging with companies on climate change.

These developments are still not mainstream, but they are becoming more popular: when FairPensions conducted the surveys cited above, we found that a significant proportion of investors had adopted climate change policies in the recent past, or were planning to introduce them in the near future. Some of this movement is connected to the lessons of the financial crisis, as investors begin to realise that they “need to show themselves capable of identifying and managing not only those issues which precipitated the current financial crisis, but also those which could reasonably be expected to cause the next one”. Investors have been spurred into action by their own losses and the promptings of figures such as City Minister Lord Myners, who has urged them to take a more active role.

As has been stated above, these developments still have a long way to go, but investors are increasingly taking the view that it is in their interest to work with investee companies to future-proof them against the risks of climate change. Those investee companies may wish to consider the benefits of working with the more progressive investors, as well as considering whether their own pension funds are investing in a sufficiently future proof manner – it is, after all, in all of our interests to ensure that UK plc is ready for the future.

Duncan Exley is Director of Campaigns at FairPensions. Founded in 2005, FairPensions is the only charity in the UK devoted to campaigning for responsible investment in the pensions industry.