A large percentage of major asset managers still don’t consider climate risks in their investments decision-making and don’t believe climate change is financially material to investing, a new survey from the institutional investor group Ceres found.
"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," Ceres President Mindy Lubber told reporters Wednesday in releasing the survey results.
Regulatory issues should push investors to look at the carbon bottom line in addition to the financial. Emissions caps in the EU and the strong potential for caps in the U.S. will certainly affect the return on investments in certain companies — for better or worse. And other regulations may have indirect consequences. The “cash for clunkers” program, for instance, did not apply to automakers but did create a demand for them to produce more efficient cars.
The impact of these regulations are in addition to the current and future environmental problems like extreme weather events and water shortages that affect businesses and a growing number of climate change-related lawsuits.
So far, however, the attention paid to climate change has been mixed. Forty-four percent of the 84 asset managers surveyed, who collectively manage $8.6 trillion in assets, said they do not consider climate risks at all because they do not believe climate change is financially material to investment decision-making. Ceres, which directs the Investor Network on Climate Risk — which itself includes institutional investors with collective assets of $8 trillion — begs to differ.
Nobody is saying you have to invest one way or another, Lubber said, but one should not evaluate a company without looking at how it takes climate into account.
Ceres fears the survey’s results show businesses’ actions, or lack thereof, on climate issues — and thus their vulnerability to the business risks brought by climate change — are not being given enough heed by the investors who own them. The organization, which works with companies and investors to address sustainability challenges, hopes its report will spur a dialogue between investors and firms over how best to take climate risks into account.
The survey, done at the request of INCR, was sent out to the 500 largest asset managers according to the Pensions & Investments Global 500 Survey as well as others. Sixty-six of these top 500 responded, along with 18 others who responded at the specific request of INCR client members.
The report notes that businesses have been increasing their attention to climate risks versus previous years. The Carbon Disclosure Project, which collects emissions statistics and climate change strategies from firms, now has 2,500 companies participating, versus 235 in 2003. Many businesses have also taken voluntary action to lessen the effects of climate change. Lubber cited General Electric and Wal-Mart in particular as making unlikely but welcomed moves in a more climate-conscious direction.
And a few major investors, such as F&C Management Ltd., are already taking climate-related factors into account in their investment practices.
"We believe climate change presents significant risks and opportunities for our clients," said Alexis Krajeski, associate director of governance and sustainable investment at U.K-based F&C.
"The reason we’re able to do this is because our clients are asking us to do it," she said.
But clearly not everyone’s clients are doing the same. The Ceres report says about half of the asset managers surveyed said they did not analyze climate risks because their investor clients did not ask them to. Ceres hopes the findings will encourage investors to emphasize the importance of these risks to those who manage their money.
Though the report found a vast majority of respondents are in the beginning stages of integrating climate risks into their decision-making, most are still considering only litigation risk or regulatory risk when deciding whether to invest in a company.
"There are a handful of asset managers who are distinguishing themselves" by taking climate issues into account, Lubber says, "but the vast majority of asset managers who responded to the survey are still only in first gear."
In addition to risks, responding to climate change presents opportunities for businesses and investors, and the report concludes that paying attention to whether businesses are trying to pursue these opportunities would benefit investors.
The survey results "highlight the lag of major financial markets to deal with climate change, even as strong state and national climate policies are being adopted globally," Lubber said.
The criteria that asset owners like institutional investors use for evaluating asset managers are heavily weighted towards short-term performance and results like quarterly returns where climate risks are far less likely to show up, the report says.
But there is nonetheless a movement toward a more climate-conscious business environment. The SEC issued new staff guidance in October that makes it easier for shareholders to file resolutions relating to how climate change policies and risks affect their firms’ balance sheets. And Lubber says the SEC is within several months of issuing guidance for companies as regards "climate change as a material risk."
Some major investors are already taking action.
The California State Teachers’ Retirement System (CalSTRS), the country’s second largest public pension fund and an INCR member, announced Wednesday it will emphasize the need for its equity managers to have expertise in in climate change and other sustainable investment analysis and will adapt their corporate governance voting practices to address climate risks.
"Our sustainable asset managers have been some of our most successful managers over the past year," CalSTRS CEO Jack Ehnes said.
Ehnes highlighted the opportunity presented by the recent turmoil in the financial sector. The investing world is currently in "a deep period of soul searching," he said, and so this is a good time to incorporate climate change-related risks in addition to other reforms.
Lubber said the report "is not intended to point fingers" and that Ceres realizes adjusting to new challenges takes time.
"I am convinced that the financial impacts are being felt more and more every day … and that because of that, over time they will be integrated into" investment decisions, she said.
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