Nearly half of money managers surveyed ignoring climate risks, considering it 'non-material'
BOSTON, Jan. 6 /PRNewswire/ -- Although there is overwhelming scientific consensus that climate change is underway and governments are imposing regulations to curb greenhouse gases, the vast majority of the world's largest investment managers are not factoring climate-related trends into their short- and long-term investment decision-making, the result being significant 'hidden risks' in the trillions of dollars of investment portfolios they are managing.
This is the key conclusion of a new Ceres report released today that surveyed leading assets managers in 2009 on their responses to the increasing business risks and investment opportunities associated with climate change. The survey was sent to the world's 500 largest asset managers, according to the Pensions & Investments Global 500 Survey.
"Despite the growing recognition of the far-reaching impacts climate change will have on the global economy, only a handful of asset managers are integrating climate risks and opportunities throughout their investment practices," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk. "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."
"The survey results, collected in early 2009, 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 survey was done at the request of the Investor Network on Climate Risk, a network of 80-plus pension funds and other institutional investors who rely on asset managers to manage their investment portfolios. Eighty-four asset managers managing $8.6 trillion in assets completed the survey, including 66 in the P&I top 500 list and 18 others who responded at the specific request of INCR client members.
The report shows that while a large number of asset managers are in the preliminary stages of including climate risks in their due diligence, only a small percentage are considering a broad range of climate risks, such as regulatory, litigation, physical and competitive risks, as part of their due diligence process for evaluating companies. Nearly half of the respondents - 44 percent - said they do not consider climate risks at all because they do not believe that climate change is financially 'material' to investment decision-making.
A key problem identified in the report is that asset owners, such as pension funds and other institutional investors, are either not asking their asset managers to include climate risk and opportunity analysis, or are only beginning to raise the subject. This is hugely important because nearly half of the respondents - nearly 49 percent - said they did not analyze climate risks because their investor clients did not ask them to. Another shortcoming identified in the report: incentive structures and benchmarks that asset owners use for evaluating asset managers are heavily weighted towards short-term performance focusing primarily on quarterly returns where climate risks are far less likely to show up.
The report recommends that institutional investors push harder to get asset managers, consultants and others in the investment community to boost their attention to climate-related issues. The reports suggests that this be done through requests for proposals (RFPs), other hiring procedures or as part of managers' performance reviews. Today, in an effort to do just this, a leading INCR member, the California State Teachers' Retirement System (CalSTRS), announced it will engage its active equity managers on their climate risk analysis. Specifically, CalSTRS will highlight the need for each manager to have expertise in climate change and other sustainable investment analysis and to adapt their corporate governance voting practices to address climate risks.
"As a long-term investor, CalSTRS wants to invest in well-managed companies that can address the physical risks of climate change and adapt to the changing regulatory and market realities of a carbon-constrained economy," said Jack Ehnes, chief executive officer of CalSTRS, the nation's second largest public pension fund, with more than $130 billion of assets under management. "Our asset managers need to ask the right questions and critically evaluate how companies are positioned so that we're sure that our investments will produce outstanding risk-adjusted returns for our members."
The report, "Investors Analyze Climate Risks and Opportunities: A Survey of Asset Manager Practices," highlights a handful of asset managers - MFS Management and F&C Management Ltd., among those - that are integrating climate risks and opportunities throughout their investment practices, including asset allocation, portfolio valuation and overall due diligence. "Like companies that are rethinking and retooling their business strategies in response to climate change, these asset managers are positioning themselves to capture the opportunities and understand and manage the risks of climate change across their portfolios," the report said.
"To achieve the climate change goals necessary to avoid catastrophic climate change, companies will need to reduce their own greenhouse gas emissions and develop products and solutions to help the world shift onto a low-carbon growth path," said Alexis Krajeski, associate director of Governance & Sustainable Investment at F&C Management Limited. "As long-term global investors, we want to invest in companies at the forefront of that change and view those lagging behind with caution. To make these assessments, we have developed requisite expertise and processes to incorporate climate-related risks into our investment decision-making. In time, we believe such enlightened investment thinking will lead to better investment performance and support the growing demand we see from clients."
Other report highlights include:
* Nearly three-quarters of asset managers do not expressly consider climate risks in their overall due diligence.
* Firms offering "green" investment opportunities are more likely to analyze climate risks for all their investments than their traditional counterparts.
* Half of all asset managers believe that some sectors have significant exposure to climate risks, yet nearly half of those do not conduct climate risks analysis in their due diligence process.
* Less than one-third of asset managers incorporate climate risk into their corporate governance analysis. Even in sectors where asset managers believe that climate risk may be important, three-quarters have not changed their analysis of governance to include that risk.
* Fewer than one-third of asset managers have proxy voting policies for scrutinizing climate-related shareholder resolutions filed with companies.
Download a copy of the full survey report here: http://www.ceres.org
ABOUT CERES & INCR
Ceres is a leading coalition of investors, environmental groups and other public interest organizations working with companies to address climate change and other sustainability challenges. Ceres also directs the Investor Network on Climate Risk, a network of more than 80 institutional investors with collective assets totaling $8 trillion focused on the business impacts of climate change. For more details, visit http://www.ceres.org or http://www.incr.com
SOURCE Ceres, Boston, MA