Responsible Investor

into their actual stock selection and portfolio construction processes.
It is at that level –where the “rubber meets the road“—that investors can send the strongest message to companies, produce significantly changed company behaviour, and, most importantly, improve their long-term, risk-adjusted returns. Unfortunately, however, we currently estimate that far less than .1% of the CDP signatories’ $40 trillion+ in assets is currently invested in any investment strategy which explicitly and systematically takes climate risk into account. Historically, there have been a number of reasons for this:

• Investment professionals have long believed that company resources devoted to environmental issues are either wasteful or actually injurious to their competitive and financial performance and therefore to both the performance of the companies themselves and investor returns;
• As a direct result, money managers, pension fund consultants, and even pension fund trustees have historically regarded explicitly addressing environmental factors in their investment strategies as incompatible with the proper discharge of their fiduciary responsibilities;

• Until recently, there has been a dearth of robust, credible research evidence and analytical tools linking companies’ environmental performance directly with their financial performance, as well as a shortage of institutional quality, company-specific research to help investors.

Before this situation can change significantly, investors will require at least four things:

• Compelling evidence that integrating climate risk analysis can in fact enhance risk-adjusted financial performance – in short, a robust investment case;
• Compelling evidence that the variance in net climate risk exposure among companies is sufficiently large to warrant investor attention;
• A comprehensive and sophisticated analytical framework for assessing relative and absolute climate-risk; and

• Company-specific information and analysis

We noted earlier that, while major global corporations appear to be narrowing the historic awareness/action gap, the same cannot yet be said for their owners – the large institutional investors. It is true that a few exceptional, leading-edge pension funds including ABP, PGGM, CalPERS, and CalSTRS are investing in specialized climate-driven opportunities, notably clean tech private equity and carbon emissions trading funds. Such initiatives are to be applauded, but from a climate perspective, they address only a tiny portion of the overall capital spectrum, and therefore the overall risk and opportunity set. We would argue that precisely the same global, climate-driven forces creating these investment opportunities and risks in the smaller, unlisted markets are also bearing down on the other 95% of the asset class spectrum as well, most notably the public equities, fixed-income, and real estate markets.

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