Conference report: US Pension funds report to INCR/UN summit on progress in climate investments

In the face of political foot-dragging, long-term investors say they are getting down to green business.

Unchecked carbon emissions, untapped investment opportunities and an unresponsive U.S. government were the recurrent themes of the day at the fifth Investor Summit on Climate Risk & Energy Solutions, held at the United Nations Headquarters in New York City on January 12. Hosted by the Investor Network on Climate Risk in collaboration with the United Nations Foundation and the United Nations Office for Partnerships, the summit convened 450 investors representing tens of trillions in assets. Speakers and panelists came from the country’s largest pension schemes, asset management firms, and executive boardrooms, and they spoke of the urgent need to transition to a low-carbon economy, the private sector’s role in making that transition happen, and what their organizations are doing to tap into the opportunities presented by the change. Speakers framed climate challenges in terms of their economic and investment impacts: “The carbon-burning economy is the rust belt of tomorrow’s economy,” said Roland Rich, executive director of the United Nations Office for Partnership. Smart investors will take stakes in the “Microsofts and Googles of clean tech,” he added. But other speakers acknowledged that solid investments in the area can be hard to pinpoint, and that poor returns have made some investors skittish. “Investing in this space hasn’t been easy,” said Kevin Parker, global head of Deutsche Asset Management. He explained that in 2005, he and his asset management team decided that renewable energy represented a vast new investment opportunity. “We were wrong,” he said, “at least as shown by investment returns over the past seven years.” As a result, the Deutsche team shifted its focus from the opportunities in the space to properly accounting for the risks introduced by climate-related missteps. He cited BP and TEPCO – the operator of the Fukushima nuclear power plant crippled by the earthquake there – as examples of stocks that suffered after environmental disasters revealed weak sustainability policies. Figures released at the summit by Bloomberg New Energy Finance (NEF), underscored how difficult investing in clean tech stocks has been over the past year. NEX, an index run by NEF that tracks the performance of 97 clean energy stocks, fell 40% in 2011. Ethan Zindler, head of policy analysis at NEF, explained that the dismal performance was due to an oversupply in the market, especially in areas like photovoltaic module manufacturing.Nonetheless, 2011 was a banner year for the clean tech sector in terms of how much investment capital flowed into it: global investment hit a record $260bn for the year, and investing in the U.S. clean energy industry outstripped that of China for the first time since 2008 (thanks, in large part, to federal stimulus spending, said Zindler). Overall, all of this is good news for clean tech, he said, though noting that stock market investors will probably remain bearish on these stocks for the foreseeable future, although a market oversupply should force technology prices down. Before long, he said, consumers may see alternative forms of energy, particularly solar, become competitive with prices for “dirty” energy – a crucial step in the mainstreaming of clean energy. Deutche’s Parker, too, concluded that he’s ultimately optimistic about the investment prospects. He said that Deutsche has invested $10bn in solar and wind infrastructure deals in Spain, and has also taken significant stakes in projects related to real estate retrofitting, agriculture, and water. For their part, the pension fund managers and state treasurers who spoke at the conference made it clear that they’re hardly coming up short in their search for green investments that offer strong returns and fall within the scope of their fiduciary responsibilities. State of New York Comptroller Thomas DiNapoli, who oversees the $140bn state pension fund, said that as an extremely long-term investor, “the state can’t afford not to invest” in green strategies. DiNapoli said that the fund’s Green Strategic Investment Program, which was announced in April 2008 and targets private equity, public equity, and fixed-income investments in renewables and clean tech, has so far deployed three-quarters of its $500m commitment. He added that the fund has recently seen particularly impressive returns on investments it made in Crystal IS, a Green Island, New York-based manufacturer of UV LEDs (which was recently acquired by Japanese company Asahi Kasei) and Swiss energy management company Landis+Gyr, which Toshiba purchased in 2011 in order to strengthen its position as the world’s leader in smart grid technology. CalSTRS, the U.S.’s second-largest public pension fund with just under $150bn in assets, recently determined that $7bn of its entire portfolio is in green investments and is looking to increase that number, said CEO Jack Ehnes. He added that the plan will formalize rules requiring that all new managers and consultants
be subject to an evaluation of their attention to sustainability. Janet Cowell, treasurer of North Carolina, said the state had hired technology firm SAS to custom-build new risk management software for its $70bn fund, and that climate risk factors will be included in its new approach to risk. Some of the pension fund representatives, like CalSTRS’ Ehnes, touched on the potential of massive job-creation opportunities in the clean tech sector, but no speaker attacked the topic more head-on than AFLCIO president Richard Trumka. In a speech that roused the UN audience to a standing ovation, the head of the largest federation of labor unions in the U.S. lamented the failure of the federal government (“effectively controlled by climate change deniers,” he said) to pass legislation that substantively addresses climate change. In the face of political foot-dragging, he said, it’s incumbent upon other sectors to pick up the slack, and AFLCIO has mobilized with that goal in mind: “A year ago, as the climate bill failed in Congress, as the jobs crisis deepened, and as workers’ pension funds continued to suffer from microscopic fixed income yields,” Trumka said, “the American labor movement decided we couldn’t wait –we had to act to help advance profitable, risk-weighted investments that would create jobs and address climate change.” First, he said, the AFLCIO’s Housing Investment Trust invested in energy efficient retrofitting of multifamily housing. Then, in June, at the Clinton Global Initiative meeting, the unions’ leaders announced a plan to work with pension funds, money managers, and others to devote $10bn in new capital to job-creating infrastructure projects over the next five years. Late in 2011, he added, AFLCIO announced another partnership, this one with Oregon, to tackle a massive retrofit of the state’s schools. Trumka’s central message dovetailed with a point Ceres president Mindy Lubber had made earlier in the day: the narrative around the search for climate-change solutions is changing.Frustrated with the U.S. government’s stagnation on the issue and the investment risk inherent in policy uncertainty, investors have given up their wait-and-see stance and are, in increasing numbers, figuring out ways to take action on their own (while maintaining their calls for clear climate change policy). Still, an oft-repeated point throughout the day was that there’s plenty more that the private sector should be doing. NEF’s Ethan Zindler issued a challenge to the financial wizards in the room to design securitized bonds that allow risk-averse institutional and retail investors to take small stakes in big energy infrastructure projects like wind farms. Bill Green, senior managing director at Macquarie Capital, emphatically echoed the point: Not only would such investment products help clean tech infrastructure scale up, but they would provide investors with a low-risk investment in infrastructure projects whose revenues are fixed for at least twenty years. Other speakers, in addressing the question of why the investment community in the U.S. has been so sluggish in factoring climate risks and opportunities into their investment approaches, referred to the “consultant problem”: with the exception of a few firms, U.S. investment consultants fail to factor climate issues into their advising. Macquarie’s Green suggested that the investors present engage with their consultants on the issue and include climate questions in their hiring decisions. The goal, many of the day’s speakers stressed, must be to push conversations around climate risk into the mainstream, and build the type of private-sector – and eventually public-sector – critical mass adequate to stand before the problem. “All of us – investors, companies, workers, environmental activists, governments – need to be part of this dialogue,” said AFLCIO’s Trumka. “Any other approach to addressing climate risk is not just fundamentally unfair, it simply won’t work in our democracy.”