Why investors must examine the $1.75 trillion climate change action plan

The action plan announced last week by the Investor Network on Climate Risk, a coalition of US and European investors under the responsible for over $1.75 trillion (€1.2 trillion) in assets, was a huge boost to institutional investors worldwide. All are, or should be, grappling with how they can avoid contributing to global warming and simultaneously benefit from their position as long-term capital owners in what is increasingly being seen as a fundamental shift in the way investments are made. To hear the biggest US investors, including CalPERS and other public pension giants, commit, amongst other things to a goal of deploying $10bn to clean technology companies collectively over the next two years, is vitally important when the topic comes up at, as it must, at pension trustee/board meetings. If the world’s biggest pension funds have taken the view that climate change is both a significant risk and opportunity, why are medium sized and smaller funds not yet doing more?
The question is not going away if the world is to meet the challenge of reducing greenhouse gases in line with the60-90% reductions below 1990 levels by 2050 that the United Nations Panel on Climate Change (UNPCC) recommends. Investors that are not up-to-speed risk more than just contributing to eco-damage. They also risk compromising returns and missing out on long-term potential. As the coalition puts it: “Climate change presents both material investment risks and significant opportunities.”
Nonetheless, the $10bn figure raises questions. Can the institutions seriously hope to put such large amounts of capital to work so quickly in the clean tech field? And what about the prospect of a bubble? The amount looks more reasonable if you break it down to a couple of hundred million each among the action plan signatory investors, particularly when you recall that leading institutional investors in clean tech like the UK’s Universities Superannuation Scheme are aiming for allocations in the region of €500m in the coming years. The huge growth in the number of clean tech companies coming to market as well as the proliferation
of funds and their sizes suggests there is investment capacity. A report in September 2007 by Canadian investor services firm Criterion Investments claimed the clean energy investment universe already had a market cap of $1.4 trillion with expected capital flows of $70bn a year. This gives some perspective to the €10bn on the table from US institutions.
Valuations, of course, need to be scrutinised carefully; when don’t they? But the underlying political signs are positive. The EU Directive proposal issued in January targets 20% of Europe’s energy being producing from renewable sources by 2020 and includes measures to remove barriers to growth for renewables, including simplifying authorisation procedures for new projects as well as funding for research and development of next generation renewable energy sources.
The investor action plan aims to lobby hard for the same kind of commitment from the US government, which willbe crucial.
Interestingly, a less headline-grabbing part of the action plan could turn out to be more important than the $10bn clean tech commitment. The coalition said it would prioritise green building standards at the core of future investment decisions, lending support to pressure on new-build properties to be energy efficient. Significantly, it also backed a 20% reduction in energy use in existing property investment holdings over the coming three years. For a giant real estate investor like CalPERS, which has more than $20bn in property, this will involve a lot of ‘retrofit’ to make existing properties energy efficient. The underlying assertion is that more efficient buildings make for better, environmentally sound profits. With buildings counting amongst the world’s biggest energy users, and hence carbon emitters, the coalition’s goal is very good news indeed.