Climate Risk a “Fiduciary Duty,” Institutional Investors Say

Representatives from various institutions made it clear that they perceive climate risk as a threat and that they have made investments that reflect this, at the Ceres Investor Summit on Climate Risk at the UN last month. The conference was organized by Ceres, a non-profit network of investors, companies and public interest groups advocating for sustainability leadership.

“Certainly we know from the significant weather events we have experienced in recent times that this risk is a risk to the overall economy; and for a pension fund and for our entire society to continue to be sustainable we need to deal with this risk in a very straightforward way,” New York comptroller Thomas DiNapoli said during the conference.

Climate Change Creates Risk and Opportunities

During the conference both DiNapoli and Donald MacDonald, trustee director of BT Pension Scheme, the largest definined benefit pension plan in the UK, suggested that climate risk broadly influenced their investment decisions. Both said they thought dealing with climate risk is a fiduciary duty.

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“If people fail to take advantage of the risks and opportunities that climate change and carbon can actually offer, then I think actually they are in breach of their fiduciary responsibilities, so I think we need to be more aggressive about this,” said MacDonald.

Echoing MacDonald’s comments, DiNapoli said, “I certainly perceive wholeheartedly that dealing with the issue of climate risk is totally consistent with fiduciary responsibilities.”

Both also noted that the funds they represent have already made various green investments.

MacDonald said his fund owns wind farms and has contributed roughly $100 million to a renewables and clean energy fund that it established for the UK government.

“We also have other investments hidden away elsewhere in the private equity sector, which are renewable-based, and we’ve got a 5% infrastructure allocation in which there is a bias towards low carbon, said MacDonald. “In fact, almost all of our infrastructure investments are low carbon.”

DiNapoli said that his fund has been engaging in green investing for years.

“Certainly, at the New York Common Retirement Fund, we have, over a period of years now, been stepping up our involvement in this area as an investor, engaged not only in terms of where we put our money but how we interact with the companies where we invest,” he said. “A few years ago, we started a green strategic investment program and we’ve built beyond that program, because we see the risk, we’ve heard the science, but those risks also present great opportunities.”

DiNapoli also highlighted his institution’s push on the companies it invested in to address climate risk.

“[W]e believe that the issue of climate change is a significant risk that every one of our companies needs to assess. We have been engaged in many ways, including shareholder resolutions.”

According to DiNapoli, First Energy is going to produce a report on its efforts to reduce greenhouse gas emissions and that his institution has asked other companies in the energy sector to “address the opportunities that are there with low carbon scenarios.

“We are going to certainly keep the pressure on the companies we invest in to protect our shareholder value and reduce our risk by being more proactive in assessing the risk of climate change and the impact of the carbon economy… And certainly we know from the significant weather events we have experienced in recent times that this risk is a risk to the overall economy, and for a pension fund and for our entire society to continue to be sustainable, we need to deal with this risk.”

Not all representatives, however, indicated that climate risk played a significant factor in their companies’ investment decisions.

Asset Allocation, Real Estate, Green Bonds

Cecilia Reyes, chief investment officer of Zurich Insurance Group, for example, said that, while her company is aware of the exposure to risks caused by climate changes, climate risk is not one of the primary risks it takes into account.

Responding to questions regarding how Zurich factors climate risk into its overall strategic asset allocation, Reyes said, “[W]e’re economic-focused. We look at traditional risk factors: equity risk, credit, interest rate risk, inflation risk, commodity risk, etc…. Is climate risk just one of the drivers of these risk factors that we’ve already taken into consideration? Perhaps, but it’s not really well understood currently how climate risk really is a systemic risk factor on the overall portfolio context actually [and how it] should be incorporated in a consistent way within this framework… I don’t clearly buy into, you know, looking into scenarios on climate and then factoring that into the long-term strategic allocation for the company.”

But Reyes also noted that she believes that factors leading to climate risk have an impact on individual asset classes, and that Zurich fully embeds the consideration of climate risk into its selection of individual securities and in its management of individual asset classes.

“Where we’re making very good progress in the area of sustainable real estate investing… [w]ith every decision we make in renovation, refurbishment, etc., we consider sustainable technologies and trying to incorporate that with the way we manage our real estate investment portfolio,” said Reyes.

She added that Zurich has invested $1 billion in AAA green bonds.

“[W]e like high-quality fixed-income instruments, and green bonds present themselves as such,” Reyes explained.

Foundations Divest Fossil-Fuel, Reinvest in Cleantech

In other news related to institutional investors’ interest in green investing, 17 private foundations managing nearly $2 billion in assets have pledged to divest their assets from coal, oil and natural gas companies and re-invest the money directly in cleantech companies. The Divest-Invest Initiative was launched on Jan. 29, and the foundations include the Schmidt Family Foundation, founded by Google’s Eric Schmidt and his wife, Wendy; the Sierra Club Foundation; the Wallace Global Fund; the Park Foundation; the John Merck Fund; and the Russell Family Foundation.

Additionally, 22 cities, two counties, 20 religious organizations, nine colleges and universities, and six other institutions have pledged to get rid of their fossil-fuel investments, according to the New York Times.

Despite the many promises recently made by various investors to do more green investing and to press companies to pay more attention to climate risk, the overall level of interest in green investing among institutional investors that invest as limited partners in cleantech venture capital funds continues to decline. At least, that’s according to Rob Day, a partner with cleantech-focused venture capital firm Black Coral Capital, based in Boston.

In one of Day’s recent blog posts this month, he said, “Earlier this week, I spoke at a conference for venture capital limited partners, and while everyone was polite about it, it was very clear that cleantech was very out of favor (or at least just very out-of-mind) with most of the attendees. There was a cleantech panel which was very sparsely attended… and whenever I described Black Coral’s focus on the sector, it was generally met with an ‘Oh, really? Huh.’

Day also makes the point that while many LPs at the conference were excited by Google’s acquisition of Nest Labs, some investors in this group may not put Nest in the “cleantech” category.

But Day’s comments do not diminish the fact that some investors that gathered at the Ceres conference at the UN in late January expressed a great deal of concern about climate risk.

“The summit today is a very important discussion and the release of this Clean Trillion report by Ceres and the Ceres team is very significant as well,” DiNapoli said during the conference. “The report lays out a very ambitious goal and ambitious agenda, but it’s a very important aspirational blueprint for where we all need to be headed.”

Institutional Investors Get Serious About Green Investing

The Clean Trillion campaign, which Ceres announced at the conference, asks for a trillion dollars a year to be invested in clean energy, beginning in 2030. In order to achieve this, Ceres says, half a trillion needs to be invested by 2020. The report mentions the International Energy Agency’s estimate that “the world will need to invest $1 trillion more per year through 2050 in solar plants, wind farms and other alternative-energy projects to have an 80 percent chance of keeping average global temperatures no more than 2 degrees Celsius above preindustrial levels.

A Ceres press release provided the following suggestions on how institutional investors can reach the goals set out by the Clean Trillion campaign:
- Manage climate risks in their portfolios;
- Invest in clean energy opportunities that offer competitive risk-adjusted returns across asset classes;
- Engage with companies to improve their practices on clean energy and climate change, including determining which issues have been included in shareholder resolutions; and
- Support policies that expand investment in clean energy.

 

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