Institutional Investor Interest in Climate Change May Boost Financing

One of the largest U.S. pension funds in California just opened its kimono on how it approaches alternative energy investment and sustainability, and a new report is urging public companies to reveal more details about managing climate change risks and opportunities.

The report, Physical Risks From Climate Change, published by Ceres, Calvert Investments and Oxfam this spring guides companies in how to provide more details to investors on physical climate change risks, and how those risks are being managed. While the report is focused on disclosures that companies can provide to investors, it comes at a time when institutional investor engagement with public companies over climate change is at an all-time-high and the increased dialogue could ultimately lead to more investment in clean technologies among these investors.

“I think as investors are really paying attention to climate change issues in record numbers… there’s definitely been a groundswell toward investing that really makes sense over the long term,” says Erica Scharn, the manager of investor programs at Ceres. “That includes the opportunity side of climate change.”

Momentum in the area of climate change could also be a factor that leads to greater investment. Scharn notes that many of the investors Ceres works with are institutional, and are thus responsible for multiple generations of benefits. These investors are grappling with the fact that the markets tend to be short sighted, while climate change risks are long-term issues.

Institutional investors have been tepid on clean technology since the financial crisis. A 2011 study on pension fund investment in green growth initiatives published by the Organisation for Economic Co-operation and Development (OECD) in France last year found that despite strong interest among pension funds in such initiatives, actual investment was low. The reasons had to due with a lack of environmental policy support plus, “a lack of appropriate investment vehicles and market liquidity, scale issues, regulatory disincentives and lack of knowledge, track record and expertise among pension funds about these investments and their associated risks,” the report states.

However, a few funds are dipping their toes deeper in the water, and more may be to come.

The California Public Employees’ Retirement System (CalPERS) in May released a report that the group says is the first-of-its-kind in describing the types of governance reforms and sustainability principles CalPERS applies to its investment portfolios.

Much of the report, Towards Sustainable Investment: Taking Responsibility (Please see CTIQ’s Research Vault), covers the ground CalPERS has trod with regards to governance reforms, engagement with public and private companies and its governance priorities.

However, CalPERS also explains that the pension fund has identified climate change as one of the main long-term risks in its portfolio, and says that without “policy mechanisms in place, the effects of our actions in terms of environmental impact will remain limited.”

CalPERS approaches climate change through a mix of investments in public and private equity and through its proxy voting efforts, the pension fund says. The pension fund invests capital primarily in private equity funds that invest in “more efficient and less polluting technologies than current products.”

Its Alternative Investment Management program has $1.2 billion total exposure to the alt energy sector, and both phases of its investments have an emphasis on solar power and biofuels, although wind, energy efficiency and biomass and waste also make up small but significant chunks of the portfolio.

CalPERS says several solar and biofuels companies look “promising,” but notes there have been only a few “winners” so far. The fund also notes that “there is a tendency to underestimate capital intensity in product manufacturing and deployment.”

And while CalPERS is among the first to produce such a report, other funds are also taking action.

New York’s Green Strategic Investment Program commits $500 million over three years to “environmentally-focused investment opportunities that produce attractive, risk-adjusted returns.”

And the Pennsylvania Treasury Investment policy even states that it will assess the risks and opportunities presented by climate change.



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