Big Institutional Investors Moving Quickly Away from Carbon, See Growing Risks from Climate Change

Part 3 in a series on the ESG risks and opportunities associated with the transition to a more sustainable economy.

Supported by Impax Asset Management


A growing number of institutional investors are taking major steps to reduce their exposure to carbon emissions.

They’re doing this via deep dives into their investment portfolio and the carbon exposure of each company they own — followed by cutting down on companies that have high exposure to carbon emissions, while boosting their ownership of companies that focus on energy efficiency, renewable power and other sectors that are likely to outperform in a low-carbon economy.

The movement is likely to expand to smaller investors that tend to follow the lead of their larger peers. But it’s already becoming widespread, experts say.

“Institutional clients are asking us about their exposure to the investment risks and opportunities associated with climate change,” says Daniel Ingram, vice president of responsible investment research and consulting at Wilshire Consulting.

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The first step for many such investors is to do a fairly straightforward carbon footprint analysis – basically a summation of the total carbon emissions from the operations of all the companies in a portfolio. “We see a number of large asset owners, especially public plans, taking the initial step of doing a carbon footprinting,” says David Richardson, global head of client service at Impax Asset Management. “It’s relatively inexpensive and a fairly quick undertaking to do that, using publicly available information from several sources, and the output is often fairly surprising to them. It at least starts the conversation that gets to a more thoughtful way of thinking about carbon risk.”

But Richardson and Ingram both say that carbon footprint is only a start.

“We recommend clients go beyond carbon footprinting, which is often backward-looking and only tells you part of the picture,” Ingram says. “We also educate clients about the physical and regulatory risks to their investments from climate change. This is particularly important for assets which are likely to be more exposed to extreme weather events, such as flood-prone real estate investments and carbon intensive companies whose earnings are sensitive to higher carbon prices.”

Indeed, it’s crucial for an investor to know about the ability to react to a carbon tax, or a cap-and-trade system, of the companies it owns. To that end, Impax recommends a process that includes a scenario analysis to assess “a carbon tax’s potential impact on individual companies,” Richardson says — particularly its impact on cash flow. “We think some sectors are better-positioned to pass those costs along, while other sectors are more likely to be impacted,” Richardson says.

This carbon risk assessment is a way to answer a vital question: “As we transition to a more sustainable economy, what is the net portfolio impact going to be?” says David Loehwing, vice president for sustainable investing at Impax. Such an assessment helps investors understand what companies they should own and what they should avoid, he says.

Companies that are prime candidates for investors seeking a low-carbon portfolio include those involved in energy production, if they are making strides to reduce carbon emissions. ‘“And a company involved in energy efficiency could be a strong, long-term investment,” Richardson says.

Indeed, energy efficiency companies comprise more than 17% of the MSCI ACWI Sustainable Impact Index. Specific names in that part of the index include Umicore, the Belgian mining company formerly known as Union Minière; high-speed rail operator East Japan Railway; and chemicals and sustainable technologies company Johnson Matthey, according to a recent report on the index.

Once they have a list of companies to avoid and to own, investors can work with asset managers to put those findings into action. A good example is Wespath Benefits and Investments, which last month paired with BlackRock on the creation of a new low-carbon strategy, called “Transition Ready.” Wespath, which oversees $23 billion in pension assets for the United Methodist Church, committed $750 million to the new strategy, which will invest in “companies best positioned to facilitate the global transition to a low-carbon economy,” the two companies say in a statement.

It’s an “enhanced passive strategy” that overweights or underweights companies in an index depending on a range of factors including a company’s exposure to energy production, its historical and potential future emissions, its take on energy efficiency, and how it manages its energy, water and wastewater use.

The key, according to Brian Deese, BlackRock’s global head of sustainable investing, is to invest in companies that are ready for the transition to a low-carbon economy. “One of the key components of assessing the ‘transition readiness’ of a company is its core business involvement, including its positioning in the manufacturing and development of carbon efficient technologies,” Deese says. “This means considering a company’s research and development, current revenue and forward-looking strategy in solutions across clean technologies.”

BlackRock will offer the strategy to other institutional clients as well. It’s likely that there will be interest in such an investment product, as many other large institutional investors are already moving into carbon-light investments. That interest also seems certain to filter down to other, smaller institutional investors in time.

Among the big pensions already taking action:

  • The San Francisco Employees’ Retirement System (SFERS), which is creating a $1 billion “carbon constrained” passive index equity strategy. The idea, according to CIO William Corker, isn’t to get rid of all carbon-producing companies, but rather to weight the portfolio more toward companies that emit less carbon. And last month, pension trustees approved a targeted divestment of five fossil fuel companies as part of a new shareholder engagement plan that will focus on climate risk.
  • In September, Japan’s Government Pension Investment Fund, the world’s largest pension, said it will invest about $10 billion in a pair of carbon-efficient index strategies that overweight companies with high carbon efficiency.
  • The New York State Common Retirement Fund has a new “Decarbonization Advisory Panel” that is charged with coming up with ways to reduce the pension’s exposure to carbon, including boosting the fund’s investment in a low-carbon index.
  • The California State Teachers Retirement System said in 2016 that it would invest $2.5 billion in a low-carbon equity index. “By underweighting high greenhouse gas emitters and fossil fuel reserve holders, the strategies are expected to benefit CalSTRS if carbon or emissions taxes become prevalent,” the pension said at the time.
  • Canada’s second-largest pension fund, Caisse de dépôt et placement du Québec or CDPQ, intends to increase its low-carbon investments by 50% by 2020, planning more than $6 billion in new low-carbon investments by then. The pension will also reduce the carbon intensity of its portfolio by 25% by 2025.


Asset managers and investors use a range of methods to get the actual data they use to build these low-carbon investment strategies, sometimes relying on third-party data providers and other times collecting the data themselves. Companies have varying responses to manager requests for carbon data, says Impax’s Loehwing.

“There are some companies that clearly understand the overarching picture. With them, the conversations we have are about the timelines for reducing their emissions,” he says. “Conversations we have with other companies are more about trying to explain how investors use this information and how we are constructing portfolios that include a climate risk assessment.”

And some companies, Loehwing adds, don’t really get it yet. “There are still some companies that are reluctant to have this conversation, or don’t see the value in addressing this challenge,” he says. But even that attitude is telling. “That’s still a piece of information we can use.”

Wilshire expects more low-carbon strategies to come to market as managers respond to increasing investor interest in lowering their carbon exposure — particularly because many investors are not sold on the efficacy of a complete divestment from fossil fuel companies.

“Demand for these types of lower carbon strategies is rising as clients are looking for viable alternatives to divesting from fossil fuels, which can be a blunt and ineffective tool to manage the broader portfolio risks from climate change,” Ingram says.

In fact, Impax believes, the growing demand for low-carbon investment products is broad and only going to grow as the need to fight climate change becomes ever-more pressing.

“Asset owners are in a position to affect change,” Richardson says. “A growing number of them recognize the need to act as a good steward of their portfolios as well as the planet, and so are looking for investment solutions that are built around a lower-carbon future.”


To learn more about this trend, register for our webinar on Wednesday, November 14th at 11AM Eastern Time, Emerging Strategies for Decarbonizing Institutional Portfolios. 

Our expert panel includes:

  • Ian Simm, Founder and Chief Executive, Impax Asset Management Group
  • Andrew Collins, Director of ESG & Responsible Investing, San Francisco Employees’ Retirement System
  • Alex Bernhardt, US Head of Responsible Investment, Mercer



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