Although they want to understand the financial impacts of climate change, investors lack the information they need for such analysis. Investment managers Stephanie Pfeifer, Rory Sullivan and David Russell give us their views

The Investor Statement on Climate Change issued by the Institutional Investors Group on Climate Change (IIGCC) in October 2006 is perhaps the most important call in recent times by European investors for action on the threat posed by greenhouse gas emissions.

In signing the statement, investors are sending a clear message about their concerns on climate change to the rest of the investment community, companies, policy-makers and other stakeholders. The statement signals that investors are willing to strengthen their focus on climate change in their investment processes and to engage with companies and governments to develop policy solutions to climate change.

In April this year, the IIGCC published the first annual report describing how the statement’s asset owner and asset manager signatories – 21 institutions representing €1.4 trillion in assets under management – have delivered on commitments made in the statement.

The report demonstrates the level of attention and resources being devoted by signatories to taking action on climate change. All asset manager signatories report that they are building their capacity to analyse the financial implications of climate policy (with improved sell-side research playing a major role). All are using their influence to encourage companies to pay greater attention to climate change and to improve disclosure and reporting on climate risks and opportunities.

This data is now influencing investment decisions, with all of the asset manager signatories reporting that they consider regulatory risks as an integral part of their investment decisions and about 90 per cent saying they are exploiting climate-change-related opportunities.

For asset owners – pension funds – a similar picture emerges. More than 80 per cent reported that they have encouraged their asset managers to exercise their voting rights on climate change issues and 67 per cent have asked them to engage with companies on climate change. Two-thirds of asset-owner signatories have also asked their asset managers to explore the potential for investment in low carbon/clean energy funds.

One of the most encouraging findings is that both asset managers and asset owners see that their responsibility goes well beyond their own direct investments, with many actively contributing to the public policy debate on climate change, particularly through collaborative initiatives such as the IIGCC. And the messages being presented are progressive, with investors emphasising the importance of clearer and stronger policy measures on climate change and calling for governments to set specific targets for greenhouse gas emission reductions.

Gaps to fill

The IIGCC report identifies four key areas where further action is required. First, despite asset owners encouraging their asset managers to do more on climate change, only 30 per cent of asset owners formally integrate climate change into their processes for appointing and evaluating fund managers or request advice on climate change from their investment consultants.

Second, some important climate change risks, in particular those associated with adaptation to the physical impacts of climate change, such as increased flood risks, are receiving relatively little attention. Some investors are looking at this: Insight and the Universities Superannuation Scheme, together with Henderson Global Investors and Railpen, have established a collaborative project focused specifically on adaptation. But this focus is still rare in the investment sector.

Third, the signals being sent by governments to investors remain weak and in places contradictory, which is hampering investment decision-making.

Fourth, even where climate change risks and opportunities are material to a company’s financial performance, these issues are not being systematically incorporated into investment managers’ decisions, in particular for asset classes other than equities.

These issues are compounded by the systemic gaps and weaknesses in the quantitative data being provided by companies, which make it difficult to compare performance between companies meaningfully even within relatively homogeneous sectors. Addressing this is a priority for the IIGCC, which has a programme of developing a series of sector-based disclosure frameworks (the first of which focused on electricity utilities) to try to overcome these gaps.

In parallel, virtually all of the signatories to the statement reported that they had engaged directly with companies to encourage them to improve their climate change reporting. While expectations of company disclosures are still some way from being completely agreed, there are some broad principles on the information that is being sought by investors (see box).

Early promise

There remain three areas where investors must work harder to ensure that climate change risks and opportunities are taken into account in investment processes.

First, the incentives for investment managers to take account of climate change need to be increased, through the integration of climate change considerations into pension funds’ selection and appointment processes.

Second, investment managers need to develop further their understanding of climate change risks and opportunities. A particular priority is the development of the tools required to ensure that these issues are properly incorporated into investment analysis.

Third, investors need to continue to support government policy directed at reducing global greenhouse gas emissions and ensuring the effectiveness of responses to the physical impacts of climate change.

Investors have come a long way in understanding and analysing the investment implications of climate change. Improvement in these areas will ensure that investors fulfil the critical role they can play in supporting the move to a low-carbon economy.


Climate change disclosure: what investors want

Here’s what investors want companies to tell them about their climate change risks, impacts and targets. Companies should:

· Report on all of their greenhouse gas emissions, not just direct emissions from processes and operations and indirectly from electricity consumption, but also emissions associated with the production of raw materials and other inputs, transport and logistics, and the use and disposal of their products and services.

· Provide a clear statement on the financial significance of climate-change-related risks and opportunities for their business, including a description of the process followed to assess materiality.

· Report on at least their last five years of emissions data. This should include a description of how data was calculated (including the assumptions made, key data sources and emission factors used, data checking and verification processes) and an estimate (ideally quantitative) of the uncertainty associated with the reported data. It should also include a discussion of the reasons for any changes in the company’s emissions (eg acquisitions or divestments, changes in data collection and analysis processes).

· Explain how they expect their greenhouse gas emissions to change over time.

· Publish their greenhouse gas emission reduction targets, including a clear statement on the proportion of the company’s emissions that are covered by the target, the baseline for the target, the expected emissions reductions, the deadline for achieving the target and whether the target is to be met wholly or partially through offsetting.


Stephanie Pfeifer is programme director at the Institutional Investors Group on Climate Change, Rory Sullivan is head of responsible investment at Insight Investment and David Russell is co-head of responsible investment at USS.