Investors see risk of climate change but struggle on gauging green assets

Institutional investors may be sophisticated enough to model the effect that accelerating global warming has on their portfolios, but generally struggle to assess which green investments work and which don’t.

Most asset owners (83%) consider the extent to which managers integrate climate change into their investment process and ownership activities and 69% indicate that it influenced their selection decision, according to the third Global Investment Survey on Climate Change by Mercer for the Global Investor Coalition (GIC) on Climate Change.
While 50% of asset owners and 52% of asset managers say they have exposure to low-carbon assets via developed market equity investments – making this the asset class with the highest level of reported low carbon exposure – few were “able to quantify the value of low carbon exposure via equity with confidence”.

Nathan Fabian, ceo of Australia-based GIC member the Investor Group on Climate Change (IGCC), tells Ethical Performance: “It’s difficult to duplicate [low-carbon investments] if you don’t understand which investments are working well for you and which ones aren’t, mostly because pension funds invest through fund structures and at arm’s length.”

The industry is exploring ways to improve the situation through a number of initiatives, such as the recently announced GIC Low Carbon Investment Register along with potential partnerships with data and research provider Bloomberg New Energy Finance, the OECD and UNEP-FI.

Something the industry may not be able to work out is flagging government support for climate change policy and action. In the UK for instance, investment in clean energy projects has tumbled to just $1.7bn in the three months to June from $4.2bn in the three months to September 2010.

Meanwhile in Australia, the prospect of a new Liberal-National coalition government after the September election is likely to usher in significant cuts to both clean energy and low-carbon investment.

“The flow of capital towards low-carbon solutions and away from carbon-intensive technologies risks being undermined by inadequate, inconsistent and halting policy efforts by world governments, especially in major greenhouse gas emitting nations,” the GIC said. But as a responsible fiduciary, an institutional investor must match its practices to the underlying risk of climate change, not just overt policy signals, Fabian notes. In an encouraging development, investors are engaging with companies on their capital investment in fossil fuels. With Carbon Tracker’s “unburnt carbon” scenario in mind, “investors are having a much closer look at holding fossil fuel companies and whether or not holding those companies adds sufficient returns to warrant the risk,” Fabian adds.

Oliver Wagg is a journalist & leading SRI commentator