This is going to be a big year for climate change, but institutional investors and their advisers are likely to play only a small part — and are running a risk they may be unaware of by doing so. In June the United Nations is holding a massive conference in Brazil, bringing together stakeholders from around the globe to mark the twentieth anniversary of its first United Nations Conference on Environment and Development. Heads of state and top government officials are all expected to attend — as are a handful of institutions.
To be sure, the topic of climate change is factoring into the thinking of more institutional asset owners both globally and in the U.S., and some are starting to take action either in their investment portfolios or through shareholder engagement. But while consideration of environmental concerns in reviewing investments is becoming common for investors in continental Europe, Australia and New Zealand, U.S. institutions, as a group, remain far less engaged; and climate change awareness advocates think they need to wake up. Fast.
“To ignore the risks of climate change and sustainability in your portfolio could be, and will be, regarded as a dereliction of your fiduciary responsibilities,” Kevin Parker, global head of Deutsche Asset Management told a room full of investors and other stakeholders at the Investor Summit on Climate Risk and Energy Solutions held at the United Nations headquarters in New York on Thursday.
Some large U.S. pension plans have heeded the warning. Among the speakers at the U.N. Conference were North Carolina State Treasurer Janet Cowell and New York State Comptroller Thomas DiNapoli, each the sole fiduciary for their state’s pension system, valued at $74 billion and $140 billion, respectively. Both have taken steps to address the issue of climate change through their portfolios. Last year North Carolina, following in the footsteps of California and Florida, conducted a review of its real estate portfolio to see how its real estate mangers were responding to climate change and the issue of energy efficiency in their buildings. The fund is now in the process of developing its own proprietary risk management software, which will include an assessment of climate change risk. In New York, DiNapoli said, the fund has already invested about three-quarters of the $500 million it had set aside for climate change investing, and interim CIO Marjorie Tsang has put together a sustainability team to review models of suitable investing.
As part of an initiative to explore how institutional investors should react to climate change, investment consultant Mercer this week published a report on how institutional investors are applying the results of its 2011 Climate Change Scenarios Study. The report found that of the 14 original institutional investor partners that had participated in the program, one-quarter had already initiated training for risk management staff and more than half indicated they planned to do so. In addition, more than half the partners have decided to include climate change considerations in future risk management or strategic asset allocation processes.
Investors that participate in the ongoing Mercer study include All Pensions Group in the Netherlands, the Swedish Första AP-fonden, the AustralianSuper fund, British Telecom Pension Scheme and the Environmental Agency Pension Scheme in the U.K., the California State Teacher Retirement System, the Maryland State Retirement Agency, and the California Public Employees Retirement System. The study cited the Environmental Agency Pension Scheme and Första AP-fonden as two funds that have integrated climate change into their investment approach.
At the U.N. Investors Summit, Roelfien Kuijpers, global head of Deutsche Bank Advisors, said that with the notable exception of Mercer and Towers Watson, a problem in the U.S. was that very few investment consultants — which act as important gatekeepers and advisers to the institutional asset owner community — were on board with the idea that climate change was a significant investment concern.
“Generally speaking, the consultant community, particularly in the U.S., is way behind the A-ball,” Kuijpers said. And she urged institutional investors to go back to their consultants and ask about the risk factors around climate change: “Talk about strategic asset allocation, talk about water scarcity and the impact that will have. More engagement and idea generation from investment consultants would likely cause more institutional investors to consider the issue from a risk and investment perspective.”
