The clamor for measures to combat global warming is finding increasing support among investors. At the United Nations Investor Summit on Climate Change in New York last month, a group of 49 pensions, foundations and money managers with $1.75 trillion in assets under their control pledged to invest $10 billion over the next two years in clean technology and set a goal to cut energy used in core real estate holdings by 20 percent over three years.
At a summit three years earlier, $1 billion in such investments was pledged.
“Green technology is one of the exciting areas that we are looking at,” says pledge signatory Russell Read, CIO of the $241 billion California Public Employees’ Retirement System, the U.S.’s biggest public pension plan. “We think we are in the beginning of a possible revolution of green technology.”
CalPERS so far has earmarked more than $1 billion to environmental investments: $600 million via private equity investments targeted at environmental technology and $500 million in public stock portfolios that use an environmental screen.
Yet any sense of self-righteousness among these institutions was tempered by their recognition that the market for environmental technology won’t reach full bloom until regulatory changes, such as carbon pricing, are clarified. That being the case, summit members remain committed to continuing to push for a mandatory national policy to reduce greenhouse-gas emissions and to maintaining pressure on the Securities and Exchange Commission to require companies to disclose material climate risks.
“What’s most important is that capital markets recognize carbon,” says Mindy Lubber, president of Ceres, an investment lobbying group on environmental issues, and director of the Investor Network on Climate Risk, which organized the summit. “Ten billion dollars is not decimal dust but we could see exponential growth with the right market signals.”
In September about two dozen institutional investors, including large pension plans, met with the SEC to push it to give guidance that would force companies to improve disclosure on climate change risks, including physical, financial and legal risks. Institutions have filed a record 54 global warming shareholder resolutions with U.S. companies this proxy season, up from 43 a year earlier and 33 in 2005, according to Ceres. Fourteen were withdrawn after the companies agreed to improve disclosure.
“The SEC has been a source of frustration,” Connecticut State Treasurer Denise Nappier told reporters at the Summit. “[We] have yet to get a clear set of guidelines.”
Lubber is hopeful that the U.S. will limit carbon emissions with new legislation next year, effectively joining more than 170 countries that have ratified the Kyoto Protocol.
Several bills in Congress would curb greenhouse-gas emissions, and the three remaining presidential candidates all support a cap-and-trade system. Republican Senator John McCain, in fact, in 2003 co-sponsored the first climate change bill in the Senate that advocated a cap-and-trade regime.
“Regulation of greenhouse-gas emissions is coming,” Bank of America chairman and CEO Ken Lewis said in a February 12 speech to the North Carolina Emerging Issues Forum. “We favor a market-based mechanism to set a value for carbon allowances, and a clear federal standard that would give investors the certainty they need to plan for the future.”
Caps on carbon emissions would also lead to improved corporate disclosure. Many companies now voluntarily report on climate change in their sustainability reports but most focus on potential opportunities rather than on financial risk, according to a survey done by KPMG International in September. With a cap-and-trade system setting prices for carbon emissions, more energy-related risks would be material and thus subject to disclosure.
“Right now it’s very unclear when the price will be applied and what it will be — whether allowances will be auctioned or given away,” says Rob Berridge, who helps organize shareholder resolutions for Ceres. “If you don’t know the rules of the game, it’s difficult to make long-term investments.”
The $10 billion pledged over two years is puny compared with a potential $170 billion in global annual energy productivity investments through 2020 identified in a report McKinsey & Co. prepared for the summit. These investments would halve global energy demand growth, generate annual energy savings of $900 billion by 2020 and have an internal rate of return of 17 percent, McKinsey estimates.
Yet, as with the $10 billion pledged by institutions, these investments won’t flow fully until “energy market failures” are corrected and more stringent energy efficiency standards are mandated, the report said. Market failures, as defined by McKinsey, include fuel subsidies, a lack of information to consumers about energy productivity choices and issues such as the reluctance of landlords and tenants to invest in energy efficiency if the benefits don’t accrue to them. The report also calls for higher energy-efficiency standards for appliances and equipment, buildings and corporate activities.
“There will be more and more places to put money as the right market signals are sent,” says Lubber.
