Instead of waiting for governments to act on various environmental policies and guidelines, asset managers can take the initiative when it comes to the carbon footprint of their funds without making changes to sector weightings or their overall investment strategy, a recent study reveals.
The report, Carbon Risks in U.K. Equity Funds, published by Mercer and Trucost on behalf of World Wildlife Fund, suggests several actions that managers could take to make their funds more environmentally friendly. These actions include throwing weight behind new reporting requirements for greenhouse gas emissions, incorporating climate change criteria into their investment policies, and encouraging fund managers to actively manage the carbon risk in their investment portfolios.
“Institutional investors, such as pension funds, invest money in listed companies, many of which are very carbon intensive,” explains Simon Thomas, CEO of Trucost, a U.K.-based environmental research organization. “Government policy initiatives to apply carbon charges could lead certain companies to lose market share to more efficient and innovative companies that emit less. As a consequence, the potential exposure of earnings to carbon costs across investment portfolios could have a knock-on effect on pension fund returns.”
According to the report, climate change ranks low in fund managers’ investment decisions, primarily due to a lack of confidence in government environmental polices, short-term pressures to generate returns and a lack of standardized costing and reporting frameworks for company emissions.
However, fund managers who ignore corporate carbon performance completely could put their fund assets at risk as carbon-intensive companies face rising carbon costs and their company valuations fall in the short-term in anticipation of future carbon risk.
“Climate change presents new challenges and opportunities for institutional investors, not only in terms of the possible physical impact over the very long-term but, more immediately, through the dramatic changes that are unfolding in government policies and regulations around the world,” says Danyelle Guyatt, principal at Mercer’s responsible investment group.
“The results of our research with WWF and Trucost indicate that the investment management industry has a long way to go before pension funds can feel reassured that sufficient attention is being paid to the investment implications of the shift to a low carbon economy,” adds Guyatt. “It is important for pension funds to be aware of these potential risks and opportunities, and to manage these proactively through their strategic asset allocation decisions and the way they review and select fund managers.”
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