Climate change is one of the most serious issues facing the planet. Scientific evidence shows that temperature changes are likely to have profoundly negative consequences for human society, the global economy and the world’s natural systems. This poses risks and opportunities to which investors and companies must respond.
Tackling climate change will hinge on the investment decisions made by institutional investors. Pension funds, insurance companies and other institutional investors hold approximately half of the shares listed on the London Stock Exchange. Other big markets around the world have similar concentrations of ownership.
How quickly these institutions move their investments from high-carbon to low-carbon companies will, to a large extent, determine our success in mitigating global warming. These investors’ decisions will turn on assessments of the longevity of oil and gas fields; the ownership and control of energy supplies; the effectiveness of any regulations to control carbon emissions; the profitability of emerging low-carbon technologies and carbon capture techniques; and the willingness of consumers to change their lifestyles.
Until recently, many investors had been unconvinced that climate change would affect their returns significantly. This indifference is passing as the consensus on the severity of global warming hardens. This shift in attitude is demonstrated by today’s launch of the Institutional Investors Group on Climate Change’s statement on global warming. In total, 15 institutional investors managing assets worth £850bn ($1.6m) have signed the statement. It is the strongest call to date from investors for urgent and effective action by policymakers and companies to address the threats posed by rising greenhouse gas emissions. Moreover, it calls for all parties to work together to develop appropriate policy solutions.
The pension fund signatories pledge to incorporate climate change considerations into how they appoint, evaluate and reward their asset managers. In future managers will be required to address climate change issues in investment research, analysis and decision-making.
Some of these steps have already been taken, with the London Pension Fund Authority and other pension funds building these requirements into their investment management agreements. Some asset managers, such as Insight, have analysed how climate change might affect their investments in areas ranging from energy intensive utilities to renewable energy groups. The asset managers signing this statement commit to doing the same.
The statement recognises the need to develop our collective efforts. There is a commitment, for example, to incentivise brokers to produce research that helps managers understand how global warming affects their investments. The signatories also agree to work together and with others to share information and experience on climate change.
We have also promised to take a more active role in this critical debate, making our concerns plain to both politicians and chief executives. It is essential that shareholders and bondholders tell companies directly about the importance of climate change. Otherwise we cannot blame them for thinking investment analysts consider global warming to be financially immaterial.
Investors tend to be more wary about engaging with governments on matters such as climate change. But it is crucial that policymakers grasp that we require clear, long-term greenhouse gas reduction targets, with a policy framework that empowers industry and individuals to play their part. This foundation will enable investors to back low-carbon technologies, energy efficiency and other ways to reduce emissions.
This statement is one of the most important contributions made by institutional investors to the climate change debate. It recognises that investment decisions taken now will have a big impact on current and future global greenhouse gas emissions and the world’s climate. It also recognises the uncomfortable reality that current investment decision-making and share ownership overlooks the risks and opportunities presented by climate change.
This statement will be presented at the investors’ group’s conference in Paris next week. We call on all asset owners and asset managers to join us in addressing this issue.
Will the Institutional Investors Group on Climate Change’s statement put pressure on companies and governments to take action? Douglas Ferrans and Peter Scales answer your questions in an online debate this Thursday from 4pm BST. Post a question now
Douglas Ferrans is chief executive of Insight Investment, HBOS’s asset management arm. Peter Scales is chief executive of the London Pension Fund Authority and chairs the Institutional Investors Group on Climate Change