Investors set to increase pressure on companies causing significant environmental costs
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The world's largest 3,000 publicly-listed companies are responsible for one-third of global annual environmental costs totalling US$6.6 trillion, according to a summary report published by the UN Principles for Responsible Investment (PRI) and UN Environment Programme Finance Initiative in October 2010. The study, conducted by Trucost, shows that the companies caused over US$2.15 trillion worth of global environmental damage in 2008. These costs, mainly driven by greenhouse gas emissions, water use and air pollution, are 20% larger than the US$5.4 trillion decline in the value of pension funds in developed countries caused by the global financial crisis in 2007/8.
Findings reveal how environmental costs caused by companies held in equity funds could reduce returns to large institutional investors as they weaken cash flows, increase systemic risks in capital markets and cause asset values to fall. Diversified long-term investors such as pension funds, mutual funds and insurance companies – known as “Universal Owners” – have equity holdings in many companies and cannot avoid environmental costs that rebound into portfolios through insurance premiums, taxes, inflated input prices and the physical cost of disasters such as extreme weather events driven by climate change.
In a hypothetical investor equity portfolio weighted according to the MSCI All Country World Index, environmental costs could equate to over 50% of the listed companies’ combined earnings, weighted according to Index constituents. An investor with US$10 billion invested in equities in the Index would be proportionally responsible for US$560 million worth of environmental damage caused by the portfolio companies annually.
The costs of addressing environmental damage after it has occurred are usually higher than the costs of preventing pollution or using natural resources more sustainably. The study encourages institutional investors to exercise ownership rights and encourage the protection of natural capital needed to maintain the economy and investment returns over the long term. Universal Owners are urged to join other investors to engage in dialogue with companies and seek policy and regulatory solutions to address externalities. The UNEP Finance Initiative has also published a briefing on how financial institutions could embed material biodiversity and ecosystem services issues into their business models, strategies, products and services.
Universal Ownership, Why environmental externalities matter to institutional investors, UN PRI
CEO briefing, Demystifying Materiality, Hardwiring biodiversity and ecosystem services into finance, UNEP Finance Initiative, October 2010