Universal ownership: why environmental externalities matter to institutional investors (full report)
06 April 2011
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Large institutional investors are, in effect, "Universal Owners", as they often have highly-diversified and long-term portfolios that are representative of global capital markets. Their portfolios are inevitably exposed to growing and widespread costs from environmental damage caused by companies. They can positively influence the way business is conducted in order to reduce externalities and minimise their overall exposure to these costs. Long-term economic wellbeing and the interests of beneficiaries are at stake. Institutional investors can, and should, act collectively to reduce financial risk from environmental impacts.
Key findings include:
- US$ 6.6 trillion The estimated annual environmental costs from global human activity equating to 11% of global GDP in 2008.
- US$ 2.15 trillion The cost of environmental damage caused by the world’s 3,000 largest publicly-listed companies in 2008.
- >50% The proportion of company earnings that could be at risk from environmental costs in an equity portfolio weighted according to the MSCI All Country World Index.
Environmental degradation that damages natural and human capital harms productivity. One way to manage business damage to the environment is to price natural resource use, waste and pollution. Damage costs from production are not usually paid in full by the companies generating them and are therefore known as 'external costs' or 'externalities'. PRI and UNEP FI commissioned Trucost to calculate the current and future estimated monetary value of environmental degredation to provide a basis for large institutional investors, otherwise known as Universal Owners, to address externalities that have the greatest financial implications.
Why did the PRI commission the research?
This report helps investors measure the unaccounted costs of business activities by putting a price on natural resources that power business but rarely show up on corporate balance sheets. This study provides an important rationale for action by large institutional investors that have a financial interest in the wellbeing of the economy as a whole.
By exercising ownership rights and through constructive dialogue with companies and public policy makers, these "Universal Owners" can encourage the protection of natural capital needed to maintain the economy and investment returns over the long term. This research also brings a responsible investor perspective to United Nations Environment Programme's (UNEP's) Green Economy Initiative, particularly en route to the 2012 UN Conference on Sustainable Development - also known as "Rio+20".