Publication / 05 Oct 2010

Universal Ownership: Why Environmental Externalities Matter to Institutional Investors (full report)

The UN-backed Principles for Responsible Investment and UNEP Finance Initiative commissioned Trucost to calculate the cost of global environmental damage and examine why this is important to the economy, capital markets, companies and institutional investors.

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.

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 minimize 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.

The results are that the estimated annual environmental costs from global human activity is US$6.6 trillion, equating to 11% of global GDP in 2008. The cost of environmental damage caused by the world’s 3,000 largest publicly-listed companies in 2008 was US$2.15 trillion. More than half of company earnings could be at risk from environmental costs in an equity portfolio weighted according to the MSCI All Country World Index.

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