Trucost Blog / 08 Aug 2014

Institutional investor interest in linking carbon and financial performance is a global phenomenon

Trucost’s clients are looking at the carbon performance of their holdings and using the insights to offer new products, integrating carbon risk into decision-making and engaging high-risk firms.

On July 25, we hosted Julie Fox Gorte of Pax World Funds and Sonal Mahida at the UN-backed Principles of Responsible Investment in a lively webinar discussion about how investors are addressing carbon risk in their portfolios.

Julie shared her motivations for commissioning Trucost to footprint the Global Environmental Markets fund: “Many companies do not report emissions, which frustrates investors wishing to manage the carbon risks in their portfolio,” she said. As a result, Pax was able to “begin the process of managing the carbon risk” in its portfolio. Trucost recently published a case study on this work.

Sonal said that, at a global level in the most recent reporting season, the PRI has seen growth in integrating responsible investment from asset owners and managers, with “77% (118) asset owners that completed the SAM module [manager selection, appointment and monitoring] consider RI in some way in SAM of investment managers”.

The insights shared by these two experts are part of a growing trend we’ve seen at Trucost across market participants and regions to manage carbon liabilities in direct investments and decisions of external managers.

In 2014 alone, we at Trucost have seen a dramatic increase in investor interest in climate and carbon performance of investments. Our clients include the largest institutional investors in North America, Europe, Africa and Australia. They are also some of the founding members of the Global Investor Coalition on Climate Change, which represents over $14 trillion in support of a global dialogue on international policy and investment practice related to climate change.

Among the Coalition’s members, several of our clients have looked at the carbon performance of their holdings and used the insights to offer new products, integrating carbon risk into decision-making and engaging high-risk firms that are not managing carbon. For example:

  • UniSuper, a pension fund based in Australia with $37bn under management, will offer a fossil free option in response to “high levels of member feedback”
  • ERAFP, a pension fund based in France with over $20bn under management, disclosed holdings that have 19% lower carbon exposure than benchmark
  • CalSTRS, a pension fund based in the USA with $160bn under management, engaged the highest emitting firms that do not disclose on carbon risk reporting and energy efficiency

In fact, our client the Environment Agency pension fund has won numerous awards for excellence in responsible investment reporting, and about half of the institutional investors nominated for the RI Reporting Awards 2014 have been working with Trucost.

This activity goes beyond pension funds to other types of institutional investors, with 350 US universities that have active divestment campaigns and 28 US-based foundations signatories to the Divest-Invest pledge.

Asset managers like Pax World Funds and Parnassus are providing a crucial service in their transparency on the carbon intensity of their strategies. For more information on how institutional investors and asset managers are approaching the questions of how to divest, engage or hedge on fossil fuel and carbon risks, please see our recent report.

As well as looking at the exposure to carbon as a risk, appetite has grown to look downstream at the net benefits of investments in firms that provide climate solutions. This can be part of an active ‘carbon hedge’ strategy, i.e. investing in those types of businesses that should benefit from a transition to a low carbon economy. For example, our client PKA, a Danish pension fund, commissioned us to quantify the carbon ‘savings’ from its growing portfolio of direct infrastructure investments in windfarms. In addition, many clients are exploring the burgeoning green bond market, which we’ve looked at in our Green Bonds Briefing and Lauren Smart’s post What makes a ‘green bond’ green?.

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