Taking action on climate change

November 06, 2006

In October 2006, the Institutional Investors Group on Climate Change (IIGCC) launched its Investor Statement on Climate Change. Now supported by 16 institutional investors – pension funds and asset managers – managing assets worth over £850bn, the statement represents perhaps the most significant call by UK and European investors for action on the threat posed by greenhouse gas emissions. It signals investors’ willingness to strengthen their focus on climate change in their investment processes and to actively engage with companies and governments to develop appropriate policy solutions to climate change.

One of the most important features of the statement is that it moves beyond a focus on corporate disclosure to set out investors’ expectations of companies’ management systems and processes. The statement encourages companies to set management responsibilities for climate change, to make commitments to greenhouse gas emission reductions and to integrate climate change considerations into their business strategies.

Investors’ expectations of companies

Companies are encouraged to:

  • Clearly define board and senior management responsibilities for climate change
  • Integrate climate change risks and opportunities into business strategy
  • Set high-level policy commitments in support of action on climate change, including commitments to greenhouse gas emissions reductions
  • Provide appropriate disclosures on climate change risks and opportunities that allow investors to assess the financial implications of these risks and opportunities for the company
  • Prepare and report comprehensive inventories of greenhouse gas emissions (both directly from operations and activities and indirectly from, for example, the use of the company’s products). These inventories should allow historic performance to be assessed and should include projections of likely changes in future emissions
  • Integrate climate change into product design and operational management. This should include setting targets and timelines for reducing greenhouse gas emissions and impacts along the value chain
  • Proactively engage with public policy makers and other stakeholders in support of policy measures to reduce greenhouse gas emissions, and not lobby to obstruct legitimate attempts to reduce greenhouse gas emissions or mitigate the effects of climate change

Government policy

In a recent report by Insight Investment focusing on how climate change policy uncertainty affects investment decision-making in the electricity industry, it was noted that: “Uncertainties in climate change policy create a financial incentive for power generation companies to delay new build and to keep old plant running for longer. This may, in turn, lead to greenhouse gas emissions remaining higher for longer than would otherwise be the case.”

The Investor Statement on Climate Change signals that investors are increasingly willing to use their individual and collective influence to encourage governments to adopt policies that provide incentives to reduce greenhouse gas emissions and to encourage appropriate responses to the physical impacts of climate change.

Specifically, the signatories encourage governments to set clear and challenging international targets for greenhouse gas emissions reductions for the short, medium and long term that will enable atmospheric concentrations of greenhouse gases to be stabilised at a level that averts the most significant risks of climate change, and to provide the necessary mechanisms and institutions for the delivery of these targets. If this happens, this should enable companies to make better investment decisions with greater confidence regarding the longer term climate change policy environment. It should also strengthen investor confidence in areas such as renewable energy, where companies’ business models are critically dependent on a supportive longer-term policy environment.

Investors’ expectations

Finally, the statement outlines the actions that investors themselves will take. The asset owners (i.e. pension funds) that sign the statement commit to requiring their asset managers to integrate consideration of climate change risks and opportunities in their investment research, analysis and decision-making and shareholder ownership activities. They must also resolve to incorporate climate change considerations into their processes for the appointment, evaluation and reward of their asset managers.

More generally, the signatories agree to work together to share information among the growing number of investors and organisations around the world concerned about climate change and to incentivise research on the risks and opportunities of climate change and climate policy.

The statement represents 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 major impact on current and future global greenhouse gas emissions and, hence, on the world’s climate. It also recognises the uncomfortable reality that current investment research, analysis and decision-making and shareholder ownership activities do not fully reflect the risks and opportunities presented by global climate change, and provides a road map for investor activity in this area.

The IIGCC Investor Statement on Climate Change can be found at: http://www.iigcc.org/docs/PDF/Public/IIGCC_InvestorStatementonClimateChange.pdf

Rory Sullivan is head of investor responsibility at Insight Investment (the asset management arm of HBOS).

Stephanie Pfeifer is programme director of the Institutional Investors Group on Climate Change (IIGCC).