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The convergence between sustainability/corporate social responsibility and investing appears to be accelerating. And, by most indications, it appears investors are more ready for the trend than the vast majority of investable companies are.
The latest fuel comes from a major new study by the consulting firm Mercer, which recommends that institutional investors shift up to 40 percent of their assets into “climate-sensitive” assets. The rationale is to mitigate environmental costs, which Mercer says could contribute as much as 10 percent to portfolio risk over the next 20 years.
The report noted that the traditional way of managing risk, via a shift to a more conservative asset allocation, “may do little to offset climate risks.” Instead, it suggested increasing exposure to certain “climate-sensitive” asset types, including infrastructure, real estate, private equity, agriculture, timberland and sustainable assets – even though many of these have been traditionally deemed as more risky on a standalone basis.
According to the study, over the next 20 years, investment opportunities in low carbon technologies could reach $5 trillion, and climate change-related policy changes could increase the cost of carbon emissions by as much as $8 trillion.
Mercer recommended that investors begin taking the following measures:
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Introduce a climate risk assessment into ongoing strategic reviews
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Increase asset allocation to climate-sensitive assets as a climate “hedge”
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Use sustainability-themed indices in passive portfolios
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Encourage fund managers to proactively consider and manage climate risks
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Engage with companies to request improved disclosure on climate risks
Of course, it remains to be seen how many companies are really ready for the trend, given that less than 10 percent of multinational companies currently report on sustainability/CSR efforts. And, of those, only a very few make it part of the primary tool for investor communications, the annual report.
The study was based on a survey of 14 leading global institutional investment firms with approximately $2 trillion in assets. The free public report, Climate Change Scenarios – Implications for Strategic Asset Allocation, is available for download on Mercer’s website.
An uneventful Copenhagen summit, the sluggish economy, and lingering questions about the propriety of data collection and analysis have turned concerns about global warming into more of a punch line than a national priority. For some people, the series of snowstorms to hit the Southeast is the clincher.
Opponents of stricter greenhouse gas emissions rules say the totality of negative forces proves that global warming, and the euphemistic climate change, is not worthy of serious national attention. Supporters of new regulations and international treaties say climate change is still serious business and must be addressed, and not derailed by weather patterns or scientific outliers.
As for me, I find the extremes on both sides of the debate amusing, somewhat misguided, and more than a little dangerous. The all or nothing approach is never sustainable, and that should be the test for any national agenda item, especially this one.
For the latest thinking on the topic, and probably some heated discussion, attend Baldwin-Wallace College’s Sustainability Symposium (free and open to the public) March 1-2 in suburban Cleveland. Featured speakers will include Sen. Sherrod Brown, NOAA senior scientist Dr. Susan Solomon, and Sherwin-Williams CEO Chris Conner. Dix & Eaton is a sponsor.
As the seasons have changed from summer into fall, the battle over climate change is heating up and building to a potential tipping point by the end of the year.
The congressional debate over the Waxman-Markey energy bill continues, and the UN Climate Change Conference will be held December 7-18 in Copenhagen. (See “Hey, World Leader! See You in Copenhagen” article by documentary filmmaker Gabriel London in the Huffington Post.) In the lead-up, during and after the UN conference, no other issue, even health care reform, will garner as much national and global attention.
The preliminary International Day of Climate Action is scheduled for October 24. It’s sponsored by a new activist group, 350.org, which is so-named because it believes carbon dioxide levels in the atmosphere should be limited to 350 parts per million (the group claims the world is currently at 385.92 ppm and rising).
So, get ready, because, by December, most companies of any significant size will have been asked more than once where they stand on climate change – Do you believe it’s a real problem? What are you doing to address emissions? What impact would new regulations have on your business? How are you handling the increased scrutiny? With whom are you partnering?
The questions may come from employees, the board, your customers, your supply chain, community groups, the media, etc. Preparation in developing your point of view and message points is critical, even if you have no intention of picking a fight or being proactive. Communicating with employees, your board and key customers is a great place to start.
Business leaders who want to try to follow the debate should be familiar with the following groups’ initiatives: U.S. Chamber of Commerce, Business Roundtable, National Association of Manufacturers, EnergyCitizens.org, Ceres, Natural Resources Defense Council, Clean Economy Network, various trade associations, and so on. Check out the variety on these sites, and it is clear that business is far from united on this issue. No endorsements implied here – just sharing some known, active resources for business leaders. Please feel free to recommend others in the comments below.
Of course, there are thousands more groups – local, national and international – that have been activated by the climate change debate. Over the next couple of months, virtually all of us will be engaged at some level. It will be interesting to see who is ready, who is caught off guard, and what happens as a result.
By the way, whether you agree with them or not, what business groups do you think are having the most impact on the climate change debate?
