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August 25, 2007

Fiddling While The Planet Burns: Mainstream Investment Funds Blinkered To Climate Risk
    by Francesca Rheannon with Bill Baue

Part one of a two-part article looks at the lack of climate risk calculations by UK fund managers. Part two will examine some new tools for assessing climate risks to investments. -- Are investment fund managers building climate change risk considerations into their planning? A new report commissioned by UK communications firm The HeadLand Consultancy says no. The study surveyed nineteen fund management houses overseeing nearly $6 trillion in assets about their attitudes toward climate change, its impact on their investment philosophy, and their perspective on the role of climate change regulation.

Visit the
Prospectus Ordering CenterIt follows a report released in July 2007 by Trucost, which ranked 185 UK investment funds according to their carbon footprint. That report found “37% of funds are exposed to greater potential carbon liabilities than the FTSE All-Share Index.”

The HeadLand study found that fund managers see incorporating climate change considerations into their investment decisions as being outside their institutional mandate. Only those funds specifically focused on socially/environmentally responsible investing took such considerations into account.

While managers are aware of the reality of climate change, the survey reported that their goal to maximize returns keeps them focused on quarterly performance as their “sole priority.” Climate change is beyond their event horizon. To the managers, the longest term is defined as three years, so they are “not looking at 2012, let alone 2050.”

Further, many of the fund managers do not find much value in tools that can be used by corporations or investors to evaluate climate change risk factors.. Calculating carbon footprints is not seen as a essential to assess company performance. Many fund managers view corporate social responsibility reports largely as public relations ploys to mollify “the green fraternity.”

Thus blinkered to climate change, managers are unable to evaluate either risks or opportunities related to climate change. According to the study “It seems…that limited, if any, fundamental in-house investor analysis has yet to take place (amongst the participants) whereby either ‘winners’ or ‘losers’ (associated with this issue) were calibrated and consequent investment decisions taken.”

Obvious hazards to investments in sectors such as insurance, energy, and transportation, are being ignored, according to the HeadLand report. It did not refer to other less quantifiable consequences of global climate change, such as political instability, resource wars, crop failures, or local ecosystem collapse.

The report also points out that managers are aware of some risks of investing in emerging technologies to deal with climate change. These weigh in to further discourage managers from taking their investments in a greener direction. Some fund managers polled in the report expressed fears about a “bubble mentality” swelling in the new technology market. And, as recently reported in an article about biofuels, poorly thought-out “fixes” for global climate change don’t merit investor confidence.

The HeadLand study points to another factor that discourages managers in taking climate change into account: a “chicken and egg” phenomenon whereby fund managers only pay attention when companies tell them they are incorporating climate change considerations into their corporate planning. But some companies don’t get the message that climate change is important to investors unless fund managers tell them.

One way out of the dilemma, HeadLand says, is the external application of guidance, whether from government regulation or pension fund trustees. HeadLand CEO Howard Lee told Social, “The investors interviewed emphasized they would welcome a clearer regulatory framework and also better direction from pension fund trustees on the issue of climate change." But the report shows that fund managers feel some ambivalence toward regulation. Some favor a "light touch regulatory environment" without one-size-fits-all compliance requirements. Others prefer market-based solutions.

However, firm mandates in regulation may be key to the kind of stability investing requires. “It is easier to make longer term investment decisions with a clear framework,” Lee said. And regulation to rein in greenhouse gas emissions could also provide benchmarks for fund managers to use when rating companies.

New tools are emerging for investors and fund managers to evaluate companies’ exposure to the environmental, regulatory and financial consequences of climate change. One such tool is the Carbon Risk Exposure Assessment Model (CREAM) developed by a Swiss SRI research firm, Centre Info. It assigns costs to the “carbon intensity” of companies, thereby seeking to internalize the externalities of their greenhouse gas emissions all along the resource extraction, production, and distribution chains.

Part two of this two-part article will report on this model and compare it to other methods of measuring corporate carbon footprints.

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