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July 13, 2009

Fund Managers Fail to Actively Manage Carbon Risks in Investments
    by Robert Kropp

Report on greenhouse gas emission by companies in UK-based equity funds encourages pension funds and fund managers to take steps to manage exposure to carbon risks in their portfolios. -- The greenhouse gas (GHG) emissions of 2,380 companies invested in by 118 equity funds in the United Kingdom exceeds 10 billion tons globally per year, according to a report commissioned by the WWF-World Wide Fund For Nature. Analysis for the report by Trucost and Mercer found that since the funds analyzed own approximately 1.4% of the total market capitalization of these companies, their ownership responsibilities amount to about 134 million tons of carbon dioxide-equivalent (CO2-e) emissions annually, or 22% of total UK GHG emissions.

The report, entitled Carbon Risks in UK Equity Funds, analyzed holdings valued at over $334 billion. Trucost found that if the $19.4 per ton three-month average market price of carbon dioxide permits under the European Union (EU) Emission Trading Scheme was applied to these holdings, carbon cost of $2.6 billion would accrue, or 0.7% of revenue.

If, however, the social cost of carbon outlined in the Stern Review on the Economics of Climate Change is applied, then the $92 per ton of CO2-e paid by the portfolio companies would equal $12.4 billion, or 3.2% of revenue. The Stern report defines social costs as "the cost of impacts associated with an additional unit of greenhouse gas emissions."

Despite the exposure to the costs of climate risk detailed in the report, interviews by Mercer found that fund managers are not yet actively managing carbon risks in their investments. This is so despite the emergence of GHG regulation in most major economies, as well as the availability of standardized data to calculate relative exposure to carbon costs in financial analysis.

The report provides recommendations for pension funds and fund managers to take, in order to take advantage of opportunities to address carbon risks.

Pension funds and fund managers can manage portfolios on GHG emissions and related exposure to carbon costs, and develop processes to proactively manage emissions-related risks and opportunities. They can integrate climate change criteria into financial analysis, stock selection decisions and active ownership practices. They can invest in renewable energy and energy efficiency technologies. Finally, they can engage with carbon-intensive companies to encourage them to report emissions fully, disclose carbon costs, and reduce emissions.

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