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
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
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