This month, a large group of influential delegates gathered at the United Nations’ New York headquarters. This was no meeting of diplomats to discuss global politics. In attendance were 450 global investors controlling tens of trillions of dollars, all calling for the companies in their portfolios to investment more heavily in low-carbon technologies and engage in tougher scrutiny of climate risks.
“Eight years ago this wasn’t on their agenda,” say Mindy Lubber, president of Ceres, a US-based coalition of investors and environmental groups that organised the summit with the United Nations Foundation and the United Nations Office for Partnerships. “But it has become ever more real that these are fundamental economic issues.”
Another indication of this can be found in new research from Bloomberg New Energy Finance showing that in 2011 a record total of $260 billion was invested in clean energy technologies, up 5 per cent from the 2010 figure and five times the amount invested seven years earlier.
Many see events such as the UN-hosted investor summit as critical at a time when leading companies are striving to adopt long-term strategies for a resource-scarce, carbon-constrained world – but are often distracted by requirements to deliver the short-term gains demanded by investors.
Some companies have signalled that they are prepared to loosen themselves from the grip of the short-term investor. In 2010, when Unilever launched its Sustainable Living Plan, chief executive Paul Polman promised that the strategy would be driven less by quarterly results than by a long-term focus on environmental sustainability.
Public pension funds are looking out 20 to 50 years while their investment managers are focused on quarterly results
However, before other companies can follow Unilever’s example, many believe there needs to be a dramatic shift in the approach of their investors.
Gwen Ruta, director of the Corporate Partnerships programme at Environmental Defense Fund (EDF), the US-based environmental advocacy group, sees some evidence that the investment community is waking up to environmental risks. “Resource scarcity does seem to be gaining some traction, even on Wall Street,” she says. Ms Ruta also points to the moves of private equity firms such as the Carlisle Group, which worked with EDF to develop the EcoValueScreen – a tool that assesses the environmental opportunities in potential acquisitions – and Kohlberg Kravis Roberts, which has a “Green Portfolio” within the firm’s portfolio of companies.
However, when it comes to institutional investors, Gavin Power, deputy director of the Global Compact, the United Nations’ corporate citizenship network, argues that pension funds and other investors have much further to go. He believes they have so far largely failed to demand from their investment managers the long-term approach needed tackle issues such as climate change and resource scarcity.
“Public pension funds are looking out 20 to 50 years while their investment managers are focused on quarterly results,” he says. “For too long, pension funds have allowed this to happen.”
Mr Power believes asset owners need to start exercising their investment rights. “They should be constructing investment mandates for asset managers that incorporate sustainability and ESG [environmental, social and governance] criteria into contracts,” he says, “as well as provisions to terminate the contract if managers don’t deliver with respect to long-term considerations.”
In October, the spotlight fell on the short-term approach of institutional investors and their role in shaping markets when the Committee for Economic Development and Yale School of Management’s Millstein Centre published a report arguing that too little is known about institutional investors and their impact on markets.
The report did not specifically consider sustainability issues but it noted that the highly fragmented nature of investments make it hard for funds to monitor and address companies facing material environmental, social and governance risks.
Among the questions asked by the report was whether institutional investors – including pension funds, mutual funds, hedge funds, sovereign wealth funds and non-profit endowments – were promoting “undesirable short-termism” in their publicly held investee companies. It also asked whether they could become more effective stewards of publicly held companies in which they invest and called for the creation of a US database on the governance and practices of institutional investors.
Meanwhile, a growing number of organisations have been working to encourage investors to pay more attention to environmental risk and opportunities and provide tools to help them do so.
In September last year, the Global Compact published a report identifying environmental, social and governance issues investors should consider in managing their commodities investments. It argues that growing scarcity of resources, as well as demographic and lifestyle shifts, will affect future price levels and investment returns and create new investment opportunities and risks.
“Given the complexity of commodities markets and of the interplay with the ‘real’ economy and our natural environment, it is crucial that trustees and investment managers devote time to these issues and truly understand underlying mechanisms leading to undesired impacts,” write the report authors.
One large group of investors is wielding clout through the Carbon Disclosure Project, an independent organisation that represents institutional investors collectively holding $71 trillion in assets under management. Since 2000, the CDP has used corporate data to report on the business risks and opportunities of climate change. It recently launched a similar programme assessing the corporate risks, strategies and opportunities presented by global water stress.
Through the United Nationsbacked Principles for Responsible Investment, a network of international investors are collaborating to take into account principles relating to environmental, social and corporate governance issues in their
investment and disclosure practices.
Meanwhile, another initiative, the UK Stewardship Code, which was published in July 2010, is designed to improve communications between institutional investors and companies in order to deliver better longterm returns to shareholders.
While Ms Lubber is optimistic that the investor community is moving in the right direction, she admits that the average asset manager is not yet factoring issues such as climate change or water stress into decision-making. “But if their largest institutional clients say that to get their business, one of the requirements is to develop competency for analysing climate risk and provide opportunities to invest in clean tech within all asset classes, that would change the way asset managers think,” she says.
For Ms Lubber, the presence of such a powerful group of investors at this month’s UN summit indicates the shifting investment landscape. “Our actions need to be more robust and we need to get to scale rather than taking baby steps,” she says. “But change is about building blocks and this is a huge block.”