Institutional investment – Public policy's impact on climate change

Climate change is a product of market failure. The absence of appropriate incentives has led to individuals and companies externalising the costs associated with greenhouse gas emissions, creating significant risks for both the global environment and the global economy.

Public policy intervention is increasingly recognised as essential not only to minimise the damage caused by climate change, but also to maximise the opportunities presented by a transition to a low carbon economy.

There is a growing recognition that understanding and influencing public policy is an essential element of enhancing long-term shareholder value in an increasingly carbon-constrained world. Investors' interests are threatened by the potential for climate change to materially and severely impact on economies as well as individual companies.

Additionally, climate change presents significant opportunities for companies to innovate and create long-term shareholder value through, for example, the identification of new technologies, capturing new markets or through avoiding or reducing the need for defensive expenditures (eg to respond to increased risks of floods or extreme weather events).

Achieving these kinds of benefits requires that public policy on climate change is directed towards achieving significant reductions in greenhouse gas emissions over the medium and long-term.

Low risk and disruption

The Institutional Investors Group on Climate Change therefore has a specific programme of public policy engagement which focuses on encouraging policy makers to (a) minimise the risks associated with extreme weather events and other changes in the climate, and (b) allow the transition to a low carbon economy in a manner that minimises disruptions to existing business activities.

A key message has been that governments need to specify and commit to meeting long-term policy goals in order for companies to make economically efficient investment decisions that properly incorporate climate change factors.

The IIGCC has explicitly supported the UK government's policy target of a 60% reduction in UK greenhouse gas emissions over 1990 levels by 2050. This focus aligns with the fiduciary responsibilities of pension funds and other institutional investors to maximise long-term returns – and hence consider issues that could affect fund performance over the longer term.

In October 2006, the IIGCC launched the Investor Statement on Climate Change, which is now supported by 16 institutional investors – pension funds and asset managers – managing assets worth over £850 billion.

The signatories commit to using their influence with companies to encourage better management of climate change issues, to integrating climate change in their investment analysis and to building capacity within the investment system to ensure that climate change is properly considered in investment activities.

Commitment and support

One of the key features of the IIGCC statement is that the signatories commit to supporting government policies that provide incentives to reduce greenhouse gas emissions and encourage appropriate responses to the physical impacts of climate change.

The signatories request that governments set clear and challenging targets for greenhouse gas emissions reductions for the short-, medium- and long-term that will enable atmospheric concentrations of greenhouse gases to be stabilised at a level that averts the most significant risks of climate change. And, governments should provide the necessary mechanisms and institutions for the delivery of these targets.

The IIGCC statement is a clear recognition of investors' willingness to send strong messages concerning the long-term direction of climate change policy. It responds to the demands from pension fund beneficiaries and other stakeholders that investors play a much more proactive and constructive role in public policy debates around climate change.

Rory Sullivan is head of investor responsibility at Insight Investment (the asset management arm of HBOS plc). Stephanie Pfeifer is programme director of the Institutional Investors Group on Climate Change.

The IIGCC Investor Statement on Climate Change can be found at http://www.iigcc.org/docs/PDF/Public/IIGCC_InvestorStatementonClimateChange.pdf