We use cookies to support features like login and allow trusted media partners to analyse aggregated site usage.
To dismiss this message and allow cookies to be used, please click "Continue".

Continue

Opinion

Twitter board

Follow us
  • To read LGIM's take on alternative credit click here: https://t.co/UeMKBQuKmd https://t.co/HqpKasST687 days ago
  • Climate change, #MeToo, plastics: ESG in 2019 might sound like a repeat of last year but that is where the similari… https://t.co/JfbVlSHXvs8 days ago
  • Have you seen our latest property roundtable? Click here to read more: https://t.co/Brd4QkMsNk https://t.co/EleMsa1HZz35 days ago
  • Has the direct lending market become a victim of its own success? Read more here: https://t.co/55jXOQqnCr… https://t.co/3rDYQhcbgX38 days ago
  • Have you seen our latest roundtable? An investor sits down with fund managers and advisers to discuss real estate's… https://t.co/DZqJFjnCxP43 days ago
  • Decision-makers at key pension schemes share their views with Mona Dohle on how to pick the right manager and wheth… https://t.co/ZGCHhJMJCu45 days ago
  • Read our latest interview with Mark Mansley, chief investment officer of Brunel Pensions Partnership here:… https://t.co/0fKgRopmsW52 days ago
  • "ESG is a hot topic among investors, but it appears that trustees are yet to catch on. Mark Dunne takes a look at t… https://t.co/pKGoquOCMk58 days ago
  • "@BNPPAM_COM is launching a sustainable SME funding strategy to boost the economy and help investors escape the low… https://t.co/clDIoHPo6P64 days ago
  • "Pension funds, as long-term investors, could find themselves exposed under many of the potential future scenarios… https://t.co/d37su2PwsD65 days ago
  • As LDI strategies are gradually being replaced by CDI approaches, how are pension schemes managing the additional r… https://t.co/rlMnrBmr1d66 days ago
  • Emerging market debt is rapidly becoming a local currency market, but investors are still nervous about a US rate r… https://t.co/3coGF5Dq8n77 days ago
  • Have you seen our latest roundtable? We brought fund managers, consultants and trustees together to discuss emergin… https://t.co/BMLta4c9pm80 days ago
  • Does the turbulence hitting stock markets at a time of rising bond prices mean it is time to ditch multi-asset fund… https://t.co/GiSdFpE01N86 days ago
  • More and more pension schemes are increasing their allocations to private equity, but will the illiquid strategy br… https://t.co/8l8TI75r9v92 days ago
  • Border to Coast Pensions Partnership CEO Rachel Elwell tells Mona Dohle about the challenge of developing a common… https://t.co/nQZfFveQdz93 days ago
  • Out now- The portfolio institutional October issue featuring our cover on ESG and fixed income: Breaking new ground… https://t.co/hnmwYclXS594 days ago
  • Friday View: ESG in fixed income: The new frontier - LGPS bolster infrastructure collaboration - EM Roundtable: The… https://t.co/zxvEKaZkoM97 days ago
  • Local government pension scheme (LGPS) pool Border to Coast has appointed the first external managers for its £1.2b… https://t.co/eBAbx0ubzJ97 days ago
  • "Investors seduced by the impressive growth forecasts for emerging market economies should prepare themselves for a… https://t.co/7nAnrL8s7t98 days ago

Friday View: 9 August 2013

Climate Change: the five investment myths

By Ian Simm
Friday 9th August 2013

Talking about climate change is fashionable again. In the year when the concentration of carbon dioxide in the atmosphere touched 400 parts per million for the first time in human history, President Obama has elevated the topic in his in-tray, the Chinese are experimenting with “cap and trade” and the Liberal Party in Australia is threatening to roll back policy if elected in September.

Institutional investors who are minded to be cynical about the issue are probably picking the wrong answers to five key questions.

First, isn’t the science too uncertain to act? Over the past five years, the scientific consensus has concluded resolutely that human emissions of greenhouse gases are heating the planet and will continue to do so. There is uncertainty over the rate of warming and the effect of feedback mechanisms, especially clouds, so future climate and weather conditions can only be thought of in terms of scenarios. Yet investors are trained to make decisions in uncertain circumstances.

Second, do pension funds need to act now? Although the most plausible climate scenarios suggest that dangerous climate change may be many decades away, governments are likely to act with increasing determination to reduce emissions, often with scant regard for the value of investors’ assets. Although in the initial phase of their carbon legislation European and Australian policymakers strove to neutralise the impact of legislation on the private sector, Germany’s expanding base of subsidy-supported renewable power generation has eroded the margins of the fossil fuel burning utilities.

Third, won’t climate change affect just a small part of a typical pension fund portfolio? Policy that depresses returns for power generators will of course impact utility assets, and higher energy prices are likely to harm companies producing basic materials such as steel, cement and chemicals. But what about the effect of changing patterns of disease on the portfolios of pharmaceutical companies, the increasing incidence of extreme weather events on infrastructure or the impact of shifting climatic belts on timber assets?

Fourth, isn’t climate change just a risk issue? Investors certainly face direct risk of more frequent, severe weather, indirect risk that climate change policy will reduce asset values and reputational risk that their stakeholders are unhappy with a “do nothing” response. Impax and FTSE have identified over 1000 listed companies for which a majority of their business is derived from markets linked to climate change and related resource efficiency themes; by tilting their portfolios towards this growing set of opportunities, investors can create a natural hedge against climate change related risks.

Finally, isn’t it sufficient just to nudge today’s portfolio? A typical pension fund investor may be tempted to ask the appointed external managers to keep a look-out for climate change related opportunities. However, these managers are generally given a three to five year performance objective and are therefore unlikely to have much incentive to create a hedge at a scale that will protect the investor’s portfolio. Only by consciously allocating to a new bucket at the portfolio level can the investor have a reasonable chance of establishing meaningful protection.

The recent financial crisis demonstrated that most investors are woefully prepared for the unexpected. Unlike a classic bubble that bursts catastrophically, climate change is a more complex issue that will impact portfolios through incremental and quantum change. Investors who plan accordingly are likely to out-perform.

 

Ian Simm is chief executive of Impax Asset Management

0

Leave your comment

View our comments policy

Please login or register with us to leave a comment. It's completely free!

Friday View

Friday View

Shareholder engagement: