Research identifies large scope to improve carbon footprint of investment portfolios

BY: MERCER

New research has exposed a seven-fold difference in the carbon footprints of institutional equity portfolios in the UK. A study by Mercer and Trucost, on behalf of WWF, found that greenhouse gas emissions from these portfolios range from 209 to 1,487 tonnes per million pounds invested. A wide variation of carbon exposure was identified between companies in the same carbon-intensive sectors such as utilities, basic resources, construction and materials, oil and gas, and food and beverage.

The report, Carbon Risks in UK Equity Funds, published today, concludes that asset managers could dramatically reduce the carbon footprints of their funds through stock selection without the need to alter sector weightings or their overall investment strategy; they could also engage with portfolio companies and support government introduction of mandatory reporting requirements for corporate greenhouse gas emissions that would make carbon management easier and more effective. The report also highlights some of the actions asset owners could take, such as incorporating climate change criteria into their investment policies, encouraging fund managers to actively manage the carbon risk in their investment portfolios, looking for new investment opportunities and supporting mandatory emission disclosure initiatives.

 The report outlines the results of Mercer and Trucost’s analysis of the greenhouse gas emissions of 118 UK-based equity funds with £206 billion in assets under management.

Simon Thomas, CEO at Trucost, said: “Institutional investors, such as pension funds, invest money in listed companies, many of which are very carbon intensive. Government policy initiatives to apply carbon charges could lead certain companies to lose market share to more efficient and innovative companies that emit less. As a consequence, the potential exposure of earnings to carbon costs across investment portfolios could have a knock-on effect on pension fund returns.”

The research found climate change to be of little importance in fund managers’ investment decisions. The main reason cited was a lack of confidence in government polices to address greenhouse gas emissions – despite emerging greenhouse gas regulations in major economies such as Europe and the US. Short-term pressures to generate returns and a lack of standardised costing and reporting frameworks for company emissions were also reasons why managers do not actively consider greenhouse gas emissions as part of their investment processes.

However, the report outlines how fund manager complacency on corporate carbon performance could put pension fund assets at risk as carbon-intensive companies face rising carbon costs and their company valuations fall in the short-term in anticipation of future carbon risk. It also highlights the potential to use existing available GHG data in financial analysis and decision-making.

Danyelle Guyatt, principal in the responsible investment group at Mercer, commented: "Climate change presents new challenges and opportunities for institutional investors, not only in terms of the possible physical impact over the very long-term but, more immediately, through the dramatic changes that are unfolding in government policies and regulations around the world.

“The results of our research with WWF and Trucost indicate that the investment management industry has a long way to go before pension funds can feel reassured that sufficient attention is being paid to the investment implications of the shift to a low carbon economy. It is important for pension funds to be aware of these potential risks and opportunities, and to manage these proactively through their strategic asset allocation decisions and the way they review and select fund managers."

David Nussbaum, Chief Executive of WWF-UK, said: "This research reveals that companies are already being affected by the rising cost of carbon. This cost will increase with the global transition to a low-carbon economy. There are great opportunities for companies that lead and innovate in this new economy. However, investors need more information on companies’ carbon liabilities to assess the risks and opportunities. WWF wants to see measures put in place like comprehensive, mandatory company reporting that increase the opportunities for fund managers to manage carbon risks."

Other key points from the research include:

·         The 118 funds, managed from the UK, hold investments equal to 1.4 percent of the market capitalisation of 2,380 companies, which accounts for approximately 134 million tonnes of carbon emissions. These equate to 22 percent of  UK greenhouse gas (GHG) emissions.

·         Two carbon prices were attributed to the funds:

1.       An EU Emission Trading Scheme price of £12 per tonne of carbon* would mean a combined carbon cost of £1.6 billion, equating to 0.7 percent of revenue from these holdings. Tighter caps on emissions under the EU ETS, greater auctioning of allowances and higher oil prices should support higher carbon prices going forward. 

2.       Under future rising carbon costs equivalent to the UK Government’s Stern Review on the Economics of Climate Change’s estimated social cost of carbon of £57 per tonne**, the same companies would face combined carbon costs of over £7.65 billion, equating to 3.2 percent of the funds’ combined revenues.

·        Among the 118 portfolios, exposure to carbon costs varies significantly.

·         Nine of the 10 main contributors to the overall carbon footprint of the portfolios are in the Utilities and Oil & Gas sectors. The research includes in-depth analysis of the increasingly negative effects that carbon costs could have on carbon-intensive Utilities and Oil & Gas companies.

The full report can be viewed at the following link: http://www.trucost.com/CarbonRisksinUKEquityFunds.pdf

About Trucost

Trucost is the world’s leading provider of data and analysis on the carbon impacts of companies. It helps investors, companies and governments understand how environmental issues will affect companies’ future earnings.

Trucost has the world’s largest database of corporate environmental impacts and covers all the companies in the world’s major stock indices. Institutional investors and fund managers use this information to assess the carbon exposure of their funds, understand risks and create investment funds with lower carbon impacts. For more information, visit www.trucost.com

About WWF

WWF UK seeks to influence the transformation of the UK’s finance sector into a sustainable, green and fair system. WWF is forming a new One Planet Finance change network where WWF will work with partners to create shared solutions that demonstrate how a financial system can better serve the long-term interests of society and the environment. www.wwf.org.uk/carbonrisk

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York  & Chicago and London stock exchanges.

Mercer has a leading, specialist global business group focused on responsible investment and environmental, social and governance (ESG) issues. It works directly with leading responsible investors to research innovative products and to develop cutting-edge strategies and practical implementation plans. www.mercer.com/ri

 

 

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