Climate Risks: Is Your Money Manager Paying Attention?

| Fri Jan. 8, 2010 12:34 PM EST

The majority of the world's leading asset managers are not factoring in climate-change in their decision-making, finds a new study from the sustainable business group Ceres. Climate change will create risk factors for some businesses and opportunities for others, argues Ceres, and smart money managers should be accounting for that.

The group surveyed the world's 500 biggest asset managers, and received responses from 84 who manage $8.6 trillion in assets. Of those, 71 percent said they currently are not factoring in climate risks when considering investments—though half said they believe that some sectors have "significant exposure to climate risks." Forty-four percent said that they don't consider climate risks at all "because they do not believe that climate change is material to their investment decision making."

Risks associated with climate change range from the direct impacts of increased severe storms, droughts, and flooding, to the cost increases of doing business if or when a price is put on carbon dioxide. But there are also opportunities for companies who are providing low-carbon solutions or otherwise adapting to the changing climate. The Ceres analysis found that most money managers are not looking very far into the future when assessing these risks and opportunities and choosing investments.

Part of the challenge the report identifies is that clients are not requesting this kind of information: 49 percent said their investor clients aren't asking them to consider this kind of risk, so they're not doing it yet. Most said, however, that they are in the preliminary stages of figuring out how to assess climate-related factors.

"The vast majority of the asset managers who responded to the survey are only in first gear on climate change," said Mindy Lubber, president of Ceres. "This is disappointing--it defies reality and the very real numbers... The survey makes clear that the investment community is still overly focused on short term performance and dismissive of long-term risks like climate change."

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Alexis Krajeski, associate director of governance and sustainable investment at London-based F&C Management Limited, one asset management group that is factoring in climate, outlined the three areas her firm examines in assessing risks and opportunities. Her company looks closely at high emitting companies that will need to reduce emissions, those that will be impacted by shifts in consumer demand, and those, like insurers, that will be exposed directly to the impacts of climate change.

Ceres, for its part, has been leading the effort to force companies to include climate risks as part of normal disclosure rules. The group works with investors, businesses, and environmental groups. In November, they brought 20 major institutional investors together to urge the Securities and Exchange Commission to develop guidelines to help businesses account for climate-related factors that will affect their bottom lines. Lubber said she has been told that the SEC is in final stages of preparing that kind of guidance for companies, and expects to see guidelines announced in the coming months.

While many companies seem to be waiting for a law limiting carbon to start accounting for costs, Lubber pointed out, there are still significant risks to businesses outside of those stemming from legislation. "There's no doubt that the right market signal needs to come from Congress, with a cap on carbon and a price on carbon. That would have the most impact," she said. "But without that, the financial and material risks still exist."

"The bottom line is clear--companies, investors, and the rest of capital markets need to respond to the ever-increasing business risks and opportunities presented by climate change," said Lubber.

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