The Green Light Report

The Green Light Report

Resilient portfolios in an uncertain world

ShareAction (formerly FairPensions) is a UK registered charity that exists to promote an investment systemwhich serves savers, society and the environment. In particular, we work to encourage pension funds and otherinstitutional investors to be active owners of listed companies, and to integrate long-term environmental, socialand governance (ESG) risks into investment analysis and shareholder engagement. We also work to improvetransparency and accountability to the savers whose money is invested in the capital markets.

Fairshare Educational Foundation (ShareAction) is a company limited by guarantee registered in England andWales number 05013662 (registered address Ground Floor, 16 Crucifix Lane, London, SE1 3JW) and aregistered charity number 1117244.

This report was researched and written by Lise Pretorius, with contributions from Catherine Howarth, ChristineBerry and Louise Rouse.

DisclaimerThis publication and related materials are not financial or investment advice. ShareAction makes norepresentation regarding the advisability or suitability of investing in any particular company, entity, investmentfund or other investment vehicle. A decision to invest or not to invest in any such investment fund, other entity orinvestment vehicle or to use the services of any fund manager or investment adviser should not be made inreliance on any of the statements set forth in this publication. Whilst every effort has been made to ensure theinformation in this publication is correct, ShareAction and its agents cannot guarantee its accuracy and theyshall not be liable for any claims or losses of any nature in connection with information contained in thisdocument, including but not limited to lost profits or punitive or consequential damages or claims in negligence.

Acknowledgments Special thanks go to James Leaton & Mark Campanale (Carbon Tracker), Nick Robins (HSBC), Mick McAteer(Financial Inclusion Centre), Stephen Davis (Harvard Law School Programs on Corporate Governance andInstitutional Investors), Jenine Langrish (ShareAction Chair) , Craig MacKenzie (Scottish Widows InvestmentPartnership), Sean Kidney (Climate Bonds Initiative), Stephanie Pfeifer (Institutional Investors Group on ClimateChange), Keith Johnson (Network for Sustainable Financial Markets), Lisa Beauvilain (Impax), Bob Buhr (SociétéGénérale), Faith Ward (Environment Agency Pension Fund), and Jane Ambachtsheer (Mercer Investments) fortheir comments on draft chapters of this report.

We would also like to thank the various individuals, listed in Appendix 3, who attended our four seminars overthe summer of 2013. The views presented in this report are those of ShareAction and do not necessarilyrepresent those of seminar participants or consultees. All seminar participants and consultees offered theirviews in a personal capacity. Any errors are those of ShareAction.

ShareAction gratefully acknowledges the support of The Ashden Trust, The Generation Foundation, and Tellus Materfor this project.

About ShareAction


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Contents

Executive Summary 2

Introduction 8

Chapter 1: Setting the internal frameworks for managing climate risks 16

Chapter 2: Addressing carbon intensive portfolios 27

Chapter 3: Investing in a low carbon future 41

Chapter 4: The role of public policy 53

Conclusion & Recommendations 63

Appendices 67

References 71


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Executive Summary

Climate change can be described as the greatesteconomic challenge of the 21st Century1, withsignificant implications for pension funds under arange of different scenarios. In the case ofeffective regulation to tackle climate change,fossil fuel companies and other high carbonassets could suffer a substantial loss in value,with consequences for pension funds who trackindices in which these companies are heavilyover-represented. Conversely, if climate change isallowed to advance unchecked by regulation, therisks are even greater: extreme weather eventsand growing volatility of food and fuel prices arelikely to hit returns across entire portfolios in waysthat are both dramatic and unpredictable.

These risks are particularly significant forpension funds who are ‘universal owners’, withholdings across the economy. The impacts ofclimate change on their portfolios are likely to faroutweigh any short-term benefits to fossil fuelcompanies and other high carbon industriesfrom the continuation of ‘business as usual’.Moreover, the already strong financial case formanaging these risks is reinforced by pensionsavers’ wider interest in avoiding the impacts ofsevere climate change – for example, becauseof its negative effect on the spending power oftheir pension pot. Both the financial and widermacroeconomic risks of climate change will hityounger savers particularly hard: fiduciaryinvestors will wish to ensure that they are lookingafter these savers’ long-term best interests.

This report is designed to help pension funds –both defined benefit (DB) and defined contribution(DC), trust- and contract-based – to understandand limit their exposure to climate risks. We makerecommendations for action which, in our view,can be implemented by all types of schemes –although we do not assume that all schemes willimplement all recommendations. We aim topresent a range of complementary options formanaging climate risks and making the most oflow carbon investment opportunities.

Setting internal frameworks for managingclimate risks Good governance is a vital first step to effectiverisk management, and climate risks is noexception. There are a number of steps pensionfunds can start taking to identify, monitor andmanage climate risks and opportunities.Although we focus on trust-based governance,these steps are equally applicable to contract-based pension providers.

The first step will be to understand climaterisks. For funds who have not considered thisissue before, this is likely to require trusteetraining; more experienced funds can help bysharing their knowledge and expertise. Schemeboards should also consider and articulate theirinvestment beliefs in relation to climate changeand other environmental, social andgovernance (ESG) issues. issues.

Next, a fund specific evaluation of risk shouldbe undertaken to highlight key areas for action.Various tools are available to assist funds indoing this, including Mercer’s ‘TIP’ framework2

and the Asset Owners Disclosure Project’s(AODP) best practice methodology.3 Conductinga portfolio carbon footprint can help investors toidentify where carbon risk is concentrated. Suchassessments have been performed by Trucostfor the equity holdings of the London PensionsFund Authority, and for the Environment AgencyPension Fund.4 Although current footprintingmethodologies have their limitations, footprintingcan still be a useful tool provided that funds aremindful of these limitations, using the data toinform their judgements about climate risksrather than to mechanistically determine actionsto reduce reported portfolio emissions.

Developing a climate policy – whether a stand-alone policy or part of a wider responsibleinvestment policy – can help funds to identifypriority areas for action and communicate thosepriorities to service providers and beneficiaries.


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Funds looking for guidance in this area maywish to refer to the policies of existing leaders,such as BT Pension Scheme, or to the bestpractice template produced by the AODP.

Developing an action plan with clear goalsagainst which progress can be measured canhelp to ensure that risk assessments andpolicies translate into action. In our view, thiscan most effectively be achieved by settingtargets to reduce portfolio carbon risk, althoughwe do not seek to prescribe exactly what thesetargets should be. Pension funds should ensurethat their asset managers and consultants areinstructed and incentivised to help them meetthese goals. In particular, clear expectationsabout climate risk management could beincorporated into investment mandates: wesuggest some possible wording to achieve this.

Finally, pension funds should also reportregularly to members on how the fund ismanaging climate risks on their behalf. TheEnvironment Agency Pension Fund’sResponsible Investment Review5 provides aparticularly excellent example in this regard.

Addressing carbon intensive portfoliosOne important way in which pension funds canaddress climate risks is to reduce theirexposure to high carbon, high-risk activities.This can be done through engagement or stockselection, and applies to equity investments,bonds, and property portfolios.

Fossil fuel holdingsMajor oil and gas companies are allocatingincreasing amounts of shareholder capital tohigh-cost, long-term exploration and extractionprojects. This reflects an assumption thatsustained high prices and continuing highdemand will justify production costs. Yet theseassumptions may no longer hold. Someanalysts are now forecasting the price of oil tobe within the range of $80-90 per barrel by the

end of the decade, with demand to peak by2020.6 Furthermore, as Carbon Tracker hasargued7, concerted regulatory action to meetglobally agreed limits of 2°C could render up to80% of the world’s known reserves of fossilfuels ‘unburnable’, resulting in sharp falls tofossil fuel companies’ valuations. Equityportfolios are particularly exposed to theserisks, as the FTSE 100 and other global indiceshave relatively high proportions of their marketcapitalisation in carbon intensive stocks.8

As prudent fiduciary investors, pension fundsshould request that their fund managers assessthe ‘stranded asset’ risk in oil and gascompanies’ project line-up. They should supportcalls for reduced capital allocation to high-cost/low-return projects in favour of returningmoney to shareholders or reallocation to lessrisky projects. Recent examples of shareholderactivism in the US suggest this strategy can besuccessful.

For coal, where the market is already oversupplied,falling long-term demand projections, increasingregulation on utility emissions (in both Europe andthe US) and a clampdown on internationalfinancing bring into question any prospects ofrecovery.9 Already inefficient power plants acrossEurope and the US have shut down, and majordiversified mining companies are diverting capitalaway from coal.10 While some analysts argue thatdemand growth will be found in China, India, andSouth East Asia, these forecasts to a large extentdepend on maintaining the recent economicgrowth path in China, which is itself increasinglybeing questioned.11 The risky outlook for coalassets, combined with the climate changeimplications of continued coal use (which will affectpension funds’ entire portfolios) bring into questiontheir suitability as an investment for long-termuniversal owners. We suggest pension funds set atime frame in which their actively managedfunds will no longer hold pure play coal.


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Other carbon-intensive equity holdingsInvestors should also be alert to carbon risksacross their wider portfolios, where the maincontributors to carbon footprints come frombasic resources (including mining), constructionand materials, and the food and beveragesectors.12 Funds can increase the resilience oftheir portfolios through:• Stock selection. Funds with active mandates

can ask their managers to integrate carbonrisk criteria into stock selection; those withpassive mandates can reduce risk byswitching tracker funds to carbon tiltedindices.

• Engagement. Industry initiatives such asCDP’s Carbon Action13 and CCLA’s ‘Aimingfor A’14 are already encouraging companiesto take steps to reduce carbon risk and toprovide their shareholders with informationon their progress.

Bonds and propertyThe Principles for Responsible Investment’sSovereign Fixed Income Working Group15 arguesthat issues such as climate change could directlyimpact traditional economic indicators such asfiscal performance, and therefore credit ratings.Corporate issuers could be impacted by carbonregulation. Yet investment managers arestruggling to incorporate these risks into bondanalysis and they are almost entirely off the radarscreen of rating agencies (apart from oneanalysis by Standard and Poor’s looking at theimplications of carbon constraints for the oil andgas sector16). Asset owners should ask thatbond managers and credit rating agenciesanalyse and evaluate these risks, particularlyfor longer duration bonds. Some pension fundsare already making these demands.

In property, capital values and income yieldsare already changing as a result of tighterregulation of energy use, changes in demandfor sustainable buildings, and the insurancecosts associated with climate-sensitive changes

to the physical environmental (i.e. flood risk).17

Pension funds should request that propertymanagers integrate financially relevantenvironmental factors into their investmentappraisals and development and refurbishmentplans.

Investing in a low carbon futureIntegrating climate change into investmentstrategies is not just about reducing exposure tocarbon-related risks, but also about gainingexposure to low carbon investmentopportunities. The OECD18 calculates that thecumulative investment required fordecarbonising the global economy is US$2tn ayear, or 2% of global GDP annually. Theseinvestment opportunities cut across all sectors,spanning energy generation, transport, energyefficiency (in buildings, power grids, andindustry), agriculture, water and wastemanagement. They also cut across all assetclasses.

The ‘why’: the case for climate-relatedinvestmentsInvesting in the creation of a low carbon,resource-efficient economy makes sense forpension funds on a number of levels:• Low carbon investments provide a vital

hedge against climate risks: Mercerrecommends that in some scenarios, up to40% of a portfolio should be allocated to lowcarbon assets for this reason.19

• As the likely growth sectors of the future, theyrepresent attractive investment prospects:the green economy accounted for a third ofthe UK’s GDP growth in 2011-12.20

• As long-term ‘universal owners’, pensionfunds have an interest in helping to financethe transition to a low carbon, resource-efficient economy which is capable ofdelivering sustained economic growth andhence sustained returns to their beneficiaries.


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The ‘how’: assessing the investmentlandscapeIn equities, the opportunities are diverse. Greenequities such as water and energy efficiencyhave performed particularly well over the lastfew years.21 Though the same has not been trueof renewable energy stocks, this trend may bestarting to reverse. Clean energy indices havestarted to recover in the past 12 months andthere are good reasons — for example, growingdemand for renewables in developing countries— to think that this could be the start of a moresustained recovery. 22

While integration of climate risks in fixed incomeinvestments is still far behind that of equities,green bonds are potentially attractive topension funds because of their low risk, steadyincome streams. Although the market hashistorically lacked scale and liquidity, this isbeginning to change: research from the ClimateBonds Initiative and HSBC23 estimates that theclimate bond market almost doubled in 2012(from $174bn to $346bn). The researchscreened bonds in the transport, energy,climate finance, buildings and industry,agriculture and forestry, waste, and watersectors. These presented generally low risk, lowyield assets, and as such are relatively easy toplace within pension funds existing assetallocations.

Further developing an investment grade greenbond universe will require both demand andsupply side solutions. On the supply side,initiatives such as The Climate Bond Standardand Certification Scheme — a screening tool forcertifying climate bonds for investors andgovernment — will help to increase theefficiency of the market and encourage thescaling up of issuances.24 On the demand side,pension funds should clearly signal tomanagers and consultants that they desiresuitable fixed income products to gain exposureto the green economy.

Infrastructure as an asset class will play acritical role in the transition to a low carboneconomy: infrastructure investment decisionsmade today could lock us into a high or lowcarbon growth path for decades to come. At thesame time, given the appropriate policies, thestructure of these investments could deliver lowrisk, steady income streams over long timehorizons. While only the largest pension fundshave the capacity to invest directly ininfrastructure projects, smaller funds can findopportunities in pooling their assets – forexample, through the recently-establishedPensions Infrastructure Platform (PIP), led bythe National Association of Pension Funds(NAPF).25 It is important that the PIP’sinvestments are consistent with pension savers’interest in the transition to a low carboneconomy.

Early stage investments are well suited to thenew technologies required in a green economy,such as smart grids and energy storagesystems. Pension funds should thereforeconsider green investment options as part oftheir allocations, if any, to private equity andventure capital.

Overcoming barriersWhile green investments face barriers such asan uncertain policy environment, limited certifiedproducts, and limited scale, pension funds canhelp to overcome these by signalling theirdemand for these investment opportunities.Relatively few mainstream investment managersor consultants bring investment opportunities inthe climate solutions space to their pension fundclients, and, as such, pension funds shouldinvite ideas to be brought to them forconsideration.


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Good quality climate-related assets are alreadyavailable across a wide range of asset classesand sectors. By making even a smallallocation to climate-related assets, pensionfunds can provide a powerful, public signal ofdemand and help to overcome the issue ofscale. This will go a long way in overcomingsome of the remaining barriers to greeninvestments.

The Role of Public PolicyPension funds have a clear interest in a stablepolicy environment with clear commitments totackle climate change. This will help investors toaddress the risks and opportunities discussedabove by giving greater certainty over the likelyeffects of regulation on high carbon assets, aswell as the investment outlook for emerging lowcarbon technologies.

Pension funds can seek to influence theoutcome of key public policy decisions in thebest interests of their beneficiaries. Yet theinvestor voice in the policy space remainsmuted. While the Institutional Investors Groupon Climate Change (IIGCC), which engageswith policymakers, has a strong Europeansupport base, it has more limited support fromUK investors. The UK’s National Association ofPension Funds (NAPF) has a strong policyengagement function but has not yet exercisedits voice on climate policy. Meanwhile,companies in carbon intensive industries poursignificant resources into swaying policydecisions in their favour. In 2013 in the USalone, companies spent US$1.61bn onlobbying Congress, with many hiringspecialised lobbying firms.26 This imbalancehas potentially serious consequences for thelong-term interests of pension funds and theirbeneficiaries.

The policy landscape in 2014: an overviewIn 2015, global governments will meet in Paristo negotiate binding emissions cuts for alleconomies, which, if adopted, will lead to aglobal carbon budget for the period after2020.27 The 2015 talks will also give impetus tothe reform of energy subsidies which currentlyartificially prop up fossil fuels, reducing theincentive for investment in renewable energy.

Concurrently, national and regional policiesaround the world continue to evolve and arealready having impacts on markets in whichpension funds are invested. In the EU, reform ofthe Emissions Trading System is needed tocreate a clearer long-term carbon price signal.28

In the UK, investor confidence in climate policyhas been somewhat undermined by theperceived hostility of the Treasury towards thegreen agenda, delay in setting a 2030decarbonisation target (now due to be set in2016), and the recently announced decrease inrenewable energy subsidies.

Further to this, despite welcome advances oncompany reporting (such as the requirementfor companies to report their greenhouse gasemissions annually from 1st October 201329)investors still lack rigorous integrated reportsfrom companies which will allow the connectionbetween company strategy and sustainability tobe made.


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How can pension funds respond?Shaping these outcomes will require morecoordinated and better resourcedengagement by pension funds. By poolingresources through collective engagement, far-reaching changes that are in the interests ofpension savers can be achieved in a targeted,cost-effective manner. Pension funds couldstrengthen the work already being done by theIIGCC by committing technical and financialresources, and encouraging NAPF to allocateresources to engage effectively on climatepolicy.

An important corollary of this is the need todiscourage investee companies from usingshareholder capital for lobbying activitywhich runs contrary to pension funds’interests, such as opposing new environmentalstandards or effective carbon pricemechanisms. Investor groups are beginning toscrutinise corporate lobbying more closely.Pension funds should request that theirinvestment managers support collaborativeinvestor initiatives to ensure greatertransparency and accountability from investeecompanies on their lobbying positions.

ConclusionBy developing internal policies to startunderstanding, assessing and managingclimate risks, pension funds can start to createresilient portfolios. They can proactively mitigatethe risks associated with high carbon assets aswell as position themselves to take advantage ofthe growth industries of the emerging greeneconomy. Finally, pension funds should play anactive role in shaping the policy outcomes thatwill impact the markets they depend on andwhich will determine whether, and how smoothly,the transition to a low carbon economy can beachieved. In this report, we have sought toprovide pension funds with some tools forthinking about this vital and urgent issue, and –most importantly – to move towards action toprotect pension savers’ long-term interests.

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Introduction



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UK pension funds are facing a demandingperiod. Despite signs that the economy isbeginning to recover from the biggest financialcollapse in living memory, the investmentoutlook remains challenging. In this environment,as the difficulties of maintaining short-termreturns dominate discussions about investmentstrategy, climate change may seem to many aless than pressing issue. Yet, as we will argue inthis report, climate change represents asignificant financial risk with enormousimplications for the retirement outcomes oftoday’s savers. Indeed, it is perhaps the biggestsystemic financial risk of our age. Whileunderstandably preoccupied with the falloutfrom the 2008 crisis, pension funds should notneglect to protect their beneficiaries from whatcould be the next crisis in the making.

Pension funds are inherently long-term investors.Even many closed defined benefit schemeshave liabilities which stretch many decades intothe future. Likewise, many of the savers currentlybeing automatically enrolled into definedcontribution schemes will not begin to draw theirpensions for 40 or 50 years. Early figuressuggest that employees too young to be auto-enrolled are the largest group voluntarily optingin to auto-enrolment schemes.30 Fiduciaryinvestors will naturally want to give seriousthought to how they are protecting theirbeneficiaries’ long-term best interests, whichmay not be well served by short-term returnsachieved at the expense of the economy’s abilityto generate sustainable returns in the future.

Although climate change certainly is a long-term risk, it would be a mistake to think that this

means it can safely be ignored in the shortterm. Firstly, as we will explore later in thisreport, the risks and opportunities associatedwith climate change are already beginning tomanifest themselves, although they willcertainly grow in the future. Secondly, actionnow is required to prevent even greater risksfrom crystallising. As the landmark SternReview demonstrated, the costs of climatechange will rise the longer we fail to act.Indeed, without a step change in progresstowards decarbonising our economies, wedramatically increase the chances of reaching‘climate tipping points’ beyond which theeconomic and environmental impacts would beeven more severe and unpredictable. Despitebeing a long-term consideration, climatechange is nonetheless an urgent one.

This report aims to assist pension funds byguiding them through the financial implicationsof climate change and the steps that funds cantake to position their portfolios for the risks andopportunities it presents.

The climate challengeThe newest scientific research from theInternational Panel on Climate Change (IPCC)31

has confirmed that warming in the climatesystem is unequivocal, and that it is extremelylikely that human economic activity is thedominant cause. Depending on the scenario,global mean temperatures could rise bybetween 0.3°C - 4.8°C by the end of the century.

It is difficult to imagine what these temperatureswill mean in practice. The World Bank haswarned that there is no guarantee that humanscan adapt to a 4°C warmer world.32 It is not thecase that temperatures will rise equallyeverywhere and that the effects will stop there –the climate system is incredibly complex andsensitive to change. The frequency and intensityof extreme weather events will increase, rainfallpatterns will affect the availability of water, and

While understandably preoccupiedwith the fallout from the 2008 crisis,

pension funds should not neglect to protecttheir beneficiaries from what could be thenext crisis in the making.

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many of the ecosystems whose services humanshave historically taken for granted will bejeopardised. Higher levels of warming alsoincrease the probability of reaching climate‘tipping points’, where the state of the climatesystem would be pushed into an entirely differentmode of operation.33

While governments around the world haveagreed that a limit of 2°C warming is necessary,the IPCC has warned that current rates ofemissions make this goal increasingly unlikelyunless drastic action to decarbonise theeconomy is taken.34

Financial implications for pension fundsClimate change poses significant financial risksfor investors under a range of different scenarios.Below we consider some of the key types of riskinvolved. As well as affecting schemes’investments, in the case of defined benefitschemes these risks could also potentiallyaffect the solvency of the sponsoring employer.

• Regulatory risks of concerted action on climatechange. According to Grantham LSE/VividEconomics, policy measures to tackle climatechange could increase the cost of carbonemissions by $8tn by 2030.35 Regulationposes a particular risk to fossil fuel companieswhose present valuations are heavilydependent on their reserves. Research byCarbon Tracker suggests that only 20% of theworld’s total fossil fuel reserves can be burntuntil 2050 if we are going to meetinternationally agreed targets to limit warmingto 2°C.36 Even a more generous carbonbudget allowing for 3°C warming implies thatcurrent fossil fuel reserves cannot all be burnt

– the already planned activities of listed fossilfuel companies alone are enough to go over a50% chance of limiting warming to 3°C.

If and when climate policy clamps down onemissions, a large proportion of fossil fuelassets will be at risk of devaluing orbecoming ‘stranded’. Given the highexposure of major indices to fossil fuelassets – for example, 17% of the FTSE 100’smarket capitalisation is attributable to justfour oil and gas producers37 – this could wipepotentially huge amounts of value frompension fund portfolios. Even in the absenceof concerted regulatory action to meet the2°C target, analysts are increasinglysuggesting that oil and gas stocks are at riskfrom declining demand, due to growingenergy efficiency and the adoption ofrenewable technologies (see Chapter 2).

• Physical risks of unmitigated climate change.However, this does not mean that regulationto tackle climate change runs counter toinvestor interests – far from it. Indeed, theabsence of regulation poses, if anything,greater long-term risks for pension savers.Climate change will have profound negativeconsequences for the economy as a whole,risking the stability of financial markets andthe ability of pension funds to meet theirliabilities. The Stern Review estimates that thetotal cost of climate change in the ‘businessas usual’ scenario, including the directimpacts on the environment and humanhealth, is likely to lie in the upper range of a 5-20% loss in global GDP.38 These costs will rise

policy measures to tackle climatechange could increase the cost of

carbon emissions by $8tn by 2030“ ”10


the total cost of climate change in the‘business as usual’ scenario,

including the direct impacts on theenvironment and human health, is likely tolie in the upper range of a 5-20% loss inglobal GDP.

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with delays in coordinated action; increasinglyso after 2050. In other words, while regulationis likely to hit returns in carbon intensiveholdings, unmitigated climate change is likelyto hit returns across entire portfolios in waysthat are unpredictable. Real assets (such asproperty) are likely to be particularly severelyaffected.

• Risk of opportunity loss. The transition, atwhatever pace it happens, to a lower carbonglobal economy will create significant growth incertain industries. Climate-alert pension fundswill gain from the growth of those industries;others risk losing out on opportunities. TheOECD39 calculates that the cumulativeinvestment in green infrastructure required fordecarbonising the global economy is $36-42tnuntil 2030, or $2tn a year. There are significantinvestment needs across all sectors, spanningenergy generation, transport, energy efficiency(in buildings, power grids, and industry),agriculture, water and waste management.40

The green economy already accounted for athird of the UK’s growth in 2011/12.41

These risks are particularly significant forpension funds because they tend to be‘universal owners’, meaning they have holdingsacross the economy. The performance of theeconomy as a whole matters more to suchinvestors than the profitability of any individualasset in their portfolios.42 Thus, they have aninterest in discouraging their investeecompanies from creating negative social orenvironmental ‘externalities’, the costs of whichare borne by companies elsewhere in theirportfolios – even if this strategy is profitable forthe individual company concerned. In the caseof climate change, as we have seen, there is astrong business case, even at the individualcompany level, for reorienting carbon intensivebusiness models to avoid the costs of futureregulation. However, there is also a strong casefor universal owners to promote

decarbonisation even if it is not in the short-termcommercial interests of the individualcompanies concerned, since the economicimpacts of climate change are likely to faroutweigh any short-term benefits to fossil fuelcompanies and others from the continuation of‘business as usual’.

What does this mean for fiduciaries?It is therefore clear that climate change hasserious implications for beneficiaries’ financialbest interests, which fiduciary investors need tounderstand and manage. These climate risksare of particular relevance to pension funds withtheir inherently long-term horizons: many of theUK savers currently being auto-enrolled will beretiring decades from now. Of course, not allpension savers have identical time horizons; infulfilling their fiduciary duty of impartiality,pension fund trustees and others should seekto ensure impartiality between younger andolder savers. Given the numerous pressures tofocus on maintaining short-term returns (asidentified by the Kay Review43), in most casesthis will mean paying greater attention to long-term risks.

Some experts, such as US academic KeithJohnson, have even argued that neglect ofsuch risks could amount to a breach of the dutyof impartiality to younger members.44 Forinstance, in one survey of leading Europeanpension funds, respondents estimated theirideal investment horizon at 23 years, and theiractual horizon at 6 years.45 These funds are

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in fulfilling their fiduciary duty ofimpartiality, pension fund trustees and

others should seek to ensure impartialitybetween younger and older savers. Giventhe numerous pressures to focus onmaintaining short-term returns, in mostcases this will mean paying greaterattention to long-term risks.

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described by the researchers as ‘sustainabilitypioneers’, yet overcoming the bias towardsshort-termism and giving full weight to theinterests of their younger members clearlyremains a challenge for them. It is importantthat all pension funds are alert to this challengeand make active efforts to meet it. The growingpopularity of target date funds offersopportunities to ensure that funds specificallydesigned for younger members are managed ina way which is fully consistent with thosemembers’ long-term investment horizons,without any risk of affecting the interests ofolder members.

The already strong financial case for managingclimate risks is reinforced by pension savers’wider interest in avoiding the impacts of severeclimate change. Firstly, it could significantlyerode the spending power of their pensions:retirees spend a relatively high proportion oftheir income on food and fuel, both of whichcould become significantly more volatile andexpensive in a climate-constrained world.46

Climate change could also have broaderimpacts on beneficiaries’ future economicwellbeing and quality of life. Research hassuggested that the UK will be hit harder by thephysical impacts of climate change than manyother European countries, largely because ofrising sea levels and flooding.47

The extent to which fiduciary investors can takeaccount of such factors is controversial; theLaw Commission has been asked to clarify thisarea of law and make recommendations togovernment, and is due to report in June 2014.ShareAction has long argued48 that case lawdoes not prohibit pension funds from takingaccount of their beneficiaries’ wider social andeconomic interests provided that this is notdetrimental to their financial interests. After all, apension is not an end in itself, but a means tothe end of a secure and prosperous retirement.Thus, in the same way that charities are

permitted to have regard totheir charitable objectives insetting investment policy,investment fiduciaries shouldbe able to have regard to theunderlying purpose of thefund. In the case of climatechange, pension savers’financial interests are alignedwith their wider interestsrather than conflicting,creating a particularly strongcase for action.

An example of how thisthinking can be applied inpractice is provided by theEnvironment Agency PensionFund, whose 2012Responsible InvestmentReview characterises the issue as follows:

“Just to look after our current members, we willneed to be able to pay retirement pensions wellinto the 21st century. Over such a long timeframe, we expect future trends in global climate,population and economics to have a majoreffect on the financial value of our fund’sinvestments.”

“These issues also matter because we want ourpensioners to live in a clean and healthyenvironment which is at least as good as theone we enjoy today. For many members, theirpension will be their main source of incomewhen they retire. We want them to have a happyretirement in a world where the environment isnot deteriorating.”49

Barriers to actionIf the case for action to manage climate risk isso strong, then why aren’t more pension fundsacting? There are a number of factors whichhave historically made this difficult. The generalbarriers to long-term and sustainable

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Just to look after ourcurrent members, we willneed to be able to payretirement pensions wellinto the 21st century. Oversuch a long time frame,we expect future trends inglobal climate, populationand economics to have amajor effect on thefinancial value of ourfund’s investments.

Environment Agency Pension

Fund, 2012 Responsible

Investment Review

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Resilient portfolios for an uncertain world

investment, and the policy interventions thatcould help to address them, have receivedextensive treatment elsewhere and are not thefocus of this report. However, we brieflysummarise some of the key issues below:

• Short-termism. In the words of one respondentto our 2009 survey of investment managers’attitudes to climate change, “the mostsignificant barrier is the imbalance between therelatively short-term horizons of mainstreaminvestment analysis and the relatively long-termnature of the material business impacts ofclimate change”. As the Kay Review noted,prevailing incentive structures and regulatorypressures exacerbate the natural humantendency to focus on short-term financialreturns as a metric of longer term success.This disincentivises attention to climate risks:managers being judged on quarterlyperformance are unlikely to expend resourcesmonitoring and managing a risk which couldcrystallise years into the future. This problem isexacerbated by flawed measures of risk whichfocus on deviation from a benchmark, ignoringthe potential impacts of systemic risks such asclimate change.

• Confusion about fiduciary duties. Despite thestrong financial case for managing climaterisks, there remains a lingering sense thatclimate change is an ‘ethical’ or ‘extra-financial’issue and that such issues cannot beconsidered by fiduciary investors. The level ofuncertainty is illustrated by pension funds’responses to member queries about climatechange sent via our website in March 2013.Around a quarter of the responses mentionedfiduciary duty – half as a reason forconsidering climate change, and the other halfas a reason for ignoring it. ShareAction hascalled on government to explicitly clarify thescope of investors’ fiduciary duties, and hopesthat the Law Commission’s report will heraldsome long-overdue progress in this area.

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• Lack of clarity about roles and responsibilities.When we surveyed investment managers ontheir attitudes to climate change in 2009, 89%rated it as an ‘important’ or ‘very important’investment issue, but only 29% said theyintegrated climate data into their analyseswherever possible. One of the biggest reasonsgiven for this discrepancy was a lack of clientdemand. Yet, conversely, research by ACCA hasfound that many trustees assume that it is theinvestment manager’s job to factor in materialrisk factors such as climate change. Theresearchers concluded that “[trustees’] decisionto delegate investment decisions to their fundmanagers has led to an impression that this freesthem from a need to consider potentially materialrisk factors such as climate change”.50 Thiscreates an impasse whereby climate changeissues may not be considered by anybody in theinvestment chain. (In contract-based pensions,asset owners’ responsibility for overseeinginvestment managers is not universallyaccepted in the first place.)51

Of course, it is right that investment managerstake responsibility for the detailed implementationof investment strategy. However, asset ownersretain responsibility for ensuring that this strategyserves the best interests of beneficiaries. Sincefund managers’ incentive structures do notencourage proactive consideration of climaterisks, it is important that asset owners set clearexpectations in mandates and place value onmanagers’ performance in this regard whenselecting and reviewing managers. Even wherepension funds have high levels of confidence in

Even where pension funds have highlevels of confidence in their advisors

and managers, they cannot afford toassume that climate risks are being managedunless they have actively instructed andincentivised their agents to do so.

“”

their advisors and managers, they cannot affordto assume that climate risks are being managedunless they have actively instructed andincentivised their agents to do so.

• Collective action problems. Climate changeis clearly an enormous macroeconomic andpolitical challenge. This has sometimes ledto a perception that individual investors‘cannot make a difference’ and are better offinvesting for maximum short-term returnirrespective of climate risks – even if theirbeneficiaries’ interests would be betterserved by effective collective action whichcould have an impact on the problem.However, this presumes that the stepsrequired to mitigate climate risks are notjustifiable at the individual portfolio level. Aswe shall see in the remainder of this report,this is far from being the case.

Leaders in the UK and abroad show that it ispossible to reduce the carbon risk exposureof portfolios both through intelligent stockselection and effective shareholderengagement; to reap attractive returns whilstmaking positive investments in low carbonsolutions; and to exert an influential voice inpolicy debates which will determine the futureeconomic outlook for beneficiaries. Ofcourse, the impact of engagement – whetherwith companies or policymakers – ismagnified when investors act collectively; thisreinforces the case for investors to supportand participate in established forums such asthe Institutional Investors’ Group on ClimateChange (IIGCC), CDP and the Principles forResponsible Investment (PRI).

• Lack of information and training. Anotherfactor identified in ACCA’s 2009 study ofpension fund trustees was lack of awarenessand education about the implications ofclimate change for investments. While guideshave been produced by a range of bodies

including the Carbon Trust,52 Mercer,53 TowersWatson54, and the Local Authority PensionFund Forum (LAPFF)55, the study found thatawareness of these resources remains low.Part of the aim of this report is to synthesisethe existing research and guidance fortrustees on managing climate risks.ShareAction is also developing a programmeof trustee training on climate risks tocomplement this report, which we believe willfill an important gap in the market.

Outline of the reportThis report is designed to help pension fundsunderstand and limit their exposure to climaterisks. It aims to be relevant to both definedbenefit (DB) and defined contribution (DC)funds, and to both trust-based and contract-based pension schemes. We use the term‘pension fund’ as a short-hand for all thesediffering types of schemes. Much of the reportwill also be relevant to other long-terminvestors, such as endowed charitable trusts.Throughout the report we highlight examples ofbest practice from the UK and overseas. Whilstthe report is focused on the UK pensionsindustry, we hope that its recommendations willalso be of use in a wider international context.

We make recommendations for action which inour view can be implemented by all types ofscheme, although naturally the exact details willvary depending on each scheme’s particularcharacteristics – and, in particular, its size andresources. Although the recommendationsform a coherent whole, we do not assume thatall schemes will implement all recommendations– in particular, we recognise that smallerschemes with limited resources will wish toprioritise the actions which are most cost-effective and productive for their particularcircumstances. We aim to present a range ofcomplementary options for managing climaterisks and making the most of green investmentopportunities.

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15

In the remainder of the report, we break thisdown into the following key areas:

• Chapter 1 (Setting internal frameworksfor managing climate risks) looks at howpension funds can measure, monitor andreport on their climate risk exposure – andwhat steps can be taken to ensure that theserisks are managed, both by internal decision-makers and by investment managers andconsultants acting on behalf of the fund.

• Chapter 2 (Addressing carbon intensiveportfolios) examines the risks lying in carbonintensive portfolios and explores how fundscan seek to reduce their carbon risk exposure,both through stock selection and throughshareholder engagement with carbonintensive companies to reduce the risk of‘stranded assets’ and to ensure their businessmodels are well-positioned for the transition toa low carbon economy.

• Chapter 3 (Investing in a low carbonfuture) looks at the reverse side of this coin,exploring the positive investment opportunitieswhich the low carbon transition will provide,and examining how funds can make the mostof these opportunities whilst also helping tofinance the transition to an economy capableof delivering sustainable long-term returns.

• Chapter 4 (The role of public policy)focuses on the role of public policy infacilitating climate-conscious investment, andon how investors can engage withpolicymakers – and with investee companieswhose lobbying activities may be impedingeffective political action on climate change –to promote a more supportive policyenvironment.

Chapter 1

Setting Internal Frameworks for Managing Climate Risks

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1717

IntroductionThe regulatory and physical risks associated withclimate change are altering the investmentlandscape in which pension funds must meet theirliabilities and investment goals. There areexcellent examples of asset owners whorecognise that climate change poses a risk to theirinvestments and are acting to mitigate those risks.Yet most are not. This ‘wait and see’ approach tounderstanding how climate risks may affectportfolios could serve members poorly.

This chapter addresses the governance of pensionfunds in light of the accumulating risks associatedwith climate change. We draw on the wealth ofexisting guidance produced by institutions such asthe United Nations Environment ProgrammeFinance Initiative (UNEP FI); consultants such asMercer, Towers Watson, and Trucost; funds suchas the Universities Superannuation Scheme; andnot-for-profit organisations including the LocalAuthority Pension Fund Forum (LAPFF), the AssetOwners Disclosure Project (AODP), CarbonTracker and the 2° Investing Initiative. We identifycommon themes which run through thesecontributions and synthesise them into a series ofpossible actions for funds seeking to achieve highquality oversight of climate risks. The actions thatare most appropriate for a particular scheme willdepend on its size and sophistication as well asthe steps it has already taken to begin addressingclimate risks.

Although this chapter and its recommendationsare framed in terms of trust-based governance(whether defined benefit or defined contribution),the basic concepts are equally applicable tocontract-based pension schemes. ShareActiontakes the view that contract-based pensionproviders have a responsibility towards theirpolicyholders to ensure that the investment optionsoffered are capable of delivering sustainable long-term returns: this includes ensuring that managersare addressing climate risks. As asset owners,contract-based providers should also take

responsibility for ongoing monitoring of investmentmanagers’ activities to ensure that savers’ bestinterests are being well served.56

Understanding and assessing climate riskexposureTrustee trainingClimate change presents pension funds with arelatively unfamiliar set of risks, to be discussedthroughout this report. Trustees and otherfiduciaries are likely to need training to buildtheir understanding of how such climate riskscould impact fund members over the time totheir retirement and beyond.57 Training might bedelivered online, to a particular trustee board orits investment committee, or be undertakenjointly with other pension funds.

Recommendation 1.1

Trustees and pension fund officers withresponsibility for investment matters shouldundertake a minimum of two hours trainingon the financial materiality of climatechange and environmental risk.

Joint training that brings different pension fundstogether may be particularly worthwhile. No fundcan manage all of the climate-related risks facingits beneficiaries on its own: some collaborationbetween funds is essential and can greatly reducethe cost of being effective. Knowledge-sharingbetween funds should enable the pensionsindustry as a whole to better protect savers. Asmall number of funds in the UK have built astrong understanding not only of climate risks butof the pros, cons and practicalities of differentstrategies to reduce and hedge those risks.

A small number of funds in the UKhave built a strong understanding not

only of climate risks but of the pros, consand practicalities of different strategies toreduce and hedge those risks.

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Recommendation 1.2

Pension schemes with experience ofstrategies addressing climate risks shouldshare their knowledge and insights withothers in the industry.

Investment beliefsIn recent years a growing number of pensionfund boards have taken the time to articulate theirinvestment beliefs explicitly.58 There is someevidence that pension funds with well-developedand well-documented beliefs achieve superioroutcomes for their members.59 Amongst fundsthat have articulated their investment beliefs,some — though not all — have addressed themateriality of environmental, social andgovernance (ESG) factors to investment successover the time horizons that are relevant to theirbeneficiaries.

A wide range of ESG factors influence corporatesuccess and investment returns but none hasgreater potential to alter retirement outcomes fortoday’s savers than climate change.Nevertheless, trustees of pension funds willreach different conclusions about the risksposed by climate change in light of the evidencebefore them and the demographics of theirmembership base. Trustees’ fiduciary duties givethem discretion to apply their best judgement.

Recommendation 1.3

Trustees should develop and articulate theirinvestment beliefs in light of the evidenceon the economics of climate change.

Most occupational and stakeholder pensionschemes are required by law to draw up a writtenStatement of Investment Principles (SIP) andreview it at least every three years. A scheme’sSIP must state “the extent (if at all) to which social,environmental or ethical considerations are takeninto account in the selection, retention andrealisation of investments”60. Therefore, the SIP isone logical place for a pension fund to articulateits beliefs on climate risks. The NationalAssociation of Pension Funds (NAPF) hasproduced a helpful short Responsible InvestmentGuide61, highlighting climate change as anexample of a financially material environmentalrisk. The guide is available on the NAPF’s website.

Fund specific assessment of climate risksPension funds will have different exposure toclimate risks depending on their assetallocation, the geographical spread of theirinvestments, and stock selection. Despite thesefund-specific differences in the level of riskexposure, key types of climate risk are commonacross the industry. These include:• Regulatory risk for carbon intensive

investments. The risk here is that policymeasures locally, nationally and potentiallyglobally put a material price on carbonemissions or restrict the burning of carbon.

• Physical risks to investors’ assets arisingfrom the impacts of a changing climate,including extreme weather events, waterstress and rising sea levels.

• Risk of opportunity loss. The transition, atwhatever pace it happens, to a lower carbonglobal economy will create significant growthin certain industries. Climate-alert pensionfunds will gain from the growth of thoseindustries; others risk losing out on theopportunities.

In addition to affecting schemes’ investments,these risks may also – in the case of definedbenefit (DB) schemes – influence the strengthof employer covenants.

More generally, as discussed in the Introduction,climate change could present more than afinancial risk for savers: it also has seriousimplications for their economic interests andquality of life. In thinking about how to respondto climate risks in the best interests of theirbeneficiaries, trustees should be alert to whotheir members are and the ways in whichclimate change could impact their lives.

Questions which may be helpful whenundertaking an evaluation of climate riskexposure include the following:• How does the fund’s current asset allocation

influence exposure to climate risks? • How might different carbon cost and climate

change scenarios impact the fund’s portfolioover time?62

• Are carbon intensive holdings hedged from aclimate risk perspective by holdings in‘green’ and low carbon industries? (Suchholdings may be present without a pensionfund being aware of owning them.)

• Is the fund’s equity and property exposure tocarbon risk higher than the benchmark? If so,are these risks being adequately rewarded?63

• What level of future ‘locked in’ carbonemissions is the fund invested in? (Thisquestion is particularly relevant to long-terminfrastructure that facilitates high emittingactivities and to companies’ capital expenditureon bringing fossil fuels to market.)64

• What impact does securities selection haveon carbon risk in the fund’s equity, privateequity, property, bond, and infrastructureportfolios?

Quantifying the Risks: the role of carbonfootprinting Understanding and managing these risksrequires measurement. Carbon footprinting ofequity portfolios is one tool available forquantitatively assessing carbon risk. Givenincreasing regulation on carbon worldwide – theemergence of regional emissions tradingschemes, carbon taxes, and performancestandards – the cost of carbon is becoming agrowing risk to the profitability and value of awide range of investments in all asset classes.As argued by the United Nations EnvironmentProgramme Finance Initiative (UNEP FI),measuring the carbon intensity of portfolios is anecessary step to understanding and mitigatingthese risks. UNEP FI has produced an investorguide on measuring and managing the carbonintensity of investments and portfolios65 whichsets out the role carbon footprinting can play inreducing unrewarded risk exposure.

Trucost has developed one of the most advancedmethodologies for carbon footprinting of equityportfolios in the world. It has conducted portfoliofootprints for the equity holdings of the LondonPensions Fund Authority, Fonds de Réserve pourles Retraites (French State Pension Fund),Australian fund VicSuper, and the EnvironmentAgency Pension Fund.66 Since 2012, VicSuper hasextended its footprinting analysis to parts of itsprivate equity and property investments.67 CarbonTracker has also compared pension fund exposureto fossil fuel reserves relative to benchmarks forpension funds such as the GovernmentEmployees Pension Fund in South Africa.68

Portfolio footprints help investors to understand iftheir holdings are more exposed to carbon riskthan the benchmark, as well as identifying wherecarbon risk is concentrated. One of the fewfunds in the UK to regularly undertake carbonfootprinting is the Environment Agency PensionFund (EAPF).69 The EAPF ascribes particularvalue to being able to identify their most carbon

Given increasing regulation on carbonworldwide – the emergence of regional

emissions trading schemes, carbon taxes,and performance standards – the cost ofcarbon is becoming a growing risk to theprofitability and value of a wide range ofinvestments in all asset classes.

“”

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intensive equity holdings per £ of revenue.Knowing which stocks are most exposed tocarbon risk facilitates targeted engagement withparticular companies and has led to decisions tosell stocks where the carbon risk appears to befinancially unrewarded. The EAPF has alsobegun to analyse the environmental performanceof the companies which issue its bonds.70

As of October 2013, reporting on carbonemissions is now mandatory for UK listedcompanies.71 Companies will have to report ondirect emissions associated with operations(known as ‘scope 1’ following the GreenhouseGas Protocol) and those associated withpurchased energy (‘scope 2’).72 Given that thenecessary data will be readily available, thisshould make it easier for pension funds toconduct portfolio footprints on the same basis,at least for their equity holdings.

However, pension funds should also be awareof the limitations of footprinting based solely onscope 1 and 2 emissions. For some companies,the emissions from their direct operations aredwarfed by those that occur upstream ordownstream in their value chain (scope 3).73 Thiscan be particularly important in sectors such asoil and gas, where the majority of the emissionsassociated with the company are in the use ofthe product. Given the carbon intensity of theconstruction of renewable energy plants, up to90% of emissions can occur upstream of theplant itself74, while there are negligibledownstream emissions. The UK governmentcarbon reporting guidelines suggest companiesreport these scope 3 emissions for these reasons,but such reporting remains voluntary at present.75

More sophisticated methodologies are emergingwhich capture these sources of emissions. Forexample, BT has calculated its full (scope 1-3)corporate carbon emissions and compared itwith its carbon abatement efforts to calculate its‘net good’.76 The Carbon Trust verified themethodology and calculations. Similarly, Trucostundertook a review of operational and full supplychain emissions for Becker Underwood – anagricultural solutions provider — which aimedto be ‘net positive’ in its environmental impact.77

The UNEP FI and others have also suggestedthat we may need a new category of ‘scope 4’emissions which is specific to fossil fuelcompanies: emissions embedded in fossil fuelreserves.78 This would allow investors tounderstand the extent to which their portfoliosare exposed to the risk of stranded assets from‘unburnable carbon’ — a topic we discuss inChapter 2. The UNEP FI and GHG Protcol are inthe midst of a consultative process to develop acredible and global methodology for measuringthe emissions embedded in investments. TheGHG Protocol Financial Sector Guidance will bereleased in 2014.79

As methodologies and data availability continueto improve, pension funds should seek to remainabreast of these developments to ensurefootprinting exercises give an accurate pictureof portfolio carbon exposure. In the meantime,footprinting exercises based on scope 1 and 2emissions provide a useful, even if imperfect,way of measuring this exposure. What mattersis that funds are clear on the purpose andlimitations of undertaking a footprint – i.e. as oneelement of a wider assessment of climate risks,and not as a proxy for such an assessment – anddo not apply its findings mechanically in a waywhich could create unintended consequences.

For example, utilities often account for a largeproportion of portfolio carbon footprints. But thisdoes not necessarily mean that the right

20

For some companies, the emissionsfrom their direct operations are

dwarfed by those that occur upstream ordownstream in their value chain. “

”

response to conducting a footprint would be toreduce exposure to utilities. Indeed, given thatutilities will be a critical part of the transition to alow carbon economy, pension funds mightdecide that their interests as universal ownerswould be better served by engaging with utilitycompanies to reorient their strategies for a lowcarbon world. In this case, footprinting wouldallow the fund to identify outliers within thesector where high carbon activity was notadequately rewarded, and to either prioritisethese companies for engagement or sell out ofthem in favour of better-performing peers.

Recommendation 1.4

Pension funds should undertake anevaluation of their exposure to climate risks,quantifying those risks where possible.

Qualitative assessments of risk exposureA second consideration is that measuringemissions is only the first step toward measuringrisk. Emissions present risks in so far as theyinteract with regulation to cap emissions, orcontribute to physical climate risks. Understandinghow carbon emissions relate to risk must to somedegree rely on judgments about how differentscenarios may unfold and how these may affectinvestments – for example, how different marketconditions may affect investee companies for agiven level of emissions.80

A number of high quality free resources areavailable to pension funds for making suchassessments. • Mercer has made available a sophisticated

tool (its TIP framework) that uses qualitativeand quantitative inputs to estimate the rate ofinvestment into low carbon and efficiency-related technologies (T), the impacts (I) onthe physical environment, health and foodsecurity, and the implied cost of carbonresulting from global policy (P) developments(such as the implied cost of carbon due to

regulatory measures and/or emissionstrading schemes) under four climatescenarios.81 The framework can be used byinstitutional investors to identify and managethe systemic risks and investmentopportunities arising from climate change.Results of portfolio reviews undertaken usingthe framework can be used to developpolicies and processes that both captureopportunities and mitigate identified risks.

• For evaluating service provider risk, pensionfunds might like to use the Climate ChangeInvestment Risk Audit developed by Railpen,HSBC and Linklaters.82 This provides aquestionnaire that can be sent to a pensionfund’s service providers to assess theirunderstanding and management of climaterisks.

• The AO DP’s Climate Change Best PracticeMethodology is an alternative tool forcomprehensive pension fund riskevaluation.83 It provides detailed guidance forfunds on assessing their risk exposure,together with a ‘checklist’ of key steps andconsiderations.

From measurement to managementDeveloping a climate policyThe development of a policy – whether a stand-alone policy or part of a broader ResponsibleInvestment policy – will assist pension funds inaddressing the most financially material climaterisks. A policy is helpful in selecting priorityareas for action, and communicating thosepriorities to fund managers, consultants, andbeneficiaries. It guides day-to-day decision-making and assists with appropriate reaction torelevant events and developments.

Understanding how carbon emissionsrelate to risk must to some degree rely

on judgments about how different scenariosmay unfold and how these may affectinvestments

“”

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There are already useful tools available to fundslooking for guidance in this area. For example,the AODP provides a sample best practice policywhich can be drawn upon (See Appendix 1). Wedo not seek to prescribe which specific policiesfunds should adopt. However, drawing on thisand other examples of best practice climatepolicies, we suggest that a pension fund climatepolicy might cover the following areas:• Investment beliefs underpinning the policy• Overall goals of the policy• Who is responsible for agreeing, updating

and implementing the policy• How often the policy will be reviewed• Priority activity areas arising from fund-specific

risk evaluation• Use of shareholder rights to manage climate

risks• Participation in collaborative initiatives to

address climate risks• Reporting to beneficiaries

Recommendation 1.5

Pensions funds should develop a policy (orsub-policy) that sets out fund-specificobjectives and priorities for managingclimate risks. The policy should be signedoff at board level or by an investmentcommittee of the main board.

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Action plans and target-settingIt is important that policies and climate riskassessments are translated into concrete stepsto mitigate the risks identified. This does notalways happen: of the 37 asset owners surveyedby the Global Investors’ Coalition on ClimateChange (a network which includes the IIGCC) in2013,84 56% were conducting formal or informalrisk assessments of their portfolios but only halfof these had made changes to their investmentprocesses. Further to this, it is unclear to whatextent these changes in processes had led tochanges in asset allocation. Given thatrespondents were by definition already climate-conscious investors, these figures are also likelyto be overestimates of those that apply to thewider investment community.

A pension fund’s climate policy therefore needstranslating into a plan of action. The content ofthis plan will depend on the fund’scircumstances. For funds which are only justbeginning to think about climate risks, the stepsdiscussed earlier in this chapter, such astraining trustees and assessing climate risks,might themselves be the focus of an actionplan. For funds who are more advanced on thisjourney, their plans might incorporate some ofthe more substantive steps discussed in theremainder of this report. Funds will necessarily

CASE STUDY 1 – BT Pension Scheme85

BT Pension Scheme (BTPS) published a Sustainability Policy in 2012 articulating theTrustees’ approach across the Scheme’s assets. As a long-term asset owner BTPSconsiders sustainable factors to improve long-term risk adjusted returns.

As part of its ongoing analysis of the potential risks from climate change, BTPS have beenactively exploring ways to efficiently allocate capital to investments that could outperform asa result of policy moves towards a low carbon economy.

For example, in 2011 BTPS invested £100m in a carbon-tilted version of the FTSE All-ShareIndex (with carbon intensive companies underweighted. BTPS also invests in low carboninfrastructure, with £350m in a global renewable energy fund and £75m invested alongsidethe UK government in a UK-based environmental innovation fund.86

focus on a relatively small number of priorityareas. These might be determined on the basisof risk analysis or simply with reference towhere the fund believes it can most readily andcost-effectively achieve a positive impact.

The goal of all such strategies is ultimately toreduce climate risks, and we believe it is importantto measure the extent to which this goal is beingmet. Here, investors can apply lessons from theirengagement with listed companies to their ownstrategies. Successful investor initiatives such asthe CDP’s Carbon Action project (see case study2) show that setting clear targets can dramaticallyimprove firms’ chances of making progress.Although we do not seek to prescribe exactly whatthese targets should be, we do believe it is bestpractice for pension funds to set their own targetsto reduce portfolio carbon risk (comprising bothoperational emissions of investee companies andthe future emissions locked into fossil reservesand infrastructure). For example: • We aim to reduce the carbon intensity of our

portfolios, relative to benchmarks for eachasset class by X% in X years.

• We aim to increase our exposure to climatechange solutions by X% in the next X years.

These are given as illustrative examples. Asdiscussed above in relation to portfoliofootprinting, funds may decide that portfolio

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carbon intensity based on scope 1 and 2emissions is not a perfect proxy for portfolioclimate risk, and that they can achieve betterresults by pursuing a programme of targetedengagement with carbon-intensive holdings inkey sectors. In this case, setting clear targetsfor the outcomes of engagement activityremains just as important.

Those investors who are already signatories toCDP and to the Carbon Action project specifically(190 investors, of whom 41 are UK pension funds)will have the most insight into the value of settingachievable but stretching targets for emissionsreduction. We suggest those investors lead theway by disclosing their own targets andreporting on progress in the same way theyhave called on investee companies to do so.

Aligning the investment chainAs discussed in the introduction, it cannot betaken for granted that pension funds’ key serviceproviders (actuaries, investment consultants,investment managers) are taking climate risksinto account. Service providers may not havethe expertise or indeed the incentives toproactively manage climate risks. Thus, ifobjectives and targets are to be met, assetowners must ensure that their service providers(particularly external investment managers) areaware and supportive of those goals.

CASE STUDY 2: CDP and Carbon Action

One of the best known investor initiatives focused on climate risk is CDP, a not-for-profitorganisation that has the support of 722 institutional investors around the world.87 These investorschampion disclosure by companies of their carbon emissions and use of other natural resources.Recently, CDP has established a project called Carbon Action which focuses on the businessbenefits of target setting and corporate investment in emissions reduction and energy efficiencyprojects. The results have been positive, with carbon reduction activities associated with theproject delivering average return on investment of 33% or a payback in 3 years. Most strikingly,high emitting companies that set absolute emissions reduction targets achieved double the rateof improvement compared to companies without targets, with 10% higher firm-wide profitability.88

Pension funds should make explicit theirexpectations on the measurement andmanagement of climate risks and seek toensure that their service providers have theskills and strategies to deliver on thoseexpectations. The wording of investmentmanagement mandates (or appropriate side-letters) is a key opportunity to signal demandfor the capabilities required to manage climaterisks and to ensure that such capabilities aredeveloped actively. The International CorporateGovernance Network (ICGN) has developed amodel mandate which sets out ‘model contractterms’ between asset owners and investmentmanagers.89 The mandate focuses onalignment to long-term horizons and theintegration of ESG factors into the investmentchain. Asset owners could explicitly mentionclimate change as one of the factors that mustbe addressed by their investment managers.

Pension funds can highlight their beliefs andexpectations regarding climate risks in theirStatement of Investment Principles, requests forproposals for both investment managers andconsultants, investment managementagreements, and policies for voting andengagement. An example mandate can befound in the adjacent box.

Model mandate clause“As fiduciaries, we require fund managers toacknowledge long-term and systemic risksfrom climate change given the long-terminvestment horizon of our beneficiaries, andto take active steps to manage these risks.Relevant actions may relate to assetallocation, investment analysis, risk hedging,and shareholder voting and engagement.

We require that:The manager provide a succinct annualoverview of his/her assessment of thesystemic risk of climate change (asmanifested through regulatory as well asphysical impacts) and of actions by themanager in response to such risks”.

Ability to comply with these expectations alsoneeds to be given genuine weight in managerselection decisions. In the same 2013 study bythe Global Investor Coalition on ClimateChange cited above,90 83% of asset ownerssaid they considered the extent to whichmanagers integrate climate change into theirprocesses and activities, but only 69% indicatedthat this had influenced their decision.

Recommendation 1.6

Pension funds should prepare a practicalaction plan to deliver their climate policywith time-bound targets.

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if objectives and targets are to bemet, asset owners must ensure that

their service providers (particularly externalinvestment managers) are aware andsupportive of those goals.

“”


25

Reporting to BeneficiariesAs UNEP FI has noted, while companies areincreasingly under pressure from investors toreport on their emissions through platformssuch as CDP, investors themselves do notcurrently face the same pressure to discloseemissions associated with the companies theyare invested, or the associated risks. Yet, as thepensions industry shifts from a defined benefit(DB) world to a predominantly definedcontribution (DC) world, expectations willinevitably change regarding the value and roleof high quality reporting to fund members whobear the investment risk. Savers may begin toexpect the same accountability from theirpension funds that institutional investors expectfrom the companies in which they invest.91

Reporting on the management of climate risks canbe one aspect of the information that pensionfunds provide to their members on overallinvestment strategy, performance and riskmanagement. Some funds will choose to preparemore dedicated reporting on ResponsibleInvestment. A particularly excellent example of thisis the Environment Agency Pension Fund’s (EAPF)Responsible Investment Review (see case study).

Members will be interested not only in the risk-mitigation side of the equation, but also in thepositive contribution made to the low carbontransition and emissions reduction throughinvestments in green sectors and in technologiesdriving resource efficiency in the wider economy.Where a pension fund’s Action Plan includestargets for emissions reduction amongstparticular sectors or companies, progresstowards those targets should also be reported.

CASE STUDY 3: Environment AgencyPension Fund’s (EAPF) Responsible Investment Review92

The EAPF’s Responsible InvestmentReview is a document that communicatesto members and stakeholders the fund’sgoals, plans and progress in managingenvironmental, social and governancerisks. It clearly sets out the board’s beliefsabout the materiality of climate change, thefund’s environmental performance targets,and a roadmap for how these targets arebeing pursued. It explains how investmentmanagers are selected and howexpectations are set for these managers tointegrate environmental risk in all assetclasses.

Corporate reporting on climate and carbon riskhas improved dramatically in recent years,supported by initiatives such as the ClimateDisclosure Standards Board.93 These initiativesoffer valuable examples of good practice andcomparable reporting frameworks for pensionfunds to draw upon.

Recommendation 1.7

Pension funds should report regularly tomembers on the progress being made toreduce climate risks. Such reporting can bea stand-alone account or embedded inpension fund annual investment reports .

Savers may begin to expect the sameaccountability from their pension

funds that institutional investors expect fromthe companies in which they invest.“

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CHAPTER SUMMARY

In this chapter we discussed how pension funds can start understanding and managing climaterisks. We have suggested steps which may help funds to measure their risk exposure andultimately develop a credible action plan for reducing this exposure. We have also suggestedthat funds communicate with beneficiaries about how these risks are being managed on theirbehalf. We recommended the following actions, which fall into three broad areas:

Understanding and assessing climate risk exposure:• Trustees and pension fund officers with responsibility for investment matters should

undertake a minimum of two hours training on the financial materiality of climate change andenvironmental risk.

• Pension schemes with experience of strategies addressing climate risks should share theirknowledge and insights with others in the industry.

• Trustees should develop and articulate their investment beliefs in light of the evidence on theeconomics of climate change.

• Pension funds should undertake an evaluation of their exposure to climate risks, quantifyingthose risks where possible.

Developing policies and plans to ensure effective management of climate risks:• Pension funds should develop a policy (or sub-policy) that sets out fund-specific objectives

and priorities for managing climate risks. The policy should be signed off at board level or byan investment committee of the main board.

• Pension funds should prepare a practical action plan to deliver their climate policy with time-bound targets.

Reporting on progress:• Pension funds should report regularly to members on the progress being made to reduce

climate risks. Such reporting can be a stand-alone account or embedded in pension fundannual investment reports.

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Chapter 2

Addressing Carbon Intensive Portfolios


28

Introduction Carbon intensive investments pose risks toinvestors under various climate scenarios. In alow carbon world, the energy, transport, builtenvironment and infrastructure systems will bevery different from the ones we have today. In thisscenario, a limit on emissions will see fossil fuelslose value while related infrastructure such astransport, factories, buildings and power plantswill have to be replaced or modified before theend of their expected economic lifetime.94 As thephysical impacts of climate change becomemore apparent and market and regulatorypressures to limit emissions intensify, carbonintensive investments will be particularly at risk ofdevaluation. On the other hand, in a scenario withunconstrained carbon emissions, unrelentinginvestment in high carbon assets couldjeopardise entire portfolios vulnerable to theeconomic impacts of climate change. Pensionfunds therefore have a wider interest in avoidingthe physical damage of climate change byreducing the carbon intensity of their portfolios.

This chapter examines the main carbon risksfacing pension funds. These include theimpacts of regulation to curb carbon emissionsand the doubts being cast on the demand andprice assumptions underlying the currentbusiness as usual, high cost capital expenditureprogrammes of most oil majors. We explore therisk implications for equity investments, bonds,and property portfolios. We make a number ofrecommendations to assist pension funds inmitigating these risks in line with their fiduciaryduties, taking account of how the approach ofactive and passive investors might differ.

Equities UK Investors’ Exposure Global equity markets continue to besignificantly exposed to climate risks. Sectoranalysis of the MSCI World Index shows 12% ofglobal market capitalisation attributable to fossilfuels.95 The FTSE 100 reflects a similarproportion, with 17% of market capitalisationattributable to just four oil and gas producers,and 9% to mining companies. The energy (oiland gas), utilities, and materials (mining andchemicals) sectors — comprising only 24companies, were responsible for 87% ofreported emissions in the Index in 2009.96

The FTSE 100 companies made up 81.7% ofvalue of the UK stock market at the end of2010, with pension funds holding UK stocks inthe same proportion – that is, around 81% inFTSE 100 companies, and the rest in smallerstocks.97 Though UK pension funds’ proportionof equity holdings has declined from 68% in2003 to 39% in 2012,98 what remains issignificantly exposed to climate risks due to thecarbon intensity of the FTSE 100 and othermajor indices.

Investors are not only exposed to the risksassociated with current emissions – i.e. thosethat are reported annually on a retrospectivebasis — but also to the risks posed by future, orembedded, emissions. These are locked intocompanies’ business models as a result of thecapital investments they make today. Researchby the 2° Investing Initiative99 found that thecreation of capital stock (equipment, buildings)by FTSE 100 companies is proportionally moreconcentrated in the mining, oil, and gas sectorsthan the capital formation of (1) listed companies

As the physical impacts of climatechange become more apparent and

market and regulatory pressures to limitemissions intensify, carbon intensiveinvestments will be particularly at risk ofdevaluation.

“”

17% of market capitalisation of theFTSE 100 is attributable to just four oil

and gas producers, and 9% to miningcompanies. “

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in general, and (2) national economies. In 2011,almost 70% of the investment in new capitalstock by FTSE 100 companies was made by theoil and gas, and mining sectors.

Fossil Fuels - Unsustainable Capital ExpendituresOil and Gas Current trends in capital expenditure threatenfossil fuel companies’ reliability as high incomeshares. Unprecedented levels of industrycapital expenditure have been accompanied byflat share prices and declining returns on equityeven through a period of sustained US$100/barreloil prices. In this environment, Morgan Stanleyhas argued that reining in capital expenditurewould have a positive effect on European oilmajors’ share prices and allow dividend coverfrom cash flows to increase.100

Yet, in the oil and gas industry a continuedfocus on increasing capital expenditure —which is at an all-time high for listedcompanies101 – seems relentless. In the lastyear alone, the top 200 oil and gas companiesspent $593bn on new exploration horizons andtechniques,102 and an expected $2tn worth of oiland gas projects are planned for 2020.103

Many of the projects currently being fundedwith shareholder capital face high andescalating costs in an environment of uncertaincommodity prices. As the era of ‘easy’ oil andgas reserves has passed, the proportion ofcapital expenditure spent on high cost,unconventional projects such as shale oil andgas, coal bed methane, gas to liquids, Arcticoil, and oil sands is rising.104 The size andcomplexity of capital expenditure projects hasseen global costs of developing oil and gasinfrastructure double in the past decade, andthe number of companies with a capitalexpenditure budget of over $4bn rise from fourin 2001 to over 30 in 2012.105

In allocating shareholder capital to high costlong-term projects, oil majors makeassumptions that future market conditions willbe such as to ensure an adequate return oninvestment: that sustained high prices will justifyproduction costs; that production costs will notincrease; and that current industry demandprojections are accurate. However, analysts andinvestors106 are increasingly querying thoseassumptions, in particular those of continuedstrong demand and sustained high prices for oil.

Demand The assumed inevitability of strong and growingdemand for fossil fuels for several decades isincreasingly being challenged by investmentanalysts. Citi points to the twin trends of gasswitching and increasing energy efficiency inpredicting a “plateau for global oil demand” by2020. HSBC107 likewise predicts that “oildemand could be reduced relatively quickly”owing to fuel efficiency measures. In addition toefficiency, Generation Foundation108 highlightsthe ‘‘greater adoption of renewable energysources” as a corroding factor for fossil fueldemand. It refers to projections that globalrenewable electricity will account for 25% ofgross power generation in 2018, with growthbeing driven by developing nations109.

These more cautious demand projections areindependent of any global deal on climate. Anysuch agreement would increase the risk further.Carbon Tracker’s analysis argues that only 20%of the world’s total fossil fuel reserves can beburnt by 2050 if we are going to limit warming to2°C. Even a more generous carbon budgetallowing for 3°C warming implies that currentfossil fuel reserves cannot all be burnt – thealready planned activities of listed fossil fuelcompanies alone are enough to go over a 50%chance of limiting warming to 3°C. In otherwords, if regulation is introduced to reducecarbon emissions, certain reserves will become‘unburnable’ leading to stranded assets.


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Sustained high oil prices In line with its projections for peak demand by2020, Citi is of the view that by the end of thedecade Brent prices are likely to be within arange of $80-90.110 The absence of sustainedhigh oil prices poses risks to the commercialviability of high cost capital intensive oil projects.

Citi places break-even prices for projects suchas Canadian heavy oil, Russian oil, andAustralian LNG projects near $90 per barrel.Goldman Sachs estimates that international oilmajors need an oil price of $120 per barrel, withthe highest cost producers needing over $130per barrel111. High oil prices can in fact suppressdemand. An analysis by McKinsey quoted inthe Office of Tony Blair report, Technology for aLow Carbon Future, estimates that a sustainedoil price of $120 per barrel would reduce theincremental cost of additional investment indecarbonisation, and, as a result, alternatives tofossil fuels would become more attractive.112

The developing consensus among analystsabout peak demand, even without furtherclimate change regulation, means prudentfiduciary investors should challenge allocationof shareholder capital based on a questionableassumption of strong oil demand.

It is not accurate to claim that all fossil fuelprojects will lack profitability. While in theInternational Energy Agency (IEA)’s 450 Scenariomore than two thirds of current fossil fuels are notcommercialised before 2050, there will still bedemand for fossil fuels going forward: more than50% of oil and gas reserves will still be developedin this scenario, but only 20% of coal reserves.However, gas is the only fossil fuel for which there

will be significant demand growth over this period.Indeed, any scenario would represent some fossilfuel demand to a greater or lesser extent.

In this context, how should investors evaluatewhich fossil fuel companies present the greatestinvestment risk? The relative risk of fossil fuelprojects can be inferred by a project’s positionon the industry cost curve: as long as there isdemand, it will be filled by those who can deliverat least cost for given oil price. In an environmentof falling demand, it will be the highest costproducers that fall away first. Accordingly, toassess the investment risk, “investors couldusefully seek to develop a much clearer sense ofcompanies’ aggregate cost curve position andwhat would happen to their cash flows in theevent of lower oil prices or less gas demand...”113

Recommendation 2.1

Pension funds should request that theirfund managers assess the ‘stranded asset’risk in fossil fuel companies’ projectportfolios. Managers should request thatinvestee companies disclose the cost curveposition of their project portfolio anddisclose their cash flows under differentdemand and price scenarios.

US investors are already actively questioningthe profitability of oil and gas business models.Pressure to focus on profitability from activisthedge fund Elliot Management, which resultedin a year-long proxy battle, has seen integratedenergy company Hess shed numerousinternational assets (including Russian oil) andreturn money to shareholders.116 Similarly,upstream oil company Apache agreed to divest$4bn in assets by the end of 2013 and return$2bn to shareholders.117 This includes the saleof Egyptian assets after shareholders urged thecompany to justify its presence in the politicallyrisky area.118

The absence of sustained high oilprices poses risks to the commercial

viability of high cost capital intensive oilprojects. “

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Yet European oil majors, who are trading belowtheir US counterparts119, seem determined tocontinue with upstream expansion plansdespite the mixed market signals. Since the endof 2011, Europe’s oil majors have increasedtheir 12-month forward capital expenditureexpectations by 20%, while cash flowprojections have remained flat.120 At the sametime, a rising proportion of this capitalexpenditure is being spent on merelymaintaining existing assets.121

This continued growth in upstream spending,particularly on high cost projects, seemsindefensible. Pension funds and their

investment managers should engage withcompanies on misallocation of capital wherecompanies continue to allocate to risky projectsthat find it difficult to recover costs. The recentexamples of shareholder activism in the USsuggest that this strategy can be successful.

Recommendation 2.2

Pension funds should support calls forreduced capital allocation to high cost/lowreturn projects in favour of returning moneyto shareholders or reallocation to less riskyprojects.

CASE STUDY 1: Arctic oil exploration

Confronted by the end of easily accessible oil from conventional sources and thesimultaneous rise of resource sovereignty in the Middle East, Russia and Latin America,International Oil Companies (IOCs) have sought to maintain their profits by pursuing evermore extreme sources of oil in provinces such as the Arctic. The swift reduction in ice coverthat has attended the onset of climate change has now opened up the theoretical possibilityof exploiting newly discovered offshore resources in North America, Russia and Greenland.But any such extraction will be heavily dependent on a variety of market, technical andenvironmental factors. Extremely harsh climatic conditions, long distances and hightechnological demands mean extraction costs are likely to be very high. Bernstein Researchexcludes any Arctic oil and gas production from its supply predictions for the next decade,noting that “development costs will be at the high side of the industry range” and“development times are likely to disappoint”.114

Results of an unpublished US Geological Survey (USGS) of the reserves of the EastGreenland Rift Basin115, show that commercially recoverable hydrocarbon reserves in theArctic are likely to be far less than the purely technical estimates suggest. According to theUSGS, the amount of oil that can actually be extracted at an exploitation cost of $100 perbarrel is only 2.5bn barrels, with a 50% probability against the technical estimate of 7.5bnbarrels. Under these conditions, as Bernstein Research points out, “fiscal takes will be crucialto make any Arctic developments viable” – that is, securing significant tax breaks or subsidieswill be a necessary precondition for any extraction in the Arctic. This highlights the particularvulnerability of Arctic extraction to political risk – commercially viable extraction depends onthe stable support of host governments. Russia, with its unpredictable political, regulatoryand fiscal regime, is particularly challenging in this respect. Royal Dutch Shell is leading themove among IOCs to the North American Arctic with expenditure to date in excess of $6bnand their plans currently stalled. It has yet to disclose its total anticipated capital expenditurein the Chukchi and Beaufort Seas or its assumed break-even price.


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Coal For thermal coal, which is used for energy, thecase against further expansion is arguablystronger. Growth in demand for coal is projectedto fall to 1% between 2013-17, down from 7% in2007-12, driven by environmental regulations,competition from cheaper gas and renewableenergy, and energy efficiency gains which haveled to lower consumption than business as usualprojections.122 In short, the market is oversupplied,with debatable prospects for demand recovering.

This has implications not only for upstream(mining) assets but for all related physicalinfrastructure. Across Europe and America, utilitiesand power stations are shutting down before theend of their expected lifetime. RWE announcedthe closure of 6% of its capacity in the face ofcompetition from renewables – particularly solar –and suppressed power demand due to therecession with consequent low electricity prices.123

E.ON plans to close 11GW of capacity by 2015,and has already closed half that amount.124

In Europe, further plant closures are likely as theLarge Combustion Plants Directive will result inthe closure of the most polluting coal plants onenvironmental grounds by 2015.125

Emissions standards on new and existing coal-fired power stations in the US have alreadyseen a fall in coal shares; while decisions by theWorld Bank, the US Import-Export Banks, andthe European Investment Bank to stop financingnew coal-fired plants (unless in exceptionalcircumstances) will make investments in theseplants less attractive for private investors.126

Some analysts argue that new investments incoal will be justified by continuing demand inChina, and India, and South East Asia.127 Whilethe current affordability of coal is not surprisinglyseeing a resurgence of demand in the region,the longer-term structural drivers of coaldemand look questionable. Specifically, theIEA’s central scenario, on which theseprojections are based, assumes continuingstrong economic growth in China.128 Thisassumption is increasingly being questioned.Not only is China’s growth expected to slow wellbelow current estimates according to someanalysts,129 but the structure of the economy ischanging from a heavy-industry based economyto a consumer based one, which is inherentlyless energy intensive.130 Secondly, even ifdemand projections for China do hold up, thiswill not necessarily underpin global demand.The country’s increasing coal productioncapacity could see it meet its own coal needs by2015,131 and even there, high cost producershave shut down.132 The last and only frontier forsignificant demand is India. Yet, there is stillenough global supply to last 100 years atcurrent consumption rates.133

These debates highlight the inherent uncertaintyof coal as an investment. If projections of lowerdemand, oversupply, and lower price forecastsplay out, earning returns on coal investments willbecome increasingly difficult. Indeed, many of themajor diversified mining companies are alreadydiverting capital away from thermal coal.134

In addition, pension funds should not overlookthe macroeconomic consequences ofcontinued coal use. As discussed in theIntroduction, unmitigated climate change willlead to significant risks to pension funds’ entireportfolios. Combined with the risky outlook for

Pension funds and their investmentmanagers should engage with

companies on misallocation of capitalwhere companies continue to allocate torisky projects that find it difficult torecover costs.

“”

many of the major diversified miningcompanies are already diverting

capital away from thermal coal. “ ”


33

coal-specific investments, these wider risks putinto question whether coal remains a suitableinvestment for long-term, universal owners.

As highlighted by the case studies above,investors can choose to engage with coalcompanies on these issues, or divest.Engagement will likely be the preferredapproach with diversified mining companies, asinvestors may still want exposure to the other

metals and minerals sectors these companiesoperate in. However, there is a strong case fordivestment from pure play coal companies,where there is no hedge against the difficultiesof earning returns in a declining market.

Recommendation 2.3

Pension funds should set a time frame toremove pure play coal assets from theiractively managed portfolios.

CASE STUDY 2: CERES letter to coal companies

Based on the challenges facing coal discussed here, as well as the recognition that failing tosuccessfully decarbonise the energy sector will cause crippling economic and social lossesin the future, Ceres has drafted a letter for engagement with coal companies on theseissues. Through this letter, investors will ask the following of relevant companies:

• To review both its exposure to these risks and its plans for managing them. • To inform this review, to conduct a risk assessment under at least two main scenarios: (1)

a business as usual scenario such as that used in the company’s current reporting and (2)a low carbon scenario consistent with reducing GHG emissions by 80% by 2050 toachieve the 2°C goal.

Ceres further recommends that this assessment evaluate:• Capital expenditure plans for finding and developing new reserves, including

consideration of payback periods and alternative uses of capital• The potential GHG emissions associated with production of all unproduced reserves

categorised by resource type, e.g., metallurgic or coking, thermal or steam, brown, etc• The risks to assets, including both current operations and unproduced reserves, due to

factors such as carbon pricing, pollution and efficiency standards, removal of subsidiesand/or reduced demand

• The risks to assets, particularly coal mining operations, posed by the physical impacts ofclimate change, including extreme weather events, water stress, and rising sea levels

• The impacts of the above-referenced risks associated with climate policies and thephysical impacts of climate change on the Company’s current and projected workforce.

CASE STUDY 3: Storebrand135

The Swedish and Norwegian financial holding company, Storebrand, divested from 13 coaland six oil companies with large exposure to oil sands investments, based on the recognitionthat climate change regulation could render them worthless. The divestment choices weremade on the basis of which companies were likely to be hit by these constraints on carbon.These join the ranks of 177 companies and 32 countries that have been excluded fromStorebrand’s portfolio for not meeting minimum sustainability requirements.


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Other carbon intensive equities It is not only fossil fuel companies that may holdrisks for investors but also other carbonintensive sectors. Trends such as rising energycosts and the decarbonisation of the energysector will affect sectors and companies thatdepend on energy to greater or lesser extents.Investors should therefore be alert to carbonrisks across their whole portfolios.

Mercer and Trucost136 analysed the carbonfootprints of 118 UK-based equity funds, andfound that along with oil and gas companiesand utilities sectors (which together account forhalf of the emissions attributed to the equityfunds), the main contributors to the carbonfootprints came from basic resources (includingmining), construction and materials, and thefood and beverage sectors. The study appliedtwo carbon prices to these funds — £12 and£57 — for each tonne of CO2-equivalentallocated to holdings and found that the costswould equate to 0.7% and 3.2% of combinedrevenues respectively.

In the FTSE 100, efforts to reduce carbonemissions are uneven. According to a 2009study by CDP, the average rate of emissionsreduction in the FTSE 100 was 2.5%, while 2.4%was required to meet the UK’s 2020 target of34-42% reduction from 1990 levels. However,the energy, utilities, and materials sectors —responsible for 87% of reported emissions asnoted above — have a reduction rate of only1.2% annually. If targets are going to be met,these sectors will need to take more aggressivereduction measures.137

As the costs and risks associated with carbonrise, investors exposed to carbon intensivesectors can increase the resilience of theirportfolios by integrating climate factors into theirinvestment activities. There are two ways inwhich this can be done – through engagementand through introducing carbon risk criteria intoinvestment decisions.

Investors should request disclosure fromcompanies on their actions to manage thevarious risks faced by carbon intensiveindustries today: deflated demand and prices,current and future carbon prices, and achanging physical environment. There arealready tools and networks available to guidethis engagement.

Carbon Action138 has identified 17 high emittingindustries, including utilities, materials,industrials, automotive, and energy industries,all of which expose investors to carbon risks.The project asks companies in these industriesto set publicly disclosed year-on-year emissionstargets, and to invest in emissions savingsprojects with positive returns on investment.Feedback from companies shows that investingin carbon reduction activities such as energyefficiency generates positive returns – deliveringa return on investment of 33% in 2012.139

Investors can sign up to Carbon Action toencourage companies to take these steps, andto gain access to the project’s individualcompany analysis. Requests for action frominvestors - representing $10tn in assets in thecase of Carbon Action - can signal a powerfulmessage to companies regarding shareholderconcerns about carbon performance (see casestudy 4 opposite).

investing in carbon reductionactivities such as energy efficiency

generates positive returns – delivering areturn on investment of 33% in 2012. “

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Recommendation 2.4

Pension funds should engage, or ask theirfund managers to engage, with carbonintensive holdings on their emissionreduction plans. This can be done byjoining CDP’s Carbon Action and bysupporting the ‘Aiming for A’ initiative.

As well as reducing risk at individual investeecompanies, such engagement will provideinvestors with information to feed intocomparative carbon risk analysis and stockselection decisions.

The Mercer/Trucost research cited above141

showed that under different carbon pricescenarios, the performance of funds is highlyinfluenced by the choice of sectors andindividual stocks. For example, Mercer hasshown that if 118 analysed portfolios were notinvested in just three highly intensivecompanies, their combined carbon footprintwould fall by 8%. These are the utilities

companies E.ON, RWE and International Power.Along with American Electric Power and BP,these are the highest contributors to thefootprints of the funds in the study. Applyingcarbon prices of £12 and £57 to these highemitters would see carbon costs of £8.6bn and£40.9bn respectively.

In general, the portfolios analysed showedsignificant variation in exposure to carboncosts, due to both sector allocation and stockselection decisions. For example, topperforming funds generally did not have highexposure to carbon intensive sectors such asutilities or food and beverages; or had pickedrelatively less carbon intensive stocks within asector, such as a renewable power generatorover a coal-fired power generator. Therecommendation above will help arm investorswith the information they need to make thesechoices effectively by a) providing them withemissions data and b) shedding light onprogress and plans for emissions reduction.

CASE STUDY 4: Aiming for A140

A coalition of mutual funds, faith investors, and pension funds is generating pressure andsupport for the UK’s top ten extractive and utilities companies (listed below). Coordinated byCCLA, Aiming for A asks the companies to aim for continuous inclusion in CDP’s ClimatePerformance Leadership Index (CPLI) by achieving and retaining an ‘A’ performance band.

The aim is to signal to companies that are part of long-term investors’ portfolios that there isa demand for balancing short-term performance with long-term concerns.

2012 Performance Band CompanyA Anglo American (up from C in 2011)B BG Group (down from A)

BHP Billiton (no change)Centrica (down from A-)National Grid (up from D)Royal Dutch Shell (down from A-)SSE (no change)

C BP (down from B)Rio Tinto (down from B)GlencoreXstrata (no change)


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While active investors can choose which stocksto invest in, passive investors may want toconsider using a benchmark index that takesthis information into account in its design.Carbon tilted indices aim to reduce exposure tothe risks of high carbon sectors while trackingthe performance of underlying mainstreamindices (see case study 5 below). It should bebriefly noted that these approaches are differentto actively investing in the opportunitiesassociated with the transition to a low carboneconomy, which are discussed in Chapter 3.

Recommendation 2.5

For active equity mandates, pension fundsshould request the use of information aboutcompany emissions intensity and reductionplans in stock selection decisions. For passiveequity mandates, pension funds shouldconsider tracking carbon tilted indices.

Bonds The integration of ESG considerations into fixedincome investments is still at a relatively earlystage compared to equities, yet the risks in thisasset class could have a significant effect onthe stability of the global financial system. In2012, global outstanding debt on the bondmarkets reached $100tn; substantially morethan the combined GDP of world economies at$72tn and the global equity markets at $53bn.143

At the same time, pension funds havehistorically relied upon bonds as low riskinvestments, and their exposure to this assetclass has been growing. In the UK, theproportion of pension funds portfolios in bondshas grown from 31% in 2003 to 42% in 2012.144

It is therefore important to question whethercurrent investment practices adequately shedlight on the range of relevant risks to bothsovereign and corporate creditworthiness,including environmental risks. The Euro crisishas reminded investors that sovereign bondsare not risk free.

Sovereign Bonds The Principles for Responsible Investment (PRI)has a working group of investors who focus onunderstanding the potential for ESG factors toinfluence (sovereign) credit risk.

CASE STUDY 5: FTSE CDP CarbonStrategy Index Series142

The FTSE CDP Carbon Strategy Index Seriesaims to support investors in incorporatingclimate change risks into their investmentstrategy. It features future risks, trends, andcosts to assess the exposure of individualcompanies to higher future costs associatedwith greenhouse gas emissions. The indicesare carbon risk tilted versions of FTSE’sestablished benchmark indices, where theconstituent companies remain the same buttheir weightings are varied on the basis ofexposure to carbon risk relative to sectorpeers. The overall weights of each sector arethe same as for their benchmark indices, butsome companies in each sector are over-weighted, while others are under-weighted.From 2010 the performance of the FTSECDP Carbon Strategy All Share has perfectlytracked the FTSE All Share (that is, deliveredidentical returns).

while environmental issues are nowbeing shown to have important

economic impacts, they are not beingpicked up in traditional risk analysis“

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The materiality of environmental factorsThe PRI’s Sovereign Fixed Income WorkingGroup145 examined how the use of ESGfactors could enhance the robustness oftraditional risk analysis based on financialand economic data and political risk. Theframework argues that environmentalfactors such as climate change, wateravailability and pollution, natural disasters,and energy resources and management,directly impact more traditional economicindicators such as economic growthprospects or fiscal performance. These, inturn, influence credit ratings, bond yields,and bond prices. Yet empirically, whileenvironmental issues are now being shownto have important economic impacts, theyare not being picked up in traditional riskanalysis.146 On the other hand, strongcorrelations have been proven betweensocial and governance factors andsovereign bond performance.147

The issue here is not that environmentalrisks are immaterial to bond performance.Rather, as the PRI notes, it suggests thatthese risks are material but that traditionalrisk analysis is failing to pick up on them.148

To date no correlation has been found betweencountries’ sovereign bond performance andtheir environmental performance or exposure toenvironmental risk. In light of that, only a smallminority of bond analysts and managerscurrently integrate environmental risk into theirratings. According to Mercer, investmentmanagers in general are either not payingenough attention to ESG issues or struggling toincorporate them into their investmentstrategies.149 It has also been acknowledged byinvestors with a commitment to ESG integrationthat the big ratings agencies have donerelatively little so far to integrate ESG riskanalysis into bond ratings.150

This may change. Water scarcity, the loss ofbiodiversity and climate change all pose risks toeconomic growth which ultimately may impactcountries’ credit risk in the medium and longerterm. With countries in different regions andwith different geographies facing exposure tothe physical impacts of climate change, assetowners should seek to understand whether andhow their bond managers analyse and evaluatethese risks, particularly for longer durationbonds. Some pension funds are already makingthese demands of their managers.151

Corporate Bonds Generation Foundation152 warns credit investorsto “remember that until rating agencies updatetheir metrics to incorporate embedded carbonrisk, they should not have inflated confidence ina company’s credit rating.” In collaboration withCarbon Tracker, Standard & Poor looked at theimplications of carbon constraints for thecreditworthiness of the oil and gas sector andfound that smaller companies could see adeterioration in their credit risk profile from2014; larger companies could face negativeoutlooks or downgrades by 2016-2017; andcompanies with high development costs(including unconventional assets) or that areundiversified could face pressure in the nextyear or two. 153 Unfortunately, studies such asthe one by Standard & Poor have not beenaccompanied by the integration of carbon riskinto individual companies’ credit ratings.

The potential exposure of a corporate issuer tothe physical and economic impacts ofunchecked climate change and the ability of anissuer to prosper in a low carbon economyshould be integrated into credit ratings.154

Asset owners investing in corporate bondsshould request that their managers integrateESG risk in general and climate risks in particular,into analysis and investment decisions. Byapplying an ESG screen, investors can assess


38

the influence of future climate scenarios on theability of a company to meet its bond liabilities. Ina time of uncertainty, this will serve as anadditional risk mitigation tool alongside use ofmore traditional, short-term financial indicators.Leading responsible investors such as The RoyalLondon Asset Management (formerly The Co-operative Asset Management)155 argue that thepractice of investor engagement on ESG issuesis viable with bond issuers, and state that theyundertake regular checks on corporate issuers’ESG performance.

Recommendation 2.6

Pension funds should require fixed incomemanagers and credit rating agencies todemonstrate how they integrate carbon andclimate risks into credit analysis.

Property Property capital values and income yields are atrisk and already changing as a result of tighterregulation of energy use, changes in demandfor sustainable buildings, and the insurancecosts associated with flood risk and otherclimate-sensitive changes to the physicalenvironment.156 As these factors intensify,investors in property increasingly recognise thatsustainable, resource efficient buildings willenjoy lower operating costs, lower rates ofdepreciation, and smaller chances of losingvalue or competitiveness.157 A 2008 study ofover 4000 buildings in the US found thatbuildings with strong green standards enjoyed7.5% higher occupancy, 6-9% higher rents, and16-17% higher selling prices.158 According to theUK’s Carbon Trust, efficiency measures canreduce energy bills by 5-25% with a paybackperiod of less than two years.159

In the UK, demand for property meeting highenvironmental standards is already on the rise,with tenants increasingly bound by corporatepolicies that require stretching standards.160

Properties which do not meet these standardsmay incur the cost of retrospectiveenvironmental improvements,161 or becomeobsolete. Already, poor energy efficiency ratingshave been a contributing factor to the strategicearly sale of industrial buildings in the UK.162

By actively managing the environmental issuesexpected to affect property performance suchas climate impacts, resource scarcity, tenantpreferences and regulation, pension funds willbe able to create more resilient portfolios.Sustainable property investment will becomeeasier over time as performance benchmarksand certification standards are furtherdeveloped and adopted (see Appendix 2).

As a starting point, pension funds with propertyholdings should ask their property managers howfinancially relevant environmental factors, such asthose cited above, are being taken into account intheir property portfolio.163 Possible actions includeembedding environmental considerations intostandard property investment appraisals and inthe development and refurbishment of properties,and action to reduce the environmental footprintof existing property portfolios.

Buildings account for 40% of global energy use,25% of water use and are responsible for a thirdof global emissions164. As such, they providethe greatest potential for transforming theresource and carbon intensity of the economy.This asset class is therefore likely to faceincreasing regulatory pressure to reduce itsenvironmental footprint. Pension funds can playan important role in smoothing the pathway to amore climate-resilient built environment by

A 2008 study of over 4000 buildings inthe US found that buildings with

strong green standards enjoyed 7.5%higher occupancy, 6-9% higher rents, and16-17% higher selling prices.

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requesting that property fund managers adopta strategy for reducing emissions andintegrating water and waste issues into theirinvestment decisions.

Recommendation 2.7

Pension funds should require propertymanagers to integrate environmentalconsiderations into standard propertyinvestment appraisals, and into thedevelopment and refurbishment ofproperties. Pension funds should requestthat property managers outline what targetshave been set for improving energy, wasteand water efficiency.

CASE STUDY 6: UniversitiesSuperannuation Scheme (USS)165

In 2010, USS appointed a SustainabilityManager to the Property Team to specificallyfocus on ensuring that the fund addressesenvironmental and social issues associatedwith the fund’s property portfolio. The movewas driven by a belief that a sustainableapproach to property will increase the valueof its investments and lead to higher returns.

One of the first actions by the fund wasensuring compliance with the CarbonReduction Commitment (a mandatoryenergy efficiency and carbon reductionscheme). USS is collecting the energyconsumption data associated with all of itsproperties, and also establishing processesand systems for reducing energy use andtherefore emissions. The fund has alsoundertaken flood risk assessments for keyinfrastructure, such as power substations.

USS was also instrumental in establishingthe Global Real Estate SustainabilityBenchmark in 2009.

ConclusionIn this chapter we have seen that the financialperformance of carbon intensive investmentsacross a range of asset classes is threatenedby changing market conditions and regulatorymeasures (including energy efficiencymeasures), to curb carbon emissions.

The continuing strong income profile of fossilfuel companies is under threat from anunrelenting industry commitment to high cost,high risk marginal oil projects such as Arcticexploration, without sufficient disclosure ofanticipated and break-even costs amidst analystpredictions of shifting market conditions.Beyond fossil fuel holdings, carbon intensivesectors such as utilities, construction, and foodand beverages present risks for many pensionfund portfolios. Trends such as rising insurancecosts associated with flood risk and otherchanges to the physical environment mean thatsustainable, resource efficient buildings willenjoy lower operating costs, lower rates ofdepreciation, and less chance of losing value.

We have recommended that pension fundsensure that their active investment managersundertake an assessment of the vulnerability oftheir investments to carbon and climate risks,and integrate such risks into both securitiesselection and on-going engagement withinvestee company strategy. In selecting passivemanagers, we recommend that pension fundsconsider tracking low carbon tilted indices. Webelieve that pension funds will benefit from takingsteps to create more resilient, efficient portfoliosin the face of changing market conditions.


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CHAPTER SUMMARY

In this chapter we discussed the risks inherent in carbon intensive portfolios, for both fossilfuel and other high carbon assets. We suggested that by integrating these risks into eitherfocussed engagement efforts or stock selection decisions, pension funds will be better able toprotect their returns across all asset classes. We recommended the following steps:

• Pension funds should request that their fund managers assess the ‘stranded asset’ risk infossil fuel companies’ project portfolios. Managers should request that investee companiesdisclose the cost curve position of their project portfolio and their cash flows under differentdemand and price scenarios.

• Pension funds should support calls for reduced capital allocation to high cost/low returnprojects in favour of returning money to shareholders or reallocation to less risky projects.

• Pension funds should set a time frame to remove pure play coal assets from their activelymanaged portfolios.

• Pension funds should engage, or ask their fund managers to engage, with carbon intensiveholdings on their emission reduction plans. This can be done by joining CDP’s CarbonAction and by supporting the ‘Aiming for A’ initiative.

• For active equity mandates, pension funds should request the use of information aboutcompany emissions intensity and reduction plans in stock selection decisions. For passiveequity mandates, pension funds should consider tracking carbon tilted indices.

• Pension funds should require their fixed income managers to demonstrate how theyintegrate carbon and climate risks into credit analysis.

• Pension funds should require property managers to integrate environmental considerationsinto standard property investment appraisals, and into the development and refurbishmentof properties.

• Pension funds should request that property managers outline what targets have been set forimproving energy, waste and water efficiency.

Chapter 3

Investing in a low carbon future

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IntroductionIntegrating climate change into investmentstrategies is not just about reducing exposureto carbon-related risks (as discussed in Chapter2), but also about gaining exposure to the lowcarbon investment opportunities of the future.Such investments have the potential to offerpension funds attractive returns whilst providinga valuable hedge against climate-related risks.They also serve pension savers’ broaderfinancial interest in a successful transition to alow carbon economy capable of providingstable and sustainable returns. Yet pensionfunds’ allocation to green investments remainsrelatively low.166

In this chapter we set out the business case forinvestment in low carbon solutions, beforeexploring the current investment landscape, thebarriers to further growth of the greeninvestment market, and the steps pensionfunds can take to begin taking advantage ofgreen investment opportunities.

What is the ‘green economy’?As the UK government’s 2011 strategy documentargues, “a green economy is not a sub-set of theeconomy at large – our whole economy needs tobe green. A green economy will maximise valueand growth across the whole economy, whilemanaging natural assets sustainably.”167 Theinvestment opportunities associated with thegreen economy– collectively referred to here asclimate-related assets — are correspondinglydiverse. They include all low carbon goods andservices, as well as processes and technologiesthat allow energy and resources to be used moreefficiently.168 These opportunities cut across allsectors, spanning energy generation, transport,energy efficiency (in buildings, power grids, andindustry), agriculture, forestry, water, wastemanagement, and recycling.169 They also cutacross all asset classes – not only the betterknown listed equity and property opportunities,but also a growing climate-related private equity

and infrastructure space, aswell as a small but growingclimate-related bondsuniverse.170

At its broadest level, thegreen economy ischaracterised by what theInternational Energy Agency(IEA) calls a technologicaltransformation of the globalenergy system.171 The energysupply will consist of abalanced, geographicallydiverse suite of energytechnologies, while smart grids and demandresponse technologies allow energy to be usedmore efficiently, reducing the need for surplusgeneration capacity.172

Greater efficiency is the defining feature of thisgreen economy. Technological advances thatallow our wired and wireless devices and systemsto communicate with each other, have the potentialto increase the resource-, energy-, and time-efficiency of economic activity — not only in theenergy sector, but across all sectors with a highenvironmental footprint.173 In the built environment,ventilation, heating, and cooling systems, as wellas the use of appliances are optimised; and inagriculture, technological advances allow fertiliser,water use and harvesting practices to grow morefood with fewer resources.174 Increasing fueleconomy in the transport sector is eventuallyfollowed by a replacement of oil by electricity,biofuels, and hydrogen.175

This efficiency characterises new systems ofproduction and consumption. As populations andeconomies grow and the pressure on resourcesmounts, economies adopt new systems ofrecycling, reusing, and remanufacturing goodsand materials as part of standard businessprocesses.176 Countries are significantly lessreliant on imports to fuel their economies.

A green economy is not asub-set of the economy atlarge – our wholeeconomy needs to begreen. A green economywill maximise value andgrowth across the wholeeconomy, while managingnatural assets sustainably.

HM Government 2011

“

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The case for investing in low carbon solutionsAchieving the transition to a low carbon economywill require a significant mobilisation of privatecapital. The OECD177 calculates that thecumulative investment in green infrastructurerequired for decarbonising the global economy is$36-42tn until 2030, or $2tn a year (2% of globalGDP annually). According to this analysis thecurrent level of investment stands at $1tn, whichimplies the need for additional annual investmentof $1tn. Investments in the clean energy sectoralone need to reach $500bn a year in the IEA’s2°C scenario,178 and while they have grown from$50bn a year to over $250bn a year in the pastdecade, there is still a long way to go.

Financing the transition: the case foruniversal ownersPension funds, with their inherently long timehorizons, are well placed to step into this ‘greeninvestment gap’. As ‘universal owners’ withholdings across the economy, they have asignificant interest in the long-term performanceof the economy itself. Research suggests that thetransition to a green economy is vital to this long-term economic performance and therefore to themaintenance of long-term investment returns.

For example, the United Nations EnvironmentProgramme (UNEP) modelled the economy-wide effects of investing 2% of global GDP intocollectively transforming the energy,manufacturing, transport, buildings, waste,agriculture, fishing, forestry and water sectors(including in research and development in thesesectors). The study showed that in this greenscenario, the use of fossil fuels would be cut by40% and the demand for water by 20%,compared to a business as usual scenario inwhich no significant changes to the globaleconomy’s fossil fuel and energy dependenceare made.179 Global energy intensity wouldreduce by 36% by 2030. By doing this, thegreen scenario achieves growth whilepreserving natural capital. Conversely, in a

business as usual scenario, short-termeconomic growth comes at the expense ofdepleting the natural capital on which long-termgrowth depends. Economic growth in the greenscenario therefore proceeds faster over timeand outstrips business as usual by 2020.

Taken together, the elements of a climate-resilient economy significantly reduce the rawmaterial price volatility and insecure supplyexperienced today.180 An economy based onclean energy, as well as resource and energyefficiency, is also a more stable, resilient, andautonomous economy. It has a higher potentialto create more inclusive wealth and sustain it,and significantly reduces the risks associatedwith an economy based on finite resources withvolatile prices.181 In short, it is an economybetter capable of serving the interests ofpension savers – both their financial interest instable long-term returns, and their wider interestin a secure and prosperous retirement.

Positioning portfolios: opportunities in greeninvestmentInvesting in the green economy to achieve thesewider macroeconomic goals does not requiresacrificing fund performance. The appeal ofgreen investments lies not just in theircontribution to building the economy oftomorrow; they are also driving growth today. Asthe Confederation of British Industry (CBI) hasnoted, the green economy accounted for a thirdof the UK’s growth in 2011-12, and could boostthe UK economy by almost £20bn by 2014-15 ifinvestors, business, and government work tosmooth out its path.182 Moreover, improvingresource and energy efficiency brings obvious

the green economy accounted for athird of the UK’s growth in 2011-12,

and could boost the UK economy byalmost £20bn by 2014-15“

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benefits to companies and investors. A newreport by WWF and CDP183 shows that improvedenergy efficiency and deployment of low carbontechnologies could result in net savings for theUS corporate sector (excluding utilities) of up to$190bn by 2020 alone. The IEA184 suggests thatthe $36tn spent on greening the power,buildings, transport and industrial sectors fromnow to 2050 would be matched by fuel savingsby 2025 and result in a potential $100tn in fueland energy savings by 2050.

Experts such as Mercer also argue that greeninvestments make sense at the level of portfolioanalysis, as they provide a vital hedge againstclimate risks.185 As mentioned in Chapter 1,Mercer’s TIP framework looked at differentscenarios that estimate the rate of investment innew technologies (T), physical climate impacts(I), and carbon prices from policy developments(P) to 2030, and asked what implications thesescenarios would have for strategic assetallocation. Under some scenarios, managingclimate risks would require increasing allocationto assets which are sensitive to these ‘TIP’ riskfactors. Such assets include real estate,infrastructure, private equity, sustainable equities(listed and unlisted), renewable energy andcommodities (including agricultural land andtimberland). Of these ‘climate sensitive’ assets,sustainable assets such as sustainable-themedequities, renewable energy, timberland andagricultural land perform comparatively wellcompared to non-sustainability-related climatesensitive assets in all scenarios, except where nofurther action is taken to address climate change(the least likely scenario). As such, Mercer hassuggested that under some scenarios, whichinclude even modest mitigation efforts, up to 40%of a portfolio be allocated to these sustainableassets as a ‘hedge’ against climate risk factors.

Taken together, there is a compelling case – atthe company level, the portfolio level and the

macroeconomic level – for pension funds toseek out investment opportunities in the greeneconomy. In the remainder of this chapter weexplore some of these opportunities, examinethe barriers to pension funds taking advantageof them, and make recommendations for action.

Asset classes – realising the opportunitiesIn this section we examine the opportunities togain exposure to the green economy throughvarious asset classes — equities, fixed income,infrastructure, and private equity — examining theparticular advantages and challenges of each.186

EquitiesIn public equity markets tools for low carbonthematic investment, such as sustainability-themed indices, are starting to emerge. However,they are still relatively uncommon compared tothe integration of ESG considerations intomainstream portfolios.187 This can likely beattributed to doubts about financial performance.While the financial case for ESG integration hasalmost unquestionably been made‡,188 investorswill be quick to point out that investments inclean energy in particular have not performedwell in recent years (although, as we will see, thisis not true of all climate-related assets).

The past five years have seen an almostcontinuous fall in renewable energy shareprices in the face of difficult market and policycircumstances. Solar and wind manufacturershave been under pressure from anoversupplied market, falling prices, competitionfrom Asia,189 and, in the US, low gas prices.190

Many of them have gone bankrupt.191 Investorconfidence in these markets has furtherdeteriorated with decreased policy support andbank finance in Europe.192

The WilderHill New Energy Global InnovationIndex (NEX), which tracks the performance of97 global clean energy shares, fell 40% in

‡ According to a 2012 meta-study by Deutsche Bank 100% of studies looking at the link between ESG and company performance agree thatcompanies with high ESG scores have lower costs of debt and equity, and 89% of studies agree that these companies outperform in the markets.


45

2011.193 It fell a further 6% in 2012, and in Julythat year was 78% below its record in 2007.194

However, while this admittedly dismalperformance of renewable energy stocks isoften cited as a deterrent to green investing,there are two important reasons to consider theinvestment opportunities in sustainable equities.

The first reason is that the recent performanceof clean energy stocks is not necessarily a sign ofthings to come. In the 12 months following its July2012 low, the NEX saw a steep recovery, rising57% over the period.195 While this is still far off itspeak, some of the individual stocks in the Indexhave achieved what Bloomberg New EnergyFinance (BNEF) called “truly eye-watering returns”in the past year, even despite the trying marketcircumstances*.196 Furthermore, there arereasons to believe this has the potential to be thestart of a more sustained recovery.197

In March 2013, BNEF predicted a recovery inclean energy markets given a rebalancing ofsupply and demand in the solar industry, thebottoming out of gas prices, growing demandfor projects in Africa and South America, and apolicy environment which is slowly proving to bemore supportive (see Chapter 4).198 In thelonger term, according to BNEF Chief ExecutiveMichael Liebreich, “the drivers propelling theworld to a cleaner energy system are…almostlimitless. Coal and oil producers may havecaptured for the moment the economic highground – profitability supported by the ability toexternalise their costs and cement their positionthrough political action… [but] the fragility of thefossil fuel system is likely to become more, notless, evident”.199 In this sense, while the growthpains associated with new markets have takentheir toll, clean energy has the ability to deliver,and in some cases is already delivering, robustfinancial returns.

The second reason is that there is a differencebetween renewable energy stocks and greenstocks in general, which are, for better or worse,generally conflated. While it is true that broadgreen indices, such as the UK FTSE’sEnvironmental Technologies 50 (ET50), havebeen underpeforming their benchmarks, this hasonly been a result of poor performance of therenewable and alternative energy subsector.200

Companies in the FTSE’s ET series are drawnfrom a range of sectors including energyefficiency, water and waste management,pollution control and environmental supportservices.201 In many of these sectors, the storyhas been vastly different to that of clean energy.

Water has performed particularly well. In the threeyears to December 2012, water indices such asthe FTSE’s Environmental Opportunities WaterTechnology Index have continually outperformedthe MSCI World Index.202 Impax AssetManagement,203 an investment expert in resourceefficiency and environmental markets, predictsthat the concurrent trends of population growth,ageing infrastructure, water regulation, andchanging physical water patterns will seesignificant investment needs in all water-relatedsectors, including water infrastructure,treatment technologies, and utilities.

the concurrent trends of populationgrowth, ageing infrastructure, water

regulation, and changing physical waterpatterns will see significant investmentneeds in all water-related sectors

“”

* Between 25 July 2012 and 11 July 2013, US Solar manufacturers SunPower and SunEdison rose 540% and 389% respectively; SpanishWind Turbine maker Gamsea rose 341%, and US electric car manufacturers Telsa rose 312%. Numerous other clean energy companiesshowed gains between 150-300%.


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Energy efficiency-related stocks have alsoperformed well, and continue to have strongoutlooks as the drive for industrial energyefficiency grows.204 In the 12 months to October2013, the NYSE Bloomberg Global EnergySmart Technologies Index gained 53%,outperforming the 13.2% gain of the FTSE AllShare Index, according to Bloomberg equityindices data..205 The Smart Technologies Indexincludes advanced transportation, digital energy,energy efficiency and energy storage sectors.

Thus, thematic green equities not only have thepotential for shorter term recovery, butpredicted strong longer term performance onthe basis of more structural drivers. Some investors are already choosing to allocate aportion of their portfolio to thematic green equities.The Environmental Agency Pension Fund hasbeen a leader in green investing, with an alreadyimpressive 12-13% of its portfolio invested in thegreen economy, and a focus on sustainability-themed equities.206 Since 2009, the New YorkState Common Retirement Fund hasbenchmarked $100m to the ET50 as part of itsallocation to clean technology.207 In April 2013,FTSE launched its ET100 EnvironmentalTechnologies Index, which Jupiter AssetManagement is adopting as the benchmark forone of its funds.208 We believe it would be relativelyeasy for most pension funds to allocate a portionof their equity exposure to green indices or funds.

Fixed IncomeWhile integration of climate risks in fixed incomeinvestments is still far behind that of equities,green bonds are potentially attractive topension funds because of their low risk, steadyincome streams (see box, page 47). TheClimate Bonds Initiative – an investor andclimate focused not-for-profit – argues definedbenefit (DB) pension funds’ need to matchlong-term liabilities is well met by the structureof long-term environmental infrastructure, whichoften has high upfront costs, but loweroperating costs, particularly in the building,energy, industrial and transport sectors.209

Furthermore, bonds already account for 50% ofassets under management for most OECDpension funds210, so they match current assetallocation appetites.

What the market is lacking, however, is suitablevehicles for institutional investors who need tosee issuances of sufficient size. One of the mainareas of concern highlighted by the IIGCC is thatpension funds have a perceived fiduciary duty toinvest in the most commercially competitivebonds, but have so far struggled to sourcegreen bonds with the required return andliquidity requirements..211 Their position is thatgreen bonds would have to compete withconventional types of bonds on the basis of risk,return, and liquidity characteristics, because it isunlikely that a premium will be placed on a bondbeing ‘green’. Pension funds are thereforestruggling to place green bonds within existingasset allocation strategies.212 The OECD213 hasechoed these concerns, mentioning a lack ofliquidity and common ratings standards —including certainty that funds are used for greenpurposes – as significant barriers.

the climate bond market almostdoubled in 2012 from

$174bn to $346bn“ ”


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GREEN BONDSBorrowing a typology from the OECD214,green bonds can be broadly classified asfollows: • Bonds issued by development, financial

or other institutions to raise capital forgreen projects. Examples include thoseissued by the World Bank andInternational Finance Corporation.

• Asset-backed bonds which are tied tospecific projects such as infrastructure.

• Corporate bonds issued by a companywith 100% green assets, or where acompany earmarks the proceeds togreen projects or assets.

• Sovereign or municipal bonds where thefunds are earmarked for green projectsor assets.

Since 2008, the World Bank has issuedaround $3.5bn in AAA rated green bonds.215

More recently, in September 2013, theEuropean Bank for Reconstruction andDevelopment (EBRD) issued a $250m‘environmental sustainability’ bond to growthe bank’s environmental investmentportfolio.216 This already includes renewableenergy, fuel efficient public transport, thegreening of buildings, and sustainable forestmanagement. To date, these and similarbonds from other development banks havebeen the main source of issuances.

The market is still new, however, and itsdevelopments and opportunities are promising.If barriers can be overcome, pension funds willhave access to a broad range of fixed incomeinstruments linked to all growth areas of a lowcarbon economy.

Recent research from the Climate BondsInitiative and HSBC217 estimates that the climatebond market almost doubled in 2012 (from$174bn to $346bn). This universe is broader thaninvestors may typically associate with a climatebond: many of them are not specifically labelled

‘green’,218 but nonetheless contribute to a lowcarbon world (such as rail transport in China).The research screened bonds in the transport,energy, climate finance, buildings and industry,agriculture and forestry, waste, and watersectors. Of this $346bn, $163bn (or 47%) offeredinvestment grade ratings, were in currencieseligible on benchmark indices, and had issuancesizes of over $100m. The majority of these ratedproducts have been issued by corporates (83%)and financial institutions (13%), and are focusedon transport, climate finance, and energythemes. These are generally low risk, low yieldassets, and as such are relatively easy to replacewithin pension funds existing asset allocations.

Further developing an investment grade bonduniverse, with opportunities across all bondtypes will require both demand and supply sidesolutions. As think tank Climate Change Capitalhas noted, the current small size of the marketcreates something of a vicious circle: “withoutliquidity few investors will want to buy greeninfrastructure bonds and without buyers, few willwant to issue them, which will in turn result inlittle liquidity.”219

On the supply side, the Climate Bonds Initiativeis working on tools to increase the efficiency ofthe market. To be attractive to investors it shouldrun like any commodities market, i.e. havecertified standards and be liquid. The ClimateBond Standard and Certification Scheme — ascreening tool for certifying climate bonds forinvestors and governments – is one tool whichwill help to support the market as it matures, andencourage the scaling of issuances.220

On the demand side, pension funds shouldclearly state that they desire suitable fixedincome products to gain exposure to the greeneconomy.221 This could easily be done bycollaborating with the IIGCC, for example, whohave already presented a position paper ongreen bonds.


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InfrastructureWhile green infrastructure bonds are a subset ofclimate bonds, green infrastructure itself is animportant asset class. It will play a critical role inthe transition to a low carbon economy, asinfrastructure investment decisions we maketoday will determine the nature of our economyfor decades to come. Without a step change inthe carbon intensity of the world’s energyinfrastructure, the IEA has warned that the worldwould be ‘locked in’ to a high carbon growthpath.222

At the same time, there is an important potentialsynergy between massive infrastructural deficitson the one hand, and the need for pension fundsto invest to better align long-term assets andliabilities while diversifying their portfolios.223 224

Given the appropriate policies, the structure ofgreen investments could deliver low risk, steadyincome streams over long time horizons.225

While only the largest UK pension funds mayhave the skills and capacity to directly invest ininfrastructure projects, smaller and mediumsized pension funds could find opportunities inpooled funds. Pooling resources is likely toallow pension funds to gain expertise, lowerfees, and scale up investments.226 Creating newmodels for the pooling of assets shouldtherefore be seen as a priority.

UK pension funds are already taking the lead inthis regard. The recent creation of the PensionsInfrastructure Platform (PIP), led by the NationalAssociation of Pension Funds (NAPF), mayserve as one possible model for the pooling ofassets.227 The platform aims to raise £2bn worth

of pension assets. It has already catalysed£1bn worth of pledges from its ten foundinginvestors.**228 One of these founders, thePension Protection Fund, sees infrastructure as“a less risky investment than governmentbonds”, that offers a natural supply of assetsand provides the opportunity to own wholeprojects with income linked to inflation.229

The PIP will see UK pension funds makingfinancially sound investments that will at thesame time help to regenerate the UK economy.This will clearly benefit pension savers.However, in our view, a critical third criterion isthat these investments are consistent with a lowcarbon growth pathway. Not only is the creationof a low carbon economy critical to pensionsavers’ long-term interests; ‘climate-proofing’infrastructure investments now will also protectpension funds from climate policy risks in thefuture, including the risk that high carboninfrastructure being built now will be replacedbefore the end of its expected economiclifetime. The addition of this criterion should notbe too cumbersome, as 71% of the UK’sinfrastructure pipeline can already be classifiedas low carbon (including public transport).230

Recommendation 3.1

Pension funds should pool funds to createthe required scale for low carboninfrastructure investments, as well as buildclimate security considerations into theassessments they make of potentialinfrastructure investments. If the PensionsInfrastructure Platform is to be used as apooling vehicle, pension funds shouldexplicitly ask that these infrastructureinvestments be in line with the needs of alow carbon economy.

Pooling resources is likely to allowpension funds to gain expertise, lower

fees, and scale up investments“ ”

** These are: British Airways Pension pension schemes, BAE Systems Pension Funds, BT Pension Scheme, Lloyds TSB pension schemes,London Pension Fund Authority, the Pension Protection Fund, the Railways Pension Scheme, Strathclyde Pension Fund, and the WestMidlands Pension Fund.


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Private Equity/Venture CapitalMuch like infrastructure, private equity andventure capital form a small part of pensionfunds’ asset allocation, yet are important toolsfor thematic climate investments. Early stageinvestments are well suited to the newtechnologies required in a green economy.Energy storage systems and smart grids areparticularly important emerging markets and areripe for early stage capital.234 However, thereturns for green funds have shown a widerange of performance.235 Where pension fundsalready have an appetite for this asset class,green options that provide the same risk/returncharacteristics should be considered ifavailable.

Overcoming barriersUnderpinning the asset specific barriersdiscussed above are three broad issues whichpension funds can help to overcome. First, thecurrent policy environment is not providingadequate long-term signals to underpin greeninvestment – a topic which will be dealt with indepth in Chapter 4. In view of the financialinterest pension funds have in being able to

invest in sustainable, long-term assets, webelieve that it would be helpful for pensionfunds to signal their demand for these assets,along with their concerns about the policies thatundermine them.

The second issue lies in the hurdles associatedwith new and unfamiliar markets. Unfamiliartechnologies are often more risky as they haveyet to prove themselves and cement a market.There is uncertainty about construction,operation, and maintenance performance, aswell as associated costs.236 These relatively newmarkets also require the adoption of commonstandards, definitions (of green), and certifiedproducts, all of which have been slow todevelop.237

Lastly, even for those investors who wouldotherwise look to invest in climate-relatedassets, in practice there is too little financialanalysis specifically looking at theseopportunities.238 Relatively few mainstreaminvestment managers or consultants bringinvestment opportunities in the climate solutionsspace to their pension funds clients. There is

CASE STUDY 1: PensionDanmark231

PensionDanmark – Denmark’s seventh largest pension fund – plans to allocate 10% of its$25bn in assets under management to direct investments in renewable energy. The fund hasalready committed $1.5bn to solar and offshore wind projects.232 In May 2013, it concluded adeal which provided half of the debt financing of the largest offshore wind farm in the Nordicregion – the €336m Jadraas wind farm. The other half of the €210m debt came from theNorwegian and Swedish banks DNB and SEB.

PensionDanmark is the first pension fund to be involved in a renewables project in this way. Asa direct commercial lender to the project, the funding and liquidity risk is taken on by the fund,but Denmark’s export credit agency will shoulder the political, commercial, and documentationrisks. Importantly, the arrangement helped to overcome the lack of long-term funding in themarket, and has served as a guiding example for others to do the same: according to EmmaCollins, a managing partner at Platina Partners, which took on half of the required equity, this is“a model which allows pension funds to invest in this asset class with confidence, and we havenow seen other pension funds enter the market using similar structures.”233


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currently a stand-off which sees investmentadvisors waiting to be asked to research thesetypes of solutions, whilst clients expect newideas to be introduced by their advisors. Bothsides can help to break this deadlock but,ultimately, clients are in the driving seat andshould invite ideas to be brought to them forconsideration. Simply signalling demand toinvestment managers and consultants will bethe first step in pushing the market to mature.

Recommendation 3.2

Pension funds should signal theircommitment to and demand for greeninvestment opportunities. For example,pension funds should request moreclimate-related information and gradedproducts from their consultants andinvestment managers.

Furthermore, pension funds can collectivelycreate the necessary scale by committing just aportion of their portfolio to climate-relatedassets that are already available across thewide range of asset classes and sectorsdiscussed in this report.

An allocation to climate-related assets, howeversmall, would have both fund level andmacroeconomic benefits. On a fund level, thisallocation will serve as a hedge against thephysical, technological, and policy risksassociated with carbon intensive assets.240 On amacro level, it will serve to actively channelcapital to the needs of a stable, sustainableeconomy; to create scale, and by doing so, toincrease the attractiveness of these assetclasses. Leading pension funds such as theEnvironment Agency Pension Fund havealready taken this step, and serve as anexample to peers that the green economy offersfinancial returns.

CASE STUDY 2: Investing4Growth239

An example of pension funds proactively seeking investment opportunities that meet theirrequired financial criteria whilst also delivering wider positive impact is Investing4Growth, aproject run by PIRC on behalf of five local government pension funds.††

Specifically, the project aims to attract investment opportunities that would deliver:• Risk/return characteristics appropriate for the institutional investment market, and;• Underlying UK investments that have positive and measurable economic, social and

environmental impacts at a local, national and regional level, as to benefit the economicwellbeing of beneficiaries and taxpayers.

The founding funds have committed £250m contingent on suitable investment opportunitiesbeing found. The initiative has asked for proposals from investment managers withappropriate experience, who can also offer investment opportunities exceeding $25m, andhas already received encouraging proposals from investment managers, many of whichhave strong green credentials. This is a compelling demonstration of the change pensionfunds can stimulate when they ask for solutions to be brought to them.

†† Greater Manchester Pension Fund, West Yorkshire Pension Fund, West Midlands Pension Fund, South Yorkshire Pensions Authority andMerseyside Pension Fund


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Recommendation 3.3

Pension funds should adopt an internaltarget for allocations to climate-relatedsectors such as clean energy, low carbontransport, energy efficiency, agriculture,forestry, water, waste, and recycling. Theallocation could span the full range of assetclasses held by the fund.

CASE STUDY 3: Environment AgencyPension Fund (active fund)

The EAPF already has 12-13% of itsportfolio allocated to the green economy.Further, the fund has increased its allocationto sustainable property, infrastructure, andfarmland/forestry, which are seen as ahedge against both inflation and climatechange. Recognising the importance ofcommercial real estate in achieving the UKgovernment’s carbon emission reductiontargets, the fund has made a recentinvestment of £15m in the ThreadneedleLow Carbon Workplace Fund.

The fund will maintain its focus on ESGintegration and sustainability-themedequities and has recently launched aninitiative to engage the investment industryto develop best practice for investing insustainable equities. The fund states thatsome of its best performing managerssince inception are those who haveintegrated ESG issues including climaterisk at a systemic level.

ConclusionIn this chapter we have seen that there aresignificant investment opportunities in the lowcarbon economy despite a range of challenges.In our view, as the external costs of fossil fuelsare internalised and pressure builds on a rangeof natural resources, the sectors that can driveproductivity through efficiency will be thosewhose profitability will last. It is therefore inpension savers’ best interests for their pensionfunds to gain exposure to these sectors. Wehave recommended that pension funds takesteps to articulate their demand for greeninvestment opportunities that match the fund’srisk/return requirements to both policymakersand their investment agents. We havesuggested that adopting a target for greenasset allocation is both viable and desirable ontwo fronts. Firstly, it creates a hedge againstclimate risks associated with carbon intensiveassets; and secondly, it provides a powerfuland public signal for pension funds’ demand forthese climate-related assets. Such demand willgo a long way in overcoming some of theremaining barriers to green investments.


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CHAPTER SUMMARY

In this chapter we argued that a low carbon, sustainable economy is one which is morecapable of delivering long-term returns, and thus that pension funds have an interest inguiding the transition to such an economy. We showed that the opportunities for low carboninvestments span all sectors and asset classes and are already strong drivers of growth in theUK. We suggested the following steps which would unlock the investment opportunities of alow carbon world:

• Pension funds should signal their commitment to and demand for green investmentopportunities. For example, pension funds should request more climate-related informationand graded products from their consultants and investment managers.

• Pension funds should pool funds to create the required scale for low carbon infrastructureinvestments, as well as build climate security considerations into the assessments theymake of potential infrastructure investments. If the PIP is to be used as a pooling vehicle,pension funds should explicitly ask that these infrastructure investments be in line with theneeds of a low carbon economy.

• Pension funds should adopt an internal target for allocations to climate-related sectors suchas clean energy, low carbon transport, energy efficiency, agriculture, forestry, water, waste,and recycling. The allocation could span the full range of asset classes held by the fund.

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Chapter 4

The Role of Public Policy


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IntroductionUK pension savers have a financial interest in theoutcome of a range of national, European andglobal policy development processes that willplay out in the next two to three years. Thesepolicies will impact the relative competitivenessof high and low carbon assets, and therefore therisk/reward structure of the markets that pensionfunds are invested in. The lack of policy certaintyin this regard has often been cited as a majorbarrier to green investment.

Given their financial interest in these outcomes,pension funds need not be passive observersof these processes but, in collaboration withother long-term fiduciary investors, can seek toinfluence the outcome of key public policydecisions in the best interests of theirbeneficiaries. Despite this potential, the investorvoice has been almost entirely absent, barring afew notable exceptions. Companies in carbonintensive industries, on the other hand, havelong realised the power of policy engagement,and have poured significant resources intoswaying policy decisions in their favour.

This chapter examines some of the currentcritical public policy debates on climate and theirimplications for pension funds. We also discussthe opportunities for investors to contributeconstructively to these debates; a process whichcan be seen as a part of investors’ riskmanagement.242

The problem: investor vs. companyengagement effortsPension funds’ engagement with policymakersis often undertaken through investor networksand associations, where the resources ofindividual funds can be pooled and shared. InEurope, the Institutional Investors’ Group onClimate Change (IIGCC), representing €7.3tn ofassets, has described its mission as to “provideinvestors with a collaborative platform toencourage public policies, investment practices,and corporate behaviour that address long-termrisks and opportunities associated with climatechange.”243 Institutional investors also engagewith policymakers, through the Principles forResponsible Investment (PRI), CDP, the UKSustainable Investment and FinanceAssociation (UKSIF), and the CorporateSustainability Reporting Coalition (CSRC).

As we will see, the IIGCC and other groupshave articulated positions on many of the topicscovered in this chapter. The mechanisms forthis are often statements or letters, for whichmember investors can show their support.IIGCC engages on its policy positions throughface to face meetings between investors andpolicymakers. It uses the collective influence ofits network of 85 members from across Europeto communicate its policy positions more widelyand has built up some significant relationshipsboth at national and EU level. Whilst the IIGCC’smembership includes many of the largestpension funds in Europe, its UK-basedmembers number 12 occupational pensionfunds and two insurers offering pensionproducts. This compares to the 6000-plus UKpension funds and several dozen insurancecompanies whose members and customers areexposed to investment risks associated withclimate change. The IIGCC runs its effortsthough a paid team of only two people,although its membership is actively involved inall activities.

in collaboration with other long-termfiduciary investors, pension funds can

seek to influence the outcome of key publicpolicy decisions in the best interests oftheir beneficiaries.

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The IIGCC’s voice is increasingly being heard,but a greater number of pension investorssupporting these initiatives is critical if they are tomake a stand against corporate lobbying efforts— which have historically been much more vocaland well-resourced. In 2013 in the US alone,companies spent US$1.61bn on lobbyingCongress, with many hiring specialised lobbyingfirms.244 The oil and gas industry spent $71.1m onlobbying efforts, with electric utilities’ spending$67.5m – the third and fifth highest lobbyingoutlays by sector respectively.245 These well-resourced positions often, though not always, runcounter to the long-term interests of pensionsavers and the needs of a sustainable economy.

The Policy LandscapeThroughout this report we have seen that botheffectively managing risk and seizingopportunities requires appropriate public policy.In this sense, policy can tip the risk/rewardstructure of markets. As investors often point out,effective integration of climate risks is moredifficult in the absence of ‘Long, Loud, and Legal’policy signals246 which create the necessarycertainty about commitments to curb carbonemissions. This allows investors both to take intoaccount the likely effects of regulation on high-carbon assets, and to invest with greaterconfidence in emerging low-carbon technologies.To date, such policy certainty has been lacking.

In theory, a global price on carbon – eitherthrough taxes or carbon trading – is the leastcostly way to guide the transition to a lowcarbon economy.247 Such a price internalisesthe, environmental and social cost of economicactivity, thereby encouraging business toinnovate away from polluting technologies, and

enabling investors to allocate capitalaccordingly. This transfers the significant costsassociated with carbon to the polluter ratherthan the pension saver.

Importantly, fossil fuels still enjoy the bulk ofenergy subsidies (see below).248 As such, notonly does the damage to health, ecosystems,water availability, and the climate all remainexternal to energy generation costs,249 it isactively subsidised and thus incentivised. At thesame time, policy support for renewable energyand energy efficiency remains lukewarm,250 andin some cases unreliable. Spain’s retroactivechanges to renewable energy contracts servedto both undermine the local industry and createan added perception of policy risk.251

The consequences of this imbalance arepervasive. As long as energy market incentivesare skewed in favour of fossil fuels, progress inrenewable energies will be undermined. It isimportant that the full costs and benefits ofvarious energy sources are priced into marketsso that capital can more naturally be allocatedto where it is most efficiently used, botheconomically and environmentally.

The policy environment is evolving – to greateror lesser extents – around the world. Inexploring this landscape, it is important toremember that while the nature and content ofthe policy debates may change over time, theimportance of public policy engagement willnot. Nonetheless, what follows is a briefsummary of the main policy debates that willunfold in the next two to three years. We focushere on policies specific to climate change andgreen investment. Broader policy interventionsare also needed to make the investment systemitself more capable of responding to climatechange – for instance, by tackling widerproblems such as short-termism (as discussedin the Introduction to this report). However,these are outside the scope of this chapter.

The oil and gas industry spent $71.1mon lobbying efforts, with electric utilities’

spending $67.5m – the third and fifth highestlobbying outlays by sector respectively. “

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Paris 2015A global dealIn 2015, global governments will meet in Paristo negotiate binding emissions cuts for alleconomies, which, if adopted, will lead to aglobal carbon budget for the period after2020.252 The size and division of this globalbudget will have a significant impact on regionaland national policies, with implications for fossilfuel companies and their investors if ambitioustargets for emissions reductions are codified ininternational law.253

Given that the economic impacts of climatechange are likely to outweigh the economicimpacts of this regulation254, we believe it is inpension savers’ best interests, particularly thoseunder 50 years of age, to ensure that clear andmanageable regulation guides a smoothtransition to a low carbon future. This will help toavoid more sudden (and disruptive) policymeasures in the future: as the physical impactsof climate change intensify, so will thestringency of climate policy.255

Rethinking subsidies The reform of energy subsides is one agendawith particularly significant implications forinstitutional investors. According to the IMF,worldwide subsidies for petroleum products,natural gas, and electricity totalled $480bn in2011, or 0.7% of global GDP.256 UK subsidies tocoal, natural gas and petroleum totalled £4.3bnin 2011, up £510m from 2010,257 with naturalgas receiving the bulk of this support (£3.6bn)as well as the majority of the annual increase.258

Beyond the direct fiscal costs of thesesubsidies, they artificially sustain theattractiveness of fossil fuel investments andencourage energy consumption. The IMFargues that the removal of global subsidiescould reduce CO2 emissions by 13%.259

Mobilising private capitalParis 2015 will also include discussions on howto mobilise capital to fund global climatemitigation and adaptation measures. Leading upto 2015, work has already started on the rulesand mechanisms of the Green Climate Fund(GCF), an operating entity of the UNFCCC,which aims to raise $100bn a year by 2020 toaid developing countries affected by climatechange.260 Ad hoc pledges are currently beingcollected from developed nations, with the aimof completing initial capital raising by the thirdquarter of 2014.261

In addition to these government pledges, theFund aims to catalyse private sector investorswho “hold the key to supplementing governmentcash” in transforming the economy.262 The Fundis currently discussing the possible institutionalmodels for a private sector arm and thefinancial instruments that could be used.263 Ithas asked for private investors to share theirideas on how barriers to green investing(discussed in Chapter 3) may be overcome.264

The IIGCC265 has suggested that the design ofthe Fund makes use of mechanisms such asconcessional loans to projects, climate riskreduction mechanisms, subsidies to projectsthat produce verified emissions reduction, oraggregating smaller projects to enhance theirattractiveness as investments. Setting uppublic-private partnership funding models withthe Fund as a partner, or the issuance of greenbonds by the Fund, have also been suggestedas possible solutions.

Regional and national policies Running parallel to the international negotiations,regional, national, and subnational policies withfinancial impacts for investors are beingimplemented globally.266


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EU PolicyA long-term signalIn Europe, one of the major uncertainties facinginvestors is what the post-2020 policyarchitecture will look like. The IIGCC267 has urgedthat a 2030 emissions reduction target be set toallow for long-term planning, and it supports a40% reduction over 1990 emissions levels. Thegroup argues that institutional investors need arunning 15-year time horizon in which policy iscertain, and would welcome even longer-termtargets to 2040.268 The UK’s Secretary of State forEnergy and Climate Change, Ed Davey, has alsocalled for a 40% emissions reduction in Europeover 1990 levels by 2030, rising to 50% if a globaldeal is reached.269

A price on carbonA target for emissions reduction must becomplemented by a long-term price signal toguide investment accordingly. To date, the EUETS has been tasked with delivering this signalbut has been unsuccessful in sustaining carbonprices at the level required to incentivise a shift tolow carbon investment. Structural weaknessessuch as the free allocation of original allowancesand an oversupply of permits, coupled with lowerdemand for energy during the economic crisis,resulted in carbon prices too low to stimulate lowcarbon innovation.270 The structural reform of theEU ETS is at the core of a stable EU climatepolicy and 2013 has already seen someimportant decisions in this regard.

In July 2013, the EU Parliament voted in favourof a proposal to ‘back-load’, or delay, the actionof 900 million new carbon allowances, which, ifapproved by the Council, would limit supply andsupport prices.271 This came after the rejection

of a similar proposal in April272, before which theIIGCC had argued that “a properly functioningEmissions Trading Scheme is essential to thefinancing of Europe’s low carbon future andcritical to tackling the dangers of climatechange”.273 The impact of policy becomes clearwhen we consider carbon prices increased by9% on the day of the announcement.274

However, the IIGCC sees this only as a crucialfirst step in restructuring the ETS.275 The 900million permits to be withheld account for onlyhalf the surplus, suggesting further structuralchanges could be needed.276 Accordingly,further investor action will be needed to push fora long-term, stable price on carbon.

A wider suite of vehiclesNew technologies and markets come withspecific risks, and investors will not commitsignificant capital to green investments untilthey have a suitable risk/return profile. TheIIGCC has argued for the creation of morehelpful instruments that meet the risk/returnrequirements of institutional investors, such asReal Estate Investment Trusts and MasterLimited Partnerships. These legal structuresallow investors to pool capital and to avoiddouble taxation, but to date, have not beenapplicable to clean energies.277

Other regional policiesApart from the well-known regional EU ETS,national trading systems are emerging inAustralia, Switzerland, New Zealand, South Korea,and Kazakhstan, and at the sub-national level inCanada, the US, Japan, and China.278 Globally, 35jurisdictions have already implemented or are inthe process of implementing a carbon price eitherthrough a tax or a trading system.279 In the US,President Obama’s new Climate Action Plan280

also has the potential to create a strong signal foremissions reduction. If the plan passes throughthe political process, the US will impose a numberof measures, including carbon pollution standards

Globally, 35 jurisdictions have alreadyimplemented or are in the process of

implementing a carbon price either througha tax or a trading system.“

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on all current and future power plants (acommand and control instrument, as opposed tothe market-based approach of a carbon price); asignificant scaling up of renewable energy; cleanenergy research and development funding; andan elimination of fossil fuel tax subsidies in the2014 fiscal year. These policy developments aresignificant to pension funds as they suggest thateven in absence of a top-down, global deal onclimate change, bottom-up policies could create ade facto carbon price which will impact markets.281

UK PolicyMany of these discussions filter down to thenational level. The UK’s energy transition will beguided by the Electricity Market Reform (EMR), adraft of which was published in July 2013. TheEMR aims to balance the attainment of security ofsupply, climate change mitigation, andaffordability, and will require an investment of£110bn in electricity generation and transmissionto 2020.282 One of the main avenues for achievingthe aims of the reform is to incentivise thediversification of energy supply (including torenewables). In its current form the EMR will seecontracted, guaranteed prices – essentiallysubsidies — for renewable energy developers; aswell as a carbon price floor in the form of a tax.‡‡

Pension fund investment in low carbon industriesis held back by a number of concerns, mostnotably a lack of certainty around government’senergy policy. In particular, the perceived hostilityof the Treasury towards the green agenda, undersuccessive governments, has underminedconfidence in climate policy. Investor sentiment isinfluenced by rhetoric as well as substantive policy:for instance, George Osborne’s 2011 speech toConservative conference, which blamedenvironmental regulations for driving up energybills and stressed that “we’re not going to save theplanet by putting our country out of business”, waswidely interpreted as an endorsement of the viewthat ‘green is bad for growth’.283

This environment has influenced investors’response to policy developments such as thedelay in setting a 2030 decarbonisation target(now due to be set in 2016), and the recentlyannounced decrease in renewable energysubsidies.284 A group of investors led by theAldersgate Group recently wrote to the Chancellorcalling for a decarbonisation target to be includedin the Energy Bill currently before parliament,arguing that its absence “exacerbat[es] policy riskand investor uncertainty”.285

Further to this, UKSIF286 has argued for thegranting of borrowing powers to the newlyestablished Green Investment Bank, a governmentorganisation tasked with ‘crowding in’ privateinvestment for decarbonising the energy sector.

Policies to underpin sustainable investmentWhile reform of energy subsidies can help greeninvestments to compete on the basis ofinvestors’ current risk/return requirements, thereis also debate over whether investors should bedeveloping new ways of measuring andconceptualising risk. Prevailing risk measurestend to be focussed on deviation frombenchmarks and do not adequately capture thepotential impacts of systemic risks such asclimate change. In a speech to the UK pensionscommunity on the 27th June 2013, the Prince ofWales asked investors: “might you widen thescope of existing risk analysis in order to capturesome of the systemic links between risks?” Thiswider conception of risk, by better accounting forthe externalities associated with climate change,could help to give a more accurate picture of theattractiveness of green investments.287

‡‡ When the carbon price falls below a certain level, a tax on emissions will automatically take its place, effectively creating a ‘floor’ belowwhich the price of carbon cannot drop.

A group of investors recently wroteto the Chancellor calling for a

decarbonisation target to be included inthe Energy Bill “

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To facilitate this widening of risk analysis,investors will require relevant information. Awelcome move in this regard is that listedcompanies have been required to report theirgreenhouse gas emissions (scopes 1 and 2)annually since 1st October 2013.288 However, inChapter 1 we noted that annual emissions datado not give investors all the necessaryinformation they need to assess the long-termrisks faced by companies and to perform robustclimate risk analysis. Investors should thereforebe vocal about the type of information they needfrom investee companies in order to gain a clearunderstanding of their position in relation toclimate risks. CDP has expressed concerns thatthe UK’s reporting guidelines are not comparablewith those in other jurisdictions such as the US orAustralia, and that the organisational boundarieswithin which companies have to report may notmatch the geographical emissions for which theyare responsible.289 CDP suggests that in order toachieve global consistency, all national legislationon carbon reporting should be aligned to theinternational standards of the Climate DisclosureStandards Board, a global organisation workingto mainstream carbon reporting. 290

The IIGCC has articulated its expectations forreporting in sectors where standard reportingrequirements do not adequately address climaterisk factors. In 2010, it published guidelines forthe oil and gas industry suggesting thatcompanies disclose: emissions for each stageof the value chain; emissions associated withproduction history and proven reserves; theextent to which the business model is vulnerableto national and international climate regulation;and the impact of demand for fossil fuelproducts.291 These calls have more recentlybeen reinvigorated by Carbon Tracker,292 whichargues that regulators should requirecompanies to disclose the potential emissionsembedded in fossil fuel reserves and to explainhow their business models would hold up under

different demand and price scenarios. TheIIGCC has also published expectations for theautomotive and electric utility sectors.293

Sustained, coordinated investor demand forcorporate disclosure can be a powerful force forchange. Historically, this has certainly been thecase, with investors playing an importantcatalysing role in changes to reportingrequirements. The US-based Ceres (formerlyknown as the Coalition for EnvironmentallyResponsible Economies) developed stringentenvironmental reporting standards after the1989 Exxon Valdez disaster, and later, in 1997,launched the Global Reporting Initiative (GRI) inpartnership with UNEP, which aims to bringsustainability reporting standards to the rigorouslevel of financial reporting.294 The GRI is nowused by many companies, either voluntarily orunder mandatory integrated reporting schemessuch as those in South Africa and Denmark.295

In the UK, the Prince’s Accounting forSustainability Project (A4S) is the institutionalcatalyst for integrated reporting, driven by theidea that integrated reporting “will allow theconnection between strategic direction, financialperformance, and sustainability impacts to bemade.”296 The UK’s Department of Business,Innovation and Skills recently released itsnarrative reporting regulations which arecurrently before Parliament for approval. Theregulations will see all major companiesproducing a strategic report which links theirbusiness models to risks; and all listedcompanies reporting on greenhouse gasemissions.297 In our view, however, these newregulations represent a missed opportunity tofollow leaders like South Africa in promotingintegrated reporting. Pension funds were almostabsent from the debate in narrative reporting,with exceptions such as the pension fund NESTand the investor groups IIGCC and UKSIF.


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Pension fund engagement How can pension funds lend their voice topolicy debates that will affect their future? Anengagement programme could be initiatedrelatively simply by joining and contributing toexisting efforts in this space. The good workalready being done by the IIGCC, for example,could be significantly strengthened by a widerpool of members willing to contribute eithertechnical or financial resources.

Recommendation 4.1

Pension funds should become activemembers of the Institutional InvestorsGroup on Climate Change (IIGCC) andshould encourage their investmentmanagers to support this investor initiative.

In the UK, while the National Association ofPension Funds (NAPF) has a strong policyengagement function, it has not yet exercisedits voice on climate policy. Pension fundmembers of the NAPF could encourage theAssociation to invest in the resources requiredto engage effectively on climate risks.

Recommendation 4.2

Pension funds should request that NAPFdedicates some resources (and at leastone policy officer) to representing theinterests of UK pension funds and theirmembers in domestic and internationalclimate policy talks and forums.

The NAPF should work closely with the IIGCC toensure cooperation, thereby avoiding duplicationof efforts. Pension funds and investmentmanagers who belong to both organisationsmay consider forming an informal committee toensure that this cooperation is achieved.

Addressing lobbying by investee companiesA critical part of any engagement policy isaligning the lobbying efforts of investors withthose of their investee companies, as currentlyinvestors’ efforts are being undermined by thelobbying positions of carbon intensive industries.Put differently, companies are using shareholdercapital to lobby for polices that are often againstpension savers’ long-term best interests.

The various lobbying positions on the reform ofthe EU ETS illustrates this issue. Energy andenvironment ministers from 12 EU states(including the UK) supported the limiting of new

CASE STUDY 1: Investor Network on Climate Risk298

The US-based Investor Network on Climate Risk, representing 100 institutional investors with$11tn in assets, sent petitions for three years to the US Securities Exchange Commission(SEC), calling for it to issue formal guidance for company disclosure on climate risks andopportunities. The consistent and comparable data that such guidance would help toachieve is a necessary ingredient for investors wanting to integrate climate risks into theirinvestment decision-making.

In 2010, the SEC issued guidance which set out what publicly listed companies were todisclose to their shareholders in terms of climate risks and opportunities in the future. Thisincluded the impacts of physical and regulatory risks and business opportunities.


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allowances and the introduction of longer-termstructural reforms.299 This support was backedby 42 businesses and trade associations,including some carbon intensive companiessuch as E.ON, SSE, and EDF. On the otherhand, Business Europe, a business lobbygroup constituted of listed companies includingArcelorMittal and Lafarge (companies whichenjoyed significant windfall profits from the freeallowances in the first two phases of the ETS)expressed a “strong concern” for the back-loading proposal, arguing that it would “interferewith a more constructive discussion on how toachieve a systemic solution” involvingcoherence between climate and industrialpolicies.300 Business Europe has been criticisedfor claiming a unanimous business voiceagainst the back-loading proposal when,conversely, some high emitting companies hadactively voiced their approval.301

If we see this as a situation in which a minorityof companies are effectively undermininginvestors’ own interests and engagementefforts, there is a compelling case for investordialogue with investee companies on theirlobbying positions and how they useshareholder capital to this end.

To address the risks that (1) companies areusing shareholder funds to lobby againstclimate change mitigation measures and/or (2)that companies are funding third partyorganisations who are lobbying in opposition tothose companies, investors should encouragegreater accountability and transparency toshareholders on this issue.

Investor groups are beginning to scrutinisecorporate lobbying more closely.• CDP included questions on corporate

lobbying for the first time in its 2013 annualsurvey.

• In the US, the 2013 AGM season sawinvestors file shareholder resolutions seekinggreater transparency at 38 companies withan average vote in favour of 26%302. A groupof investors led by Boston Common AssetManagement and Sarasin & Partners wroteto over 40 FTSE 100 companies asking forannual disclosures on memberships in andpayments to third-party organisations, andthe criteria used to assess the compatibilityof the company’s stated policies, principles,and codes of conduct with each funded thirdparty organisation.303

• Co-ordinated through IIGCC’s corporateprogramme, members discuss with companymanagement their views of climate risks andopportunities and their strategies forresponding to them. Currently IIGCCmembers are engaging with Europeanenergy intensive industries on EU policyincluding the EU ETS.

Leaked information showing corporate financialsupport for certain organisations opposed toclimate change science was one of themotivating factors for these investor initiatives.

While a number of companies in the UK and UShave reacted positively to these calls for greatertransparency and accountability to shareholders,much work remains to be done to ensureinvestor efforts in the policy arena are notundermined by their own investee companies.

companies are using shareholdercapital to lobby for polices that are

often against pension savers’ long-termbest interests. “

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Recommendation 4.3

Pension funds should request theirinvestment managers to supportcollaborative investor initiatives (includingvoting in favour of shareholder resolutions)to secure greater transparency andaccountability from investee companies ontheir direct and indirect (via third partyorganisations) lobbying positions.

ConclusionIn this chapter we have seen that both policyand a lack of policy can have a significant effecton the ability of even the most concernedpension funds to adequately address climaterisks. In the coming years, public policydecisions at every level will shape theinvestment landscape in which pension fundsmust carry out their fiduciary duties. Given theright policy environment, pension funds couldgain the certainty and the risk adjusted returnsthey need to invest in a low carbon, resilienteconomy, or gain access to comparable andconsistent information regarding the future risksfacing companies. Shaping these outcomes willrequire more coordinated and better resourcedengagement by pension funds, particularly inthe face of powerful corporate lobbying bycarbon intensive industries. By poolingresources through collective engagement, far-reaching changes that are in the interests ofpension savers can be achieved in a targeted,cost-effective manner.

CHAPTER SUMMARY

In this chapter we discussed the importanceof public policy in determining the long terminvestment landscape. We suggested thatcoordinated public policy engagement fromthe pensions industry can help to shape policyoutcomes in the best interest of beneficiaries.This would also help to counteract strongbusiness lobbying positions. Werecommended the following actions:

• Pension funds should become activemembers of the Institutional InvestorsGroup on Climate Change (IIGCC) andshould encourage their investmentmanagers to support this investorinitiative.

• Pension funds should request that NAPFdedicates some resources (and at leastone policy officer) to representing theinterests of UK pension funds and theirmembers in domestic and internationalclimate policy talks and forums.

• Pension funds should request theirinvestment managers to supportcollaborative investor initiatives (includingvoting in favour of shareholder resolutions)to secure greater transparency andaccountability from investee companies ontheir direct and indirect (via third partyorganisations) lobbying positions

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Conclusions and Recommendations


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Climate change poses a significant financial riskto the retirement outcomes of today’s savers.Not only will it impact the ability of pensionfunds to meet their liabilities and investmentgoals, but also the wider interests of retirees byeroding their spending power and creating anincreasingly volatile world. As universal ownerswith holdings across the economy, pensionfunds are unavoidably vulnerable to these risks.But they also have influence on how variousclimate scenarios will play out. In particular, theycollectively have the ability to mobilise thecapital required to mitigate the worst effects ofclimate change.

By developing internal policies to startunderstanding, assessing, and ultimatelymanaging climate risk, pension funds can startto create more resilient portfolios. They canproactively mitigate the risks associated withhigh carbon assets and position themselves totake advantage of the growth industries of thenew, green economy. Finally, pension funds canplay an active role in shaping the policyoutcomes that will impact the markets theydepend on and which will determine whether,and how smoothly, the transition to a lowcarbon economy can be achieved.

In this report, we have sought to providepension funds with tools for thinking about thisvital and urgent issue, and – most importantly –to start taking action to protect pension savers’long-term interests. Below we summarise ourrecommended actions. Although therecommendations form a coherent whole, wedo not assume that all schemes will implementall recommendations. We recognise thatsmaller schemes with limited resources will wishto prioritise the actions which are most cost-effective and productive for their particularcircumstances.

Recommendations for setting the generalframeworks for managing climate risks

1.1 Trustees and pension fund officers withresponsibility for investment matters shouldundertake a minimum of two hours trainingon the financial materiality of climatechange and environmental risk.

1.2 Pension schemes with experience ofstrategies addressing climate risks shouldshare their knowledge and insights withothers in the industry.

1.3 Trustees should develop and articulate theirinvestment beliefs in light of the evidenceon the economics of climate change.

1.4 Pension funds should undertake anevaluation of their exposure to climate risks,quantifying those risks where possible.

1.5 Pension funds should develop a policy (orsub-policy) that sets out fund-specificobjectives and priorities for managingclimate risks. The policy should be signedoff at board level or by an investmentcommittee of the main board.

1.6 Pension funds should prepare a practicalaction plan to deliver their climate policywith time-bound targets.

1.7 Pension funds should report regularly tomembers on the progress being made toreduce climate risks. Such reporting can bea stand-alone account or embedded inpension fund annual investment reports.

Resilient portfolios for an uncertain world

Recommendations for addressing carbonintensive portfolios

2.1 Pension funds should request that theirfund managers assess the ‘stranded asset’risk in fossil fuel companies’ projectportfolios. Managers should request thatinvestee companies disclose the cost curveposition of their project portfolio anddisclose their cash flows under differentdemand and price scenarios.

2.2 Pension funds should support calls forreduced capital allocation to high cost/lowreturn projects in favour of returning moneyto shareholders or reallocation to less riskyprojects.

2.3 Pension funds should set a time frame toremove pure play coal assets from theiractively managed portfolios.

2.4 Pension funds should engage, or ask theirfund managers to engage, with carbonintensive holdings on their emissionreduction plans. This can be done byjoining CDP’s Carbon Action and bysupporting the ‘Aiming for A’ initiative.

2.5 For active equity mandates, pension fundsshould request the use of information aboutcompany emissions intensity and reductionplans in stock selection decisions. Forpassive equity mandates, pension fundsshould consider tracking carbon tiltedindices.

2.6 Pension funds should require their fixedincome managers to demonstrate how theyintegrate carbon and climate risks intocredit analysis.

2.7 Pension funds should require propertymanagers to integrate environmentalconsiderations into standard propertyinvestment appraisals, and into thedevelopment and refurbishment ofproperties.

2.8 Pension funds should request that propertymanagers outline what targets have beenset for improving energy, waste and waterefficiency.

Recommendations for investing in a lowcarbon future

3.1 Pension funds should signal theircommitment to and demand for greeninvestment opportunities. For example,pension funds should request more climate-related information and graded productsfrom their consultants and investmentmanagers.

3.2 Pension funds should pool funds to createthe required scale for low carboninfrastructure investments, as well as buildclimate security considerations into theassessments they make of potentialinfrastructure investments. If the PIP is tobe used as a pooling vehicle, pensionfunds should explicitly ask that theseinfrastructure investments be in line with theneeds of a low carbon economy.

3.3 Pension funds should adopt an internaltarget for allocations to climate-relatedsectors such as clean energy, low carbontransport, energy efficiency, agriculture,forestry, water, waste, and recycling. Theallocation could span the full range of assetclasses held by the fund.

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Recommendations for influencing publicpolicy.

4.1 Pension funds should become activemembers of the Institutional InvestorsGroup on Climate Change (IIGCC) andshould encourage their investmentmanagers to support this investor initiative.

4.2 Pension funds should request that NAPFdedicates some resources (and at least onepolicy officer) to representing the interestsof UK pension funds and their members indomestic and international climate policytalks and forums.

4.3 Pension funds should request theirinvestment managers to supportcollaborative investor initiatives (includingvoting in favour of shareholder resolutions)to secure greater transparency andaccountability from investee companies ontheir direct and indirect (via third partyorganisations) lobbying positions.

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Appendices

APPENDIX 1


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AODP Sample Climate Change Policy i

Aim and Purpose of PolicyThe Board of the [INSERT FUND NAME] (the fund) acknowledges that the impact of climatechange represents a significant risk to members superannuation. This policy aims to formalise theFund’s approach in managing climate risks.

We acknowledge the scientific consensus and aim to build an ongoing capability aroundmanaging the risks and opportunities associated with climate change. We acknowledge that sucha programme will encompass almost every aspect of our operations, ranging from asset allocationto active ownership.

These processes will be governed by a secure project governance framework and managed undera specific subcommittee, [INSERT COMMITTEE NAME], formed for this purpose. This sub-committee will serve to form a plan, implement and report on the activities related to this projectand held under the responsibility of the Chief Investment Officer.

As the fund is committed towards keeping members informed regarding this issue, we will seek toprovide updates to members and stakeholders regarding our progress on managing climatechange issues.

ScopeThis policy covers all the operations and investments of the Fund

Voluntary participation in collaborative initiativesIn relation to collaborative initiatives involving climate change issues, the Find is a signatory of theUnited Nations Principles for Responsible Investment (UNPRI), the Carbon Disclosure Project(CDP) and ongoing participant of the AIST/TCI Asset Owner’s Climate Change Initiative.

Internal fund climate change managementThe Fund will measure the emissions resulting from our operations and seek to establish targetson reducing our carbon footprint. Our progress on this matter will be updated annually andreported publically via our Annual Report.

i The Climate Institute & Asset Owners Disclosure Project. 2010. ‘Climate Change Best Practice Methodology: Improving the managementof climate change risks and opportunities in investment portfolios through superior implementation of best practice.’


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APPENDIX 2

Platforms available to help pension funds become sustainable property investors:

Global Real Estate Sustainability Benchmark (GRESB):i

This is an industry driven organization that monitors the sustainability performance of propertyportfolios. By using data submitted by companies and fund, GRESB is able to benchmark theperformance of the global real estate sector. Funds are able to see results on seven sustainabilityaspects – including energy management, water management, and GHG management - which arebenchmarked against peer groups.

Eco-Portfolio Analysis Service (EcoPAS):ii

EcoPAS – also a benchmarking service – collects data on environmental variables in real estateportfolios with the aim if identifying where the risks to investors lie, and how these compare topeers. The system was launched by IPD, a real estate performance analytics firm.

The IIGCC and Investment Property Forum Sustainability Interest Group (SIG):iii

Both these group individually aim to promote understanding in the investment community of theimpacts of climate change for property holdings, and have established a link. SIG has developeda set of Environmental Best Practice Investment Management Policies aimed at providing investorswith best practice examples in this area, and provides a range of useful materials on climatechange and property investments on its website (www.ipf.org.ok)

i Global Real Estate Sustainability Benchmark. 2011. ‘GRESB Products and Services.’ii IPD. 2013. ‘Eco-Portfolio Analysis Service (EcoPAS).’iii Investment Property Forum. 2013. ‘Sustainability Interest Group.’

Name OrganizationAndrew Adams CCLA

Jennifer Anderson The Pensions Trust

William Andrews Tipper Green Alliance

Seb Beloe WHEB Asset Management

Nick Bensted-Smith Sarasin Partners

Bridget Boulle Climate Bonds

Giles Bristow Forum for the Future

Becky Buell Meteos

Simon Bullock Friends of the Earth

Ben Caldecott Climate Change Capital

Mark Campanale Carbon Tracker

Henry Campbell-Smith Preventable Surprisesinitiative

Fong Yee Chan UNPRI

Sue Charman WWF

Kelly Clark Tellus Mater

James Corah CCLA

Ray Dhirani WWF

Jessica Fries The Prince’s Accounting forSustainability Project

Emilie Goodall UNPRI

Katie Gordon CCLA

Nick Green Royal Society PensionScheme

Simon Howard UKSIF

Daniel Ingram BT Pension SchemeManagement Limited

Aled Jones Mercer

Charlie Kronick Greenpeace

Morgan La Manna IIGCC

Bonny Landers RS Group

George Latham WHEB Asset Management

Jessica Linacre DECC

James Marriott Platform

Will Martindale Oxfam

Clare Martynski Forum for the Future

Name Organization

Edward Mason Church of England EthicalInvestment Advisory Group

Rob Nash Oxfam

Sarah Nolleth The Prince’s Accounting forSustainability Project

Gita Parihar Friends of Earth

Barry Parr AMNT

Stephanie Pfeifer IIGCC

David Pitt-Watson UNEPFI

Will Pomroy The National Association ofPension Funds (NAPF)

David Powell Friends of Earth

Dylan Rebois Tellus Mater

Dima Rifai Paradigm Change CapitalPartners LLP

Titia Sjenitzer UNPRI

Rick Stathers Schroders

Raj Thamotheram Independent

Sophia Tickell Meteos

Andy Togher The Prince’s Charities’International SustainabilityUnit

Steve Waygood Aviva

Jake White Friends of Earth

Helen Wildsmith CCLA

Helen Wilson Old Mutual

Joseph Zacune Oxfam

Michael Zimonyi Climate DisclosureStandards Board (CDSB)

Organisational affiliations are given for informationonly. All participants attended in a personal capacityand the event was held under Chatham House Rules.

The opinions expressed in this paper are those ofShareAction and are not necessarily endorsed by theroundtable participants.

Appendix 3


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During the summer of 2013, ShareAction hosted 4 workshops discussing the issues covered in each of thechapters of this report, attended by the following:


71

1 Lagarde, C. 2013. ‘A new Global Economy for a new Generation’. International Monetary Fund. http://www.imf.org/external/np/speeches/2013/012313.htm

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8 MSCI ACWI IMI sector analysis report.

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12 Trucost, Mercer & WWF-UK. 2009. ‘Carbon Risks in UK Equity Funds: Trucost study the carbon footprints of portfolios and carbonmanagement in pension fund assets.’http://www.trucost.com/_uploads/downloads/Carbon_Risks_in_UK_Equity_Funds.pdf

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17 IIGCC. 2008. ‘A changing climate for property investment: A trustees guide.’http://www.iigcc.org/publications/publication/a-changing-climate-for-property-investment-a-trustees-guide

18 Kaminker, C. & Stewart, F. 2012. ‘The Role of Institutional Investors in Financing Clean Energy.’ OECD Working Papers on Finance,Insurance and Private Pensions, No.23, OECD Publishing.http://www.oecd.org/environment/WP_23_TheRoleOfInstitutionalInvestorsInFinancingCleanEnergy.pdf

19 Op Cit.2

20 CBI. 2013. ‘The colour of growth: maximising the potential of green business.’http://www.cbi.org.uk/media/1552876/energy_climatechangerpt_web.pdf

21 Gottelier. S. 2013. ‘Investing in Water: Global opportunities in a Growth Sector.’ Impax Asset Management.http://www.impaxam.com/media/156188/investing_in_water_global_opportunities_in_a_growth_sector_uk_final.pdf

22 Liebreich, M. 2013. ‘Smoke clears from the battlefield: many casualties but campaign continues.’ Bloomberg New Energy Finance.http://about.bnef.com/blog/2013-smoke-clears-from-the-battlefield-many-casualties-but-campaign-continues/

23 Climate Bonds Initiative. 2013. ‘Bonds and Climate Change: the state of the market in 2013.’http://www.climatebonds.net/files/Bonds_Climate_Change_2013_A3.pdf

24 Climate Bonds Initiative. 2012. ‘Climate Bond Standard.’http://climatebonds.net/what-we-do/encouraging-investment/climate-bonds-standard/

25 IIGCC. 2013. ‘Investment-grade climate policy: The next phase for Europe.’http://www.iigcc.org/publications/publication/Investment-grade-climate-policy-the-next-phase-for-Europe

26 OpenSecrets.org. 2013. ‘Lobbying Database.’http://www.opensecrets.org/lobby/

27 Thorgeirsson, H. 2013. ‘Progress towards a global climate agreement.’ United Nations Framework Convention on Climate Change.http://unfccc.int/files/press/statements/application/pdf/20131709_ht_imperial.pdf

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53 Op Cit. 2

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60 Department for Work and Pensions. 2005. ‘Occupational Pension Schemes (Investment) Regulations 2005.’ The Law Relating toSocial Security.http://www.dwp.gov.uk/docs/a5-6631.pdf

61 NAPF. 2013. ‘Responsible Investment Guide 2013.’http://www.napf.co.uk/PolicyandResearch/DocumentLibrary/~/media/Policy/Documents/0308_NAPF_Responsible_Investment_guide_2013_DOCUMENT_2.ashx

62 UNEP-FI. 2011. ‘Universal Ownership: Why environmental externalities matter to institutional investors.’http://www.unepfi.org/fileadmin/documents/universal_ownership_full.pdf

63 Op Cit. 4

64 Dupre, S. & Chenet, H. 2012. ‘Connecting the dots between climate goals, portfolio allocation, and financial regulation.’ 2°InvestingInitiative.http://2degrees-investing.org/IMG/pdf/2_2deginvesting_framework_2012.pdf

65 UNEP-FI. 2013. ‘Portfolio Carbon: Measuring, disclosing and managing the carbon intensity of investments and investment portfolios.’ http://www.unepfi.org/fileadmin/climatechange/UNEP_FI_Investor_Briefing_Portfolio_Carbon.pdf

66 Op Cit. 4

67 Op Cit. 65

68 Carbon Tracker. 2012. ‘Unburnable Carbon: Budgeting Carbon in South Africa.’ http://www.carbontracker.org/wp-content/uploads/downloads/2012/11/Carbon-Tracker-Initiative_Budgeting-Carbon-in-South-Africa_Final.pdf

69 Op Cit. 5

70 Op Cit. 5

71 Defra. 2013. ‘Measuring and reporting environmental impacts: guidance for businesses.’https://www.gov.uk/measuring-and-reporting-environmental-impacts-guidance-for-businesses#reporting-greenhouse-gas-emissions

72 Op Cit.29

73 Hoffman, H V & Bush, T. 2008. ‘Corporate Carbon Performance Indicators – Carbon Intensity, Dependency, Exposure, and Risk.’Journal of Industrial Ecology, Volume 12, Number 4. pp 505-520.http://onlinelibrary.wiley.com/doi/10.1111/j.1530-9290.2008.00066.x/abstract

74 Weisser, D. 2012. ‘A guide to life-cycle greenhouse gas (GHG) emissions from electric supply technologies.’ International AtomicEnergy Agency Planning & Economic Studies Section.http://www.iaea.org/OurWork/ST/NE/Pess/assets/GHG_manuscript_pre-print_versionDanielWeisser.pdf

75 Op Cit. 29

76 The Carbon Trust. 2013. ‘BT’s 3:1 carbon footprinting methodology.’ http://www.btplc.com/Betterfuture/NetGood/OurNetGoodMethodology/BTMethodology_short.pdf

77 Trillium & Trucost. 2013. ‘Portfolio Carbon Footprint: Trillium Sustainable Opportunities Strategy.’http://www.trilliuminvest.com/wp-content/uploads/2013/07/SOS-Carbon-Footprint-03.31.13.pdf

78 Op Cit. 65

79 World Resources Institute, Greenhouse Gas Protocol, UNEP-FI & WBCSD. 2012. ‘Concept Note: GHG Protocol Financial SectorGuidance for Corporate Value Chain Accounting.’http://www.ghgprotocol.org/files/ghgp/Concept%20Note%20-%20GHG%20Protocol%20Financial%20Sector%20Guidance%20(version%202).pdf

80 Op Cit. 65

81 Op Cit. 2

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84 IIGCC. 2013. ‘Global investor survey on climate change - 3rd annual report on actions and progress.’http://www.iigcc.org/publications/publication/global-investor-survey-on-climate-change-3rd-annual-report-on-actions-and-p

85 BT Pension Scheme. 2010. ‘Sustainable Investment.’http://www.btps.co.uk/156/sustainable-investment

86 private correspondence with BTPS, 21 October 2013http://www.greenbiz.com/research/report/2013/02/state-green-business-report-2013?ms=45828


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89 International Corporate Governance Network. 2012. ‘ICGN Model Mandate Initiative: Model contract terms between asset ownersand their fund managers.’http://autoenrolme.railwayspensions.co.uk/resources/Media/Documents/Trustee/Corporate%20Governance/Corp%20Gov%20-%20ICGN%20Model%20Mandate.pdf

90 Op Cit. 84

91 ShareAction. Forthcoming Report. ‘Our Money, Our Business: Building a more accountable investment system.’

92 Op Cit. 5

93 CDSB. 2013. ‘Climate Change Reporting Framework.’http://www.cdsb.net/climate-change-reporting-framework

94 Op Cit. 64

95 Op Cit. 8

96 Op Cit. 37

97 Office for National Statistics. 2012. ‘Ownership of UK Quoted Shares, 2010. Statistical Bulletin.’http://www.ons.gov.uk/ons/rel/pnfc1/share-ownership—-share-register-survey-report/2010/stb-share-ownership-2010.html

98 Mercer. 2013. ‘European Asset Allocation Survey.’ http://www.mercer.com/assetallocation

99 2°Investing Initiative. Forthcoming report. ‘Implications of using benchmarks for long-term & climate financing.’

100 Leggett, J. 2013. ‘“Something has to give” in fossil-fuel capex: Morgan Stanley.’ Triple Crunch Log.http://www.jeremyleggett.net/2013/07/something-has-to-give-in-fossil-fuel-capex-morgan-stanley/

101 Syme, A et al. 2013. ‘Global Oil Vision: Investing for Commodity Uncertainty.’ Citi Research.https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDEQFjAA&url=http%3A%2F%2Fxa.yimg.com%2Fkq%2Fgroups%2F17389986%2F2003710356%2Fname%2FCITI%2B%2B127%2B%2BGlobal%2BOil%2BVision.pdf&ei=D4dWUtyDLIeI7Aao04DQCw&usg=AFQjCNFKqvmsbvZqDoqJysPbUazZGSMAIQ&sig2=0WgAF22QYGWEYVLkboTW9A&bvm=bv.53760139,d.ZGU

102 Op Cit. 7

103 Mackenzie, C. 2013. ‘Is the tide turning on ‘big carbon?’ The surprising step change in the stranded assets debate.’ ResponsibleInvestor.http://www.responsible-investor.com/home/article/c_mac_sa/P0/

104 Leaton, J. 2012. ‘Too Much Carbon in Your Portfolio?’ Corporate Knights.http://www.corporateknights.com/article/too-much-carbon-your-portfolio

105 Mitchell, J et al. 2012. ‘What Next for the Oil and Gas Industry?’ The Royal Institute of International Affairs.http://www.chathamhouse.org/sites/default/files/public/Research/Energy,%20Environment%20and%20Development/1012pr_oilgas.pdf

106 Op Cit. 103

107 Spedding, P et al. 2013. ‘Oil and Carbon Revisited; value at risk from ‘unburnable’ reserves.’ HSBC Global Research.http://gofossilfree.org/files/2013/02/HSBCOilJan13.pdf

108 Generation Foundation. 2013. ‘Stranded Carbon Assets: Why and How Carbon Risks Should be Incorporated in Investment Analysis.’

109 Ibid

110 Op Cit. 6

111 Vigna, D et al. 2013. ‘Top 380: Global oil price update.’ Goldman Sachs Equity Research.http://www.docstoc.com/docs/153511391/Goldman-Sachs——Top-380-Global-oil-price-update

112 Tomlinson, S. 2009. ‘Breaking the Climate Deadlock: Technology for a Low Carbon Future.’ Office of Tony Blair, The Climate Groupand E3G.http://blair.3cdn.net/fbcbeeebcd4c5b6955_kum6b3jap.pdf

113 Op Cit. 103

114 Clint, O. 2011. ‘Arctic Exploration: Does Any Of It Make Sense?’ Royal Geological Society. Paper given at Finding Petroleum:Exploring the Arctic conference. Presentation available at: http://c250774.r74.cf1.rackcdn.com/bernsteinresearch.pdf

115 Seidler, C. 2011. ‘New Estimates for Drilling Costs: The Exorbitant Dream of Arctic Oil.’ Spiegel Online. www.spiegel.de/international/business/0,1518,druck-741820,00.html

116 Op Cit. 101

117 Apache Corporation. 2013. ‘First-quarter production growth driven by 45% increase in North American onshore liquids.’ http://investor.apachecorp.com/releasedetail.cfm?ReleaseID=763467

118 Schneider, H. 2013. ‘In Egypt, U.S. oil company Apache cuts its stake as private investment dwindles.’ The Washington Post.http://articles.washingtonpost.com/2013-09-06/business/41821285_1_morsis-egyptian-economy-hosni-mubarak


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119 Peaple, A. 2013. ‘Europe’s Oil Majors Should Focus on Shareholders.’ The Wall Street Journal.http://online.wsj.com/article/SB10001424127887324867904578593570111198546.html

120 Op Cit. 100

121 Op Cit. 111

122 Op Cit. 10

123 Hromadko, J. 2013. ‘RWE to Close Plants as Profit Drops.’ The Wall Street Journal.http://online.wsj.com/article/BT-CO-20130814-703636.html

124 ArgusMedia. 2013. ‘Germany’s Eon mulls further power plant closures.’http://www.argusmedia.com/pages/NewsBody.aspx?id=860150&menu=yes

125 Op Cit. 9

126 Op Cit. 9

127 Katakey, R & Zhu, W. 2013. ‘Coal 4-Year Low Lures Utilities Ignoring Climate: Energy Markets.’ Bloomberg.http://www.bloomberg.com/news/2013-10-11/coal-4-year-low-lures-utilities-ignoring-climate-energy-markets.html?utm_source=Energydesk+Daily+Email&utm_campaign=9d4d259c4e-Energydesk_Dispatch5_9_2013&utm_medium=email&utm_term=0_ad1a620334-9d4d259c4e-6756873

128 Mackenzie, C. 2013. ‘Could China’s carbon emissions peak sooner than expected?’ RTCC.http://www.rtcc.org/2013/10/11/could-chinas-carbon-emissions-peak-sooner-than-expected/

129 Pettis, M. 2013. ‘China is going to slow down but it can handle it.’ Financial Times.http://www.ft.com/cms/s/0/2f018d1c-f475-11e2-a62e-00144feabdc0.html?siteedition=uk&siteedition=uk#axzz2dqCwbboT

130 Op Cit. 128

131 Leggett, J. 2013. ‘“The beginning of the end for coal”: Bernstein Research.’ Triple Crunch Log.http://www.jeremyleggett.net/2013/06/the-beginning-of-the-end-for-coal-bernstein-research/

132 Op Cit. 10

133 Op Cit. 10

134 Op Cit. 10

135 Meisingset, C T. 2013. ‘Storebrand reduces carbon exposure in investments – 19 companies excluded.’ Storebrand.http://www.storebrand.no/site/stb.nsf/Pages/newsdesk.html#/news/storebrand-reduces-carbon-exposure-in-investments-19-companies-excluded-62954

136 Op Cit. 12

137 Op Cit. 37

138 Op Cit. 13

139 Op Cit. 13

140 Op Cit. 14

141 Op Cit. 12

142 FTSE. 2010. ‘FTSE CDP Carbon Strategy Index Series.’http://www.ftse.co.uk/Indices/FTSE_CDP_Carbon_Strategy_Index_Series/index.jsp

143 Jones, A. 2013. ‘Considering ESG risk in credit analysis and corporate bond portfolios.’ Mercer.http://uk.mercer.com/articles/esg-risk-in-credit-analysis-and-corporate-bond-portfolios

144 Op Cit. 98

145 Op Cit. 15

146 UNEP-FI and Global Footprint Network. 2012. ‘A new angle on sovereign credit risk – ERISC: Environmental Risk Integration inSovereign Credit Analysis.’http://www.unepfi.org/fileadmin/documents/ERISC_Phase_1.pdf

147 Op Cit. 15

148 Op Cit. 15

149 Op Cit. 143

150 Op Cit. 15

151 Op Cit. 15

152 Op Cit. 108

153 Standard & Poor’s Ratings Services. 2013. ‘What a carbon constrained future could mean for oil companies creditworthiness.’Ratings Direct.http://www.carbontracker.org/wp-content/uploads/downloads/2013/03/SnPCT-report-on-oil-sector-carbon-constraints_Mar0420133.pdf

154 Op Cit. 143


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155 The Co-operative Asset Management. 2012. ‘Responsible Investment Annual Review 2011/2012’.http://www.rlam.co.uk/PageFiles/8514/TCAM%20Responsible%20Investment%20Annual%20Review%202011-12%20-%20FINAL%20-%20Hi%20Res.pdf

156 Op Cit. 17

157 IIGCC. 2013. ‘Protecting value in real estate - Managing investment risks from climate change.’http://www.iigcc.org/publications/publication/protecting-value-in-real-estate-managing-investment-risks-from-climate-chan

158 Eichholtz, P et al. 2008. ‘Doing Well by Doing Good? Green Office Buildings.’ Institute of Business and Economic Research, University of California, Berkley.http://urbanpolicy.berkeley.edu/pdf/EKQ_Green_Buildings_040808.pdf

159 The Carbon Trust. 2011. ‘Energy management: A comprehensive guide to controlling energy use.’http://www.carbontrust.com/media/13187/ctg054_energy_management.pdf

160 LGIM. n.d. ‘The Green Debate’http://www.lgim.com/library/property/tirel_the_green_debate.pdf

161 Op Cit. 157

162 Op Cit. 157

163 Op Cit. 157

164 UNEP. n.d. ‘Why Buildings?’http://www.unep.org/sbci/AboutSBCI/Background.asp

165 USS. 2013. ‘USS Property Investments & Climate Change’http://www.uss.co.uk/UssInvestments/Responsibleinvestment/MarketWideInitiativesPublicPolicy/ClimateChange/Pages/Propertyinvestmentsandclimatechange.aspx

166 Della Croce, R., Kaminker, C & Stewart, F. 2011. ‘The Role of Pension Funds in FinancingGreen Growth Initiatives.’ OECD Publishing, Paris.http://www.oecd.org/finance/private-pensions/49016671.pdf

167 HM Government. 2011. ‘Enabling the Transition to a Green Economy: Government and business working together.’https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183417/Enabling_the_transition_to_a_Green_Economy__Main_D.pdf

168 Deutsche Bank Group. 2012. ‘Investing in Climate Change 2012- Investment markets & strategic asset allocation: broadening anddiversifying the approach.’https://www.dbadvisors.com/content/_media/Inv_in_CC_2012.pdf

169 Ibid

170 Mercer. 2011. ‘Global Investor Survey on Climate Change: Annual Report on Actions and Progress.’ IIGCC, INCR and IGCC.http://globalinvestorcoalition.org/wp-content/uploads/2012/12/Global-investor-survey-on-climate-change-8.pdf

171 International Energy Agency. 2012. ‘Energy Technology Perspectives 2012 - how to secure a clean energy future.’http://www.iea.org/w/bookshop/add.aspx?id=425

172 Ibid

173 Cullinen, M. 2013. ‘Machine to Machine technologies: Unlocking the potential of a $1 trillion industry.’ The Carbon War Room andAT&T.http://www.grahampeacedesignmail.com/cwr/cwr_m2m_down_singles.pdf

174 Ibid

175 Op Cit. 171

176 Hislop, H & Hill J. 2011. ‘Reinventing the wheel: a circular economy for resource security.’ Green Alliance.http://issuu.com/greenallianceuk/docs/reinventing_the_wheel_sgl/7?e=1948230/3396990

177 Op Cit. 18

178 Op Cit. 171

179 UNEP. 2011. ‘Towards a Green Economy: Pathways to Sustainable Development and Poverty Eradication.’http://www.unep.org/greeneconomy/Portals/88/documents/ger/ger_final_dec_2011/Green%20EconomyReport_Final_Dec2011.pdf

180 Op Cit. 176

181 Op Cit. 179

182 Op Cit. 20

183 WWF & CDP. 2013. ‘The 3% Solution: Driving Profits Through Carbon Reductions.’http://assets.worldwildlife.org/publications/575/files/original/The_3_Percent_Solution_-_June_10.pdf?1371151781

184 Op Cit. 171

185 Op Cit. 2

186 Op Cit. 168

187 Inderst, G., Kaminker, C & Stewart, F. 2012. ‘Defining and Measuring Green Investments: Implications for Institutional Investors’ AssetAllocations.’ OECD Working Papers on Finance, Insurance and Private Pensions, No.24, OECD Publishing.http://www.oecd.org/finance/private-pensions/WP_24_Defining_and_Measuring_Green_Investments.pdf


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188 Deutsche Bank Group. 2012. ‘Sustainable Investing: Establishing Long-Term Value and Performance.’http://www.dbcca.com/dbcca/EN/_media/Sustainable_Investing_2012-Exec_Summ.pdf

189 Frankfurt School UNEP Collaborating Centre for Climate and Sustainable Energy Finance & Bloomberg New Energy Finance. 2013.‘Global Trends in Renewable Energy Investment 2013.’http://www.unep.org/pdf/GTR-UNEP-FS-BNEF2.pdf

190 McCrone, A. 2013. ‘The strange case of the rally in clean energy share prices.’ Bloomberg New Energy Finance.http://about.newenergyfinance.com/about/blog/mccrone-the-strange-case-of-the-rally-in-clean-energy-share-prices/

191 Bloomberg New Energy Finance. 2012. ‘Solar surge record clean energy investment in 2011.’ http://www.bnef.com/PressReleases/view/180

192 Ibid

193 Op Cit. 189

194 Op Cit. 189

195 Op Cit. 190

196 Op Cit. 190

197 Op Cit. 190

198 Op Cit. 22

199 Op Cit. 22

200 FTSE international Limited. 2012. ‘FTSE environmental markets performance report Q1 2012.’ FTSE Research.http://www.ftse.co.uk/Indices/FTSE_Environmental_Markets_Index_Series/Downloads/FTSE_Environmental_Markets_Research_Report_Q112.pdf

201 FTSE Group. 2013. ‘FTSE Environmental Technology Index Series.’http://www.ftse.co.uk/Indices/FTSE_Environmental_Markets_Index_Series/Downloads/ET50.pdf

202 Op Cit. 21

203 Op Cit. 21

204 Impax Environmental Markets plc. 2013. ‘Annual financial report announcement for the year ended 31 December 2012.’http://www.impaxenvironmentalmarkets.co.uk/investor-relations/regulatory-news/annual-financial-report-03-04-2013

205 Bloomberg. 2013. ‘NYSE Bloomberg Global Energy Smart Technologies Index - EST:IND.’http://www.bloomberg.com/quote/EST:IND

206 Op Cit. 5

207 FTSE Group. 2009. ‘FTSE Environmental Technology 50 Index Selected by New York State Common Retirement Fund (NYSCRF).’http://www.mondovisione.com/media-and-resources/news/ftse-environmental-technology-50-index-selected-bynew-york-state-common-retireme/

208 FTSE Group. 2013. ‘FTSE Launches ET100 Environmental Technologies Index - Jupiter Ecology Fund Adopts New FTSE.’http://www.mondovisione.com/media-and-resources/news/ftse-launches-et100-environmental-technologies-index-jupiter-ecology-fund-adop/

209 Op Cit. 23

210 Op Cit. 166

211 IIGCC. 2011. ‘IIGCC Positioning Paper on Green Bonds.’http://www.iigcc.org/publications/publication/iigcc-positioning-paper-on-green-bonds

212 Röhrbein, N. 2013. ‘Environmental Risk: The Changing Climate: ‘Climate risk is only one among many factors.’ IPE online.http://www.ipe.com/magazine/environmental-risk-the-changing-climate-climate-risk-is-only-one-among-many-factors_49734.php?categoryid=20567#.Ulf7X9Kkq7w

213 Op Cit. 166

214 Op Cit. 187

215 The World Bank. 2013. ‘Green Bond Fact Sheet.’http://treasury.worldbank.org/cmd/pdf/WorldBankGreenBondFactSheet.pdf

216 Wagner, J. 2013. ‘EBRD confirms imminent $250m ‘environmental sustainability’ bond.’ Responsible Investor.http://www.responsible-investor.com/home/article/ebrd_confirms_sust_bond/

217 Op Cit. 23

218 Climate Bonds Initiative. 2013. ‘Bonds & Climate Change.’ Webinar, 15 Aug.

219 Caldecott, B. 2010. ‘Green Infrastructure Bonds: Accessing the scale of low cost capital required to tackle climate change.’ ClimateChange Capital.http://www.altassets.net/pdfs/ccc_green_infrastructure_dec.pdf

220 Op Cit. 24

221 Op Cit. 218

222 IEA. 2012. ‘World Energy Outlook 2012.’http://www.worldenergyoutlook.org/publications/weo-2012/


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223 Inderst G & Della Croce, R. 2013. ‘Pension fund investment in infrastructure – A comparison between Australia and Canada’ OECDWorking Papers on Finance, Insurance and Private Pensions, No.32, OECD Publishing.http://www.oecd-ilibrary.org/docserver/download/5k43f5dv3mhf.pdf?expires=1381501284&id=id&accname=guest&checksum=B7F70C610CF6A098ADD5107A8740F8B6;

224 Nelson. D & Pierpont, B. 2013. ‘The Challenge of Institutional Investment in Renewable Energy.’ Climate Policy Initiative.http://climatepolicyinitiative.org/wp-content/uploads/2013/03/The-Challenge-of-Institutional-Investment-in-Renewable-Energy.pdf

225 Ibid

226 Op Cit.168

227 Op Cit. 25

228 NAPF. 2013. ‘Pensions Infrastructure Platform starts search for investment manager.’http://www.napf.co.uk/PressCentre/Press_releases/0305_PIP_starts_search_for_investment_manager.aspx

229 Pension Funds Online. 2013. ‘NAPF and PPF confirm creation of pension scheme infrastructure fund.’http://www.pensionfundsonline.co.uk/519/pension-funds-insider/napf-and-ppf-confirm-creation-of-pension-scheme-infrastructure-fund-?AspxAutoDetectCookieSupport=1

230 Morgan, J. 2013. ‘Infrastructure investment and the UK’s economic renewal.’ Green Alliance policy insight.http://www.green-alliance.org.uk/uploadedFiles/Publications/reports/Infrastructure%20investment%20and%20the%20UK’s%20economic%20renewal.pdf

231 Cooper, G. 2013. ‘Novel structure helps PensionDanmark support onshore wind project.’ Environmental Finance.http://www.environmental-finance.com/content/news/novel-structure-helps-pensiondanmark-support-onshore-wind-project.html

232 Cundy, C. 2012. ‘Danish pension fund ploughs assets into renewables.’ Environmental Finance.http://www.environmental-finance.com/content/news/danish-pension-fund-ploughs-assets-into-renewables.html

233 Op Cit. 231

234 Op Cit. 168

235 Op Cit. 168

236 Buchner, B K et al. 2012. ‘Effective Green Financing: What have we learned so far?’ Climate Policy Initiative Report.http://unfccc.int/files/cooperation_support/financial_mechanism/long-term_finance/application/pdf/effective-green-financing-what-have-we-learned-so-far.pdf

237 Corfee-Morlot, J et al. 2012. ‘Towards a green investment policy framework – the case of low carbon climate resilient infrastructure.’OECD.http://www.oecd-ilibrary.org/environment/towards-a-green-investment-policy-framework_5k8zth7s6s6d-en

238 Green Growth Action Alliance. 2013. ‘The Green Investment Report: The ways and means to unlock private finance for greengrowth.’ World Economic Forum.http://www3.weforum.org/docs/WEF_GreenInvestment_Report_2013.pdf

239 Investing For Growth. 2013. ‘Information for Asset Managers Enquiring About Submitting Investment Opportunities.’http://investing4growth.co.uk/files/Summary%20of%20the%20initiative.pdf

240 Op Cit. 2

241 Op Cit. 5

242 Op Cit.2

243 IIGCC. 2013. ‘About Us.’http://www.iigcc.org/about-us

244 Op Cit. 26

245 OpenSecrets.org. 2013. ‘Lobbying: Top Industries.’http://www.opensecrets.org/lobby/top.php?indexType=i&showYear=2013

246 Hamilton, K. 2009. ‘Unlocking Finance for Clean Energy, the need for ‘Investment Grade’ Policy.’ Chatham House Energy,Environment and Development Programme Paper:09/04.http://www.chathamhouse.org/sites/default/files/public/Research/Energy,%20Environment%20and%20Development/1209pp_hamilton.pdf

247 Bowen, A. 2011. ‘The case for carbon pricing.’ Grantham Research Institute on Climate Change and the Environment & Centre forClimate Change Economics and Policy.http://www.lse.ac.uk/GranthamInstitute/publications/Policy/docs/PB_case-carbon-pricing_Bowen.pdf

248 IMF. 2013. ‘Energy Subsidy Reform: Lessons and Implications.’http://www.imf.org/external/np/pp/eng/2013/012813.pdf

249 Op Cit. 189

250 Op Cit. 224

251 Couture, T D & Bechberger, M. 2013. ‘Pain in Spain: ‘New Retroactive Changes Hinder Renewable Energy.’RenewableEnergyWorld.com.http://www.renewableenergyworld.com/rea/news/article/2013/04/pain-in-spain-new-retroactive-changes-hinders-renewable-energy

252 Op Cit. 27


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253 Scott, M. 2013. ‘Investors should strike while the planet is not too hot.’ Financial Times.http://www.ft.com/cms/s/0/e2ccceaa-e7e2-11e2-babb-00144feabdc0.html#axzz2ZOeL70pG

254 Op Cit. 38

255 Op Cit. 65

256 Op Cit. 248

257 Hope, M. 2013. ‘UK fossil fuel support increased by £500 million, says OECD.’ The Carbon Brief.http://www.carbonbrief.org/blog/2013/04/uk-fossil-fuel-support

258 OECD. 2013. ‘Inventory of Estimated Budgetary Support and Tax Expenditures For Fossil Fuels 2013.’http://www.keepeek.com/Digital-Asset-Management/oecd/environment/inventory-of-estimated-budgetary-support-and-tax-expenditures-for-fossil-fuels-2013_9789264187610-en#page1

259 Op Cit. 248

260 Green Climate Fund. 2013. ‘Green Climate Fund.’http://gcfund.net/home.html

261 Carr, M. 2013. ‘Climate Fund Head Prepares First Fundraising for 2014.’ Bloomberg.http://www.bloomberg.com/news/2013-09-19/un-climate-fund-head-prepares-first-fundraising-for-next-year.html

262 Ibid

263 Green Climate Fund. 2013. ‘Business Model Framework: Private Sector Facility.’http://www.gcfund.net/fileadmin/00_customer/documents/pdf/B-04_07_BMF_PSF_12Jun13_1745s.pdf

264 Ibid

265 IIGCC. 2011. ‘Response from the Institutional Investors Group on Climate Change to the Transitional Committee for the Design ofThe Green Climate Fund.’http://unfccc.int/files/cancun_agreements/green_climate_fund/application/pdf/iigcc_response_on_gcf_survey.pdf

266 Op Cit. 65

267 Op Cit. 25

268 Op Cit. 25

269 Murray, J. 2013. ‘Electricity Market Reform - Government promises to slash cost of decarbonisation.’ Business Green.http://www.businessgreen.com/bg/news/2282803/electricity-market-reform-government-promises-to-slash-cost-of-decarbonisation

270 Op Cit. 28

271 European Commission. 2013. ‘Climate Action Commissioner Connie Hedegaard welcomes the European Parliament’s positive voteon the carbon market ‘’backloading’’ proposal.’http://europa.eu/rapid/press-release_MEMO-13-653_en.htm

272 Austin, M. 2013. ‘National governments must show far greater leadership on structural reform than they have on backloading’. CMIA.http://www.cmia.net/9-news/34-press-release-001

273 IIGCC. 2013. ‘European investors urge ‘yes’ vote on EU emissions trading proposal.’http://www.iigcc.org/files/press-release-files/IIGCC_ETS_statement_Feb_14_2013.pdf

274 Krukowska, E. 2013. ‘Carbon Market Glut-Fix Plan Wins Backing in EU Parliament.’ Bloomberg.http://www.bloomberg.com/news/2013-07-03/carbon-market-glut-fix-plan-wins-backing-in-european-parliament.html

275 Op Cit. 273

276 Environmental Leader. 2013. ‘Carbon Prices Rise on EU Backloading Vote.’http://www.environmentalleader.com/2013/07/05/carbon-prices-rise-on-eu-backloading-vote/

277 Global Agenda Council on New Energy Architecture. 2013. ‘Financial Regulation – Biased against Clean Energy and GreenInfrastructure?’ World Economic Forum.http://www3.weforum.org/docs/GAC13/WEF_GAC_NewEnergyArchitecture_DiscussionPaper_2013.pdf

278 Talberg, A & Swoboda, K. 2013. ‘Emissions trading schemes around the world.’ Parliament of Australia.http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/2012-2013/EmissionsTradingSchemes

279 Op Cit. 65

280 Executive Office of the President. 2013. ‘The President’s Climate Action Plan.’http://www.whitehouse.gov/sites/default/files/image/president27sclimateactionplan.pdf

281 Op Cit. 65

282 Department of Energy and Climate Change. 2012. ‘Electricity market reform: policy overview.’https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48371/5349-electricity-market-reform-policy-overview.pdf

283 Osborne, G. 2011. ‘Together we will ride out the storm.’http://www.conservatives.com/News/Speeches/2011/10/Osborne_together_we_will_ride_out_the_storm.aspx

284 Harvey, F. 2013. ‘Investment in renewables may get hit despite rise in wind farm subsidies.’ The Guardian.http://www.theguardian.com/environment/2013/jun/27/windfarms-renewable-energy-subsidies

285 Aldersgate Group. 2013. ‘Investors call on chancellor for greater clarity on energy policy.’http://www.aldersgategroup.org.uk/asset/download/1083/Decarb%20target%20letter.pdf


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286 Harvey, F. 2013. ‘Green Investment Bank’s chief plans to borrow and raise debt.’ The Guardian.http://www.theguardian.com/environment/2013/may/09/green-investment-bank-shaun-kingsbury

287 Clarence House. 2013. ‘A speech by HRH The Prince of Wales at The Prince’s Charities Investor Engagement Event “Resilience andthe long-term: Rethinking Portfolio Strategy”.’http://www.princeofwales.gov.uk/news-and-diary/8340/speech

288 Op Cit. 29

289 Carbon Disclosure Project & CDSB. 2012. ‘CDP-CDSB Response to Defra Consultation: Consultation on greenhouse gas emissionsreporting draft regulations for quoted companies.’https://www.cdproject.net/en-US/News/Documents/CDP-CDSB-consultation-response-october-2012.pdf

290 Ibid

291 IIGCC, Ceres & Investor Group on Climate Change. 2010. ‘Global climate disclosure framework for oil & gas companies.’http://www.iigcc.org/files/publication-files/Global_Climate_OG_DisclosureFramework.pdf

292 Op Cit. 7

293 IIGCC, Ceres & Investor Group on Climate Change. 2009. ‘Global climate disclosure framework for automotive companies.’http://www.iigcc.org/files/publication-files/Global_Climate_Auto_Disclosure_Framework.pdf;and, IIGCC, Ceres & Investor Group on Climate Change. 2008. ‘Electric Utilities: Global Climate Disclosure Framework.’http://www.iigcc.org/files/publication-files/Global_Climate_Electric_Utilities_Disclosure_Framework.pdf

294 UNEP & KPMG. 2006. ‘Carrots and sticks for starters: Current trends and approaches in voluntary and mandatory standards forsustainability reporting.’ KPMG’s Global Sustainability Services and United Nations Environment Programme (UNEP).http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social-responsibility/reporting-disclosure/swedish-presidency/files/surveys_and_reports/carrots_and_sticks_-_kpmg_and_unep_en.pdf

295 Global Reporting Initiative. 2012. ‘Brazil, Denmark, France and South Africa governments join in commitment to sustainability reporting.’https://www.globalreporting.org/information/news-and-press-center/Pages/Brazil,-Denmark,-France-and-South-Africa-governments-join-in-commitment-to-sustainability-reporting.aspx

296 The Prince’s Accounting for Sustainability Project. 2013. ‘Project Aims and Mission Statement.’www.accountingforsustainability.org/about-us

297 Deloitte. 2013. ‘Need to Know: New UK narrative reporting regulations laid before parliament.’http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/Services/Audit/uk-audit-need-to-know-june-2013.pdf

298 Fleming, P. 2010. ‘SEC Issues Ground-Breaking Guidance Requiring Disclosure of Material Climate Change Risks andOpportunities.’ Ceres.http://www.ceres.org/press/press-releases/sec-issues-ground-breaking-guidance-requiring-corporate-disclosure-of-material-climate-change-risks-and-opportunities

299 Shankleman, J. 2013. ‘Will EU backloading vote rescue the carbon market?’ Business Green.http://www.businessgreen.com/bg/analysis/2278834/will-eu-backloading-vote-rescue-the-carbon-market

300 BusinessEurope. 2012. ‘Response to EU consultation on back-loading.’http://ec.europa.eu/clima/consultations/0016/organisation/businesseurope_en.pdf

301 Murray, J. 2013. ‘Did your company inadvertently help wreck the EU emissions trading scheme?’ Business Green.http://www.businessgreen.com/bg/analysis/2264888/did-your-company-inadvertently-help-wreck-the-eu-emissions-trading-scheme

302 ISS. 2013. ‘2013 Post Season Report: United States.’http://www.issgovernance.com/2013postseasonreportus

303 ShareAction. 2013. ‘Lobbying and political spending: increasing transparency and accountability for UK companies.’http://www.shareaction.org.uk/lobbying

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