Most money managers overseeing trillions of dollars in investments are ignoring many risks that climate change poses to the assets they operate for corporations, governments and other institutions, according to a new analysis.
Nearly half of the asset managers surveyed, or 44 percent, said they don't consider emerging climate risks a financial threat to their clients' money. That means many managers are failing to see long-term hazards to corporate supply chains, shuffling competitive landscapes, and diminishing resources like water, according to a report commissioned by Ceres, a group of institutional investors and environmentalists.
In practice, that number is likely higher. Seventy-one percent of respondents said they don't calculate climate risks when developing traditional investments, versus a "green fund." Those managers oversee assets amounting to $4.5 trillion.
"This perspective is disappointing," said Mindy Lubber, the group's president. "What this survey shows is that most money managers are ignoring significant 'hidden risks' in the trillions of dollars of investments they have a fiduciary duty to be managing."
Part of the problem is the long timeline over which climate change will occur. The analysis found that some money managers looked only a few years into the future when choosing stocks. They tended not to put a high priority on climate risks, apart from quick-hitting threats like new regulations.
Others, however, believe the value of investments will diminish over time if a company isn't adapting now to cope with long-range competitive issues, energy transformations, fewer resources and physical climatic thrashings.
Don't ask, don't tell
Greg Horn, with Pegasus Capital Advisors, said managers who fail to factor environmental elements into their investment decisions are vulnerable to a "blind side" blow. He was surprised by the report's results.
"As [natural resources] become more precious, more valuable, because there's more demand on them, businesses will use them more efficiently," said Horn, who did not participate in the survey. "Businesses that aren't in those categories now are getting beaten in the marketplace."
Disbelief in climate change isn't always the reason behind inaction. Half of the surveyed money managers believe that significant risks are bearing down on a spectrum of sectors, especially utilities, power producers, manufacturing and the automobile industry. But 47 percent of those concerned managers don't incorporate an analysis of climate risks and opportunities into their due diligence process.
One reason for this is that they weren't asked to. Nearly half, or 49 percent, of respondents said investors do not ask them to look at corporate climate risks.
"A key problem identified in the report is that asset owners, such as pension funds, governments, and other private institutional investors, are only just beginning to ask their asset managers to include climate risk and opportunity analysis in their investment due diligence," the report says.
Pushing the envelope on 'due diligence'
The survey was sent to the 500 largest asset managers listed in Pensions & Investments, and was also made available to others who heard about it through the Internet or Ceres newsletters and staff. Eighty-four managers handling $8.6 trillion responded. The survey was conducted between November 2008 and January 2009.
It comes as more pressure is being placed on institutional investors to avoid assets endangered by climate change. Corporate critics often complain that environmentalists are pushing them to be politically active in the climate debate by withholding large investments from utilities and other carbon-heavy sectors.
Insurance regulators, on a related front, will issue the nation's first mandatory climate regulation this spring. The "climate risk survey" asks several questions about what steps insurers are taking to safeguard their massive investments from emerging climate dangers.
With Ceres focusing on asset managers, the group is highlighting another layer in the financial framework that it says is reacting too slowly to the hazards at hand.
"But the vast majority of the asset managers who responded to the survey are only in first gear on climate change," Lubber said. "Most are in the preliminary stages of including climate risk in their due diligence, but very, very few are considering the broad range of climate risks in their company evaluations, including physical, regulatory, litigation and competitive risks."