Investors must make it clear they require governments to take the lead on global warming, says Rory Sullivan
Climate change is rapidly emerging as our greatest environmental and
economic challenge. It is widely recognized that we cannot rely on
markets alone to deliver the substantial cuts in greenhouse gas
emissions necessary to minimize the likelihood of catastrophic climate
change.
To ensure that companies reduce their greenhouse gas emissions,
governments need to establish a long-term policy framework that
provides appropriate incentives and investment certainty. Without
policy certainty, companies, particularly in energy-intensive sectors,
will find it difficult to make decisions that properly account for the
risks associated with climate change policy. Stronger and clearer
policy is also critical to strengthening investor confidence in areas
such as renewable energy, where companies’ business models are
critically dependent on the existence of a supportive long-term policy
environment.
Recognizing these problems, institutional investors – pension funds and
asset managers – have started to play a greater role in public policy
debates on climate change. The Institutional Investors Group on Climate
Change (IIGCC), for instance, has a specific programme of public policy
engagement and a key commitment of the IIGCC Investor Statement on
Climate Change – now supported by 16 institutional investors managing
assets worth £850 billion – is that the signatories will engage
with public policy makers on climate change issues.
The IIGCC’s engagement with UK and European policy makers has
emphasized the importance of governments specifying and committing to
meeting long-term policy goals as an essential requisite for companies
to make economically efficient investment decisions that properly
incorporate climate change factors. The IIGCC has explicitly supported
the UK government’s policy target of, by 2050, reducing UK greenhouse
gas emissions by 60 per cent compared with 1990 levels.
Expressing support for stronger climate change policy may seem a
surprising position for a large institutional investor to adopt,
especially when this may impose additional costs on at least some of
the companies in which they are invested. However, the reality is that
investors’ interests are threatened by the potential for climate change
to materially and severely impact on economies as well as individual
companies. Therefore, many institutional investors now accept that
public policy engagement is entirely consistent with their fiduciary
responsibilities to maximize long-term returns. Given that many
business voices continue to oppose more robust climate change policy,
it is essential that investors clearly communicate their view both to
companies and to policy makers on this most important of issues.
Rory Sullivan is head of investor responsibility at Insight Investment, the asset management arm of HBOS
