CAMRADATA, a leading provider of data and analysis for institutional investors, has published a new white paper entitled, Low Carbon – Planning long-term investments in a low carbon world, based on a roundtable discussion it hosted in September with an expert panel of investment managers, pension consultants and asset managers.

The white paper analyses the potential of the low carbon world for those investing now and in the future, and considers how investors should go about planning long-term investments in the low carbon economy.

The debate opened with a discussion about the fact that while many investors accept that climatic catastrophe in this lifetime is a real possibility, only a minority are concerned enough to put climate change on their agenda.  Given this fact, what would make those who don’t consider climate change, alter their attitude?

Sean Thompson, Managing Director, CAMRADATA said, “In the investment world, low carbon doesn’t have to mean low returns. However, turning opportunity into action continues to be a challenging predicament for investors and low carbon investment is no different.

“We are at the point where if institutional investors do not adjust their portfolios in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) guidelines they are at risk of being left behind. Greater disclosure from companies and investors will be vital in ensuring that strategic issues regarding managing the risks and opportunities associated with climate change can be dealt with openly.

“Our paper explores the future for low carbon investments and the need for a clear channel of communication between different parties involved in defining and disclosing the investment process, to enable a smooth transition towards a low carbon portfolio,” he added.

Key findings:

Recent trends suggest that the global economy is on the pathway to decarbonisation, with China and other major economies changing their tune about carbon intensity. These transitions present high impact risks to asset managers, however, low carbon footprints have been firmly placed on the agenda.

There is a consensus amongst financial institutions that the economic consequences of climate change to their business are difficult to quantify and measure. The lack of a government-backed framework setting out how to tackle greenhouse gas emissions is becoming a burden for institutional investors.

The discussion began with the acceptance of climate change and the recognition that many different groups are engaged in the fight to restrict manmade problems.

Melissa McDonald, head of global equities product for HSBC Global Asset Management, said, “I wouldn’t say there is one particular group leading the way to a Low Carbon world. To an extent, regulators, politicians, social activists and investors are all playing their part.”

However, most investors do not yet have climate change as part of their agendas.

Kate Brett, RI consultant at investment advisory firm, Mercer, said that in a recent poll of pension fund clients across Europe, just 5% said they factored in climate change into their holdings. Kate said, “Europe is usually considered as leading on responsible investment so the finding that 95% of our clients don’t consider climate change is striking.”

Dom Giuliano, deputy CIO of Magellan Financial Group in Sydney, highlighted how the world has changed, which causes concern amongst investors.  He said, “We are changing from a 150-year-old paradigm predicated on coal, gas and oil to something new.”

He added that because the “something new” is not yet fully formed, it is understandable many asset owners are reluctant to engage in Low Carbon commitments.

The panel agreed it was no wonder most investors want to wait to see champions of renewable energy prove themselves on a more permanent basis

In the meantime, there are various investment strategies to suit asset owners convinced that Lower Carbon is coming, but are not sure how. One such strategy is the Climate Aware World Equity Fund from UBS, created for the UK’s National Employment Savings Trust (NEST) but now available to all.

Rodrigo Dupleich, co-portfolio manager of the Strategy, explained that the UBS Fund aims for similar returns to a global equity benchmark, holding a similar number of stocks (c.2,000) but aiming for 50% lower carbon emissions relative to the benchmark among other climate aware tilts.

The UBS Fund could be a way for investors to enjoy returns in line with global equities while reducing their exposure to fossil fuels and giving a reasonable and ubiquitous incentive to all public companies to be greener.

HSBC Global Asset Management has launched a systematic global equity strategy that tilts on a number of factors. Instead of using only Low Carbon to decide tilts above or below each stock’s index weight, HSBC GAM will combine inputs on companies’ carbon emissions with other risk premia such as value, size and momentum.

Melissa McDonald pointed out that factoring in carbon risk is far from a precise art because there is no set price or determination of how to measure the risk (contrast the price of a barrel of oil). Joseph Dutton, an energy policy advisor at think-tank, E3G, agreed. He said, “Carbon risk is very much tied up with national energy policy.”

and the UK plans to do so by 2025, countries in Central and Eastern Europe produce coal and rely on it for both domestic usage and export wealth. So long as nations have the power to endorse and even subsidise fossil fuel industries (and there are numerous legal means of so doing), market forces in carbon pricing and subsequently carbon risk estimates will be affected.

The panel then approached carbon risk evaluation from another perspective – reporting greenhouse gas emissions. These are divided into emissions arising from a company’s own activities (Scope I); emissions generated by purchased energy (Scope II); and emissions arising as an indirect result of the business (Scope III).

While the calibration is well established, reporting remains a voluntary exercise. Measuring emissions, however, is yet another practice whose importance is on the increase.

In the meantime, Magellan has an approach to Low Carbon that is quite different to the systematic strategies of UBS and HSBC. Dom Giuliano recounts that it was born almost by serendipity, when US clients of Magellan’s existing global equity strategy noticed that it had low exposure to high-carbon-emitting stocks.

These clients encouraged the Australian asset manager to make this characteristic explicit and the MFG Global Low Carbon Strategy was born. Magellan looks for “quality” companies that can grow their revenues predictably and with substantial and sustainable excess returns over their cost of capital.

As a final insight into how big business views renewables, Ross Wigg, Head of Renewables at Lloyds Register cited the Lloyds Register Technology Radar, which polls energy executives. When asked what is their firm’s primary driver for investing in renewable technology, the two most popular responses were to improve operational efficiency and to reduce costs.

Environmental impact was some way behind in third, almost on a par with competitive advantage and increasing the lifespan of assets. It is evident from these results that the switch to renewables is being conducted on commercial principles.

To conclude, the panel believe the world is moving towards renewable energy inexorably, if not in an entirely clear or consistent manner. They also pointed out that Pension funds, insurers and other institutional investors would do well to envisage how all their assets will be affected by the transition, which assets might prosper and which, like the horse and cart, will lose their utility and end up with only sentimental value.

Sean Thompson, Managing Director, CAMRADATA said, “The white paper highlights key concerns for investors considering climate change and the transition to a lower-carbon economy. There are risks and opportunities, but climatic change isn’t going away and investors must be prepared.

“A 40% low carbon portfolio is one initiative which can perhaps set future trends. Reducing exposure to carbon is a step in the right direction and in accepting the inevitable, it is a low-cost insurance policy,” adds Mr Thompson.