Institutional Investors and Climate Risk

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Institutional Investors and Climate Risk

Ariane van Buren, Ph.D. Director of Investor
Engagement Ceres and Investor Network on Climate
Risk
Pennsylvania Insurance Summit November 6,
2008 Rachel Carson Builindg Harrisburg, PA
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A Critical Issue for Insurers

• We'd be out of our minds if we wrote weather
  insurance on the opinion global warming would
  have no effect at all. - Warren Buffett,
  May 2006
• The insurance industry must start actively
  adapting in response to greenhouse gas trends if
  it is to survive There could hardly be a debate
  of greater importance to the insurance industry.
• - Lloyds, Climate Change Adapt or Bust
• "Any insurance company that is not focusing on
  climate change and related possible damage is not
  being realistic in looking at their future
  profitability. As an investor, a lack of
  disclosure troubles me."
• - Jack Ehnes, CEO CalSTRS, ex-Colorado
  Insurance Commissioner

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Why Do Investors Care? Business Risks and
Opportunities

• Opportunities
• Competitive advantage
• Consumer interest
• Reputational advantage
• Employee satisfaction
• Customer satisfaction

• Risks
• Policy/Regulatory
• Physical
• Reputational
• Competitive
• Legal

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Investor Network on Climate Risk

• Network of over 70 investors with more than 7
  trillion in assets
• Members act on their fiduciary duty
• to manage risks - regulatory, competitiveness,
  legal, reputation, physical - and
• to capture opportunities posed by climate change

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Investor Summit on Climate Risk History

• 2003, 2005, 2008
• Convened 500 investors, Wall Street leaders and
  CEOs,
• Represented 22 trillion dollars globally
• Considered the scale and urgency of climate
  change risks and opportunities

Thanks to the leadership of many participating
at this summit, the idea that climate risk
affects many industries around the world that are
embedded in our portfolios is being absorbed into
the very fiber of our financial markets, from
banking to investment, from insurance to
re-insurance - Denise Nappier, CT State Treasurer
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Investor Sectors within INCR

• State Treasurers CA, CT, FL, IA, IL, KY, MA,
  MD, ME, NC, NJ, NM, OR, PA, RI, VT
• State/City Comptrollers CA, NYS, NYC
• Public Pension Funds CalPERS, CalSTRS, CT, FL,
  IL, MD, NC, MERS of Michigan, NJ, NYC, NYS, NYS
  Teachers, WA
• Asset Managers AIG Investments, BlackRock, BC
  Investment Management, FC Asset Management,
  Stark Investments, State Street Corporation,
  TIAA-CREF)

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Investor Sectors within INCR

• Labor Pension Funds AFSCME, CWA/ITU, Machinists,
  SEIU, Sheet Metal Workers, Teamsters, UNITE HERE
• Foundations Duke Foundation, Nathan Cummings,
  Rockefeller Brothers Fund, United Nations
  Foundation
• Religious Investors Christian Brothers
  Investment Services, United Methodist Church
  General Board of Pensions and Health Benefits,
  Presbyterian Church USA, Evangelical Lutheran
  Church in America

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INCR strategies

• Articulates assetl owners self-interest in
  climate risk and investment opportunity
• Identifies their common interests in climate
  change
• Brings asset owners together
• To act in concert
• And focus engagement at a governance level

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Common Interests

• Combining ownership stakes gt more bargaining
  power
• Pooling resources and coordinating approaches gt
  stronger voice and share costs of engagement
• Sharing responsibility of research, engagement,
  and monitoring
• Costs spread among asset owners, lower for each
• Sharing knowledge, experience gt more effective
  action
• Sharing political risk and risk of adverse public
  opinion

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INCR Identifying Risks

• Business case for addressing climate change is
  focused not on enhancing short-term returns for
  any one holding. Instead, it is in mitigating the
  disastrous consequences predicted as a result of
  climate change and preparing portfolio holdings
  for the global shift to a lower carbon economy.
  Mercer, 2006
• Ceres research insurance, sectoral corporate
  governance on climate change, ranking companies
• Surveying fund managers (State Treasurers and 4
  largest state retirement systmems)

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INCR Approach

• Fiduciary responsibility
• Chain of command over investments
• Trustees -gt funds -gt fund managers -gt companies
• Actions any for all institutional investors
• Menu of options so any can play role
• From beginners to long-established leaders

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INCR Action Plan

• Key Components
• Request corporate disclosure of financial risks
  from climate change
• Require investment managers to assess climate
  risk in portfolios
• Factor carbon costs into valuations investment
  analysis
• Invest in low-carbon tech -gt 10B
• Improve energy performance of real estate
  portfolios investments
• Support call for government action on climate
  policy and energy efficiency

• Over 50 Signatories
• State Treasurers CA, CT, FL, MD, MA, NC, OR, PA,
  RI, VT
• Public Funds CalPERS, CalSTRS, IL, NJ
• AFSCME, SEIU, UNITE HERE
• Deutsche Bank, FC Asset Management
• Total over 1.75 trillion

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Asset Owners Own Governance Policies

• CalPERS incorporated INCR Climate Change and
  Corporate Governance criteria into its Corporate
  Governance Focus List
• Internal assessment of holdings across all asset
  classes
• Devoting resources to raising trustees awareness
  of investment opportunities in performance of new
  energy funds and investments in clean technology

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Corporate Governance and Climate Change

• Climate Governance Addressing climate change
  through corporate governance
• Board oversight (responsibility for environmental
  issues)
• Public disclosure (sustainability reports,
  securities filings)
• Emissions accounting (emissions reductions
  targets)
• Strategic planning (to reduce climate risk)
• Management execution (coordinating response
  strategies)

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Corporate Governance Climate Change Research
Available at www.ceres.org
10 industries evaluated

• Food beverage
• Forest products
• Industrial equipment
• Metals and mining
• Oil and gas

• Airlines
• Autos
• Chemicals
• Coal
• Electric power

Research conducted by Risk Metrics
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Financial Services Climate Change

• Wall Street research reports on climate
• Investment analyst briefings
• Petitions to SEC on climate disclosure
• New green investment and retail products
• Increased reference to climate in annual reports

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Banking Sector

• Banks as primary financiers of the worlds most
  carbon-intensive industries
• CLIMATE RISK Climate change legislation will
  have a large effect on how banks price
  securities, assess credit risk, and make
  investment decisions.
• CLIMATE OPPORTUNITY Banks are recognizing
  opportunities in carbon emissions trading,
  renewable energy financing, clean-tech
  investments, and consumer demands for
  climate-focused investment/retail products and
  services.

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Corporate Engagement

• Expects companies to
• Disclose climate risk and opportunities
• Reduce emissions and climate risk
• Support public policies to reduce GHG emissions
• Capture opportunities presented by the transition
  to a low-carbon economy

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Corporate Engagement Results

• Record-breaking results in 2008
• 57 resolutions filed with U.S. companies, up 33
  from last year
• Highest vote ever for a climate resolution 39.7
  (Kroger)
• Proxy advisor support rose 50-100 over last year
• Some companies finally taking action (e.g.,
  Centex)
• Unprecedented XOM media coverage, much higher
  vote much higher vote on renewables resolution,
  on renewables resolution

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Engagement Opportunities

• Urging comprehensive corporate responses to
  climate risk
• Corporate Governance and Climate Change research
  program
• Expanding climate risk scrutiny by investors,
  analysts, etc. 
• Developing proxy voting guidelines on climate
  risk
• Engaging corporations through shareholder
  interaction
• 60 planned filings. Focus on disclosure,
  quantitative GHG reduction targets, energy
  efficiency (buildings, electric utilities,
  sustainability reporting to include GHG reduction
  strategies. Growing involvement from largest
  pension funds.

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INCR in Investment

• Seeking financial returns in newly productive
  sectors and protection from escalation of energy
  costs Internal actions across all asset classes
• Increasing energy efficiency in holdings
• Surveying fund managers (4 largest public funds
  State Treasury)
• Engaging with more companies each year targeting
  widely held coal-fired electric utilities exposed
  to carbon regulation, to disclose plans to reduce
  GHG emissions

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Global New Investment in Clean
Energy 2004 2007
60 growth
148.4bn
58 growth
76 growth
92.6bn
58.7bn
33.4bn
Source New Energy Finance
Grossed-up estimate based on disclosed deals. New
investment only.
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INCR Member Investments

• CalPERS 1.3 Billion
• Private equity stakes in environmental technology
  venture funds, environmentally screened stock
  portfolios
• CalSTRS 840 Million
• Renewable energy projects in Europe and the U.S.,
  other cleantech investments
• New York City Retirement Funds 825 Million
• Private equity in clean tech, energy efficient
  real estate,, public equity in sustainable
  investment, water, and environmental solutions
• New York Common Retirement Fund 780 Million
• Renewable energy infrastructure investments
• Pennsylvania State Treasurer's Office 90
  Million
• Keystone Green Fund, supporting VC and project
  investments, clean technology stocks
• Oregon State Treasurer's Office 50 Million
• Alternative energy technology holdings
• Connecticut State Treasurer's Office 25
  Million
• Credit Suisse Fund of Funds commitment
• Another Major State Retirement Fund target 200
  Million
• Renewable energy infrastructure investments

Total 3.8 B
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Investment Opportunities

• Require asset managers, consultants and
  advisorsto consider climate risks and
  opportunities
• Audit real estate portfolios to increase energy
  efficiency and boost long-term value
• Require investment managers to identify carbon
  liabilities and risk management strategies /
  climate risk language in investment RFPs
• Invest in clean technologies stocks and private
  equity - including local venture capital - to
  stimulate economic development

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Endorsers include CalPERS, CalSTRS, NYC
AFSCME, SEIU Merrill Lynch CA, CT, FL, KT, ME,
MD, MA, MI, NJ, NC, NY, OR, RI, VT, WA Alcoa,
Allianz SE, BP America, DuPont, Sun Microsystems,
etc.

• 65 investors and businesses worth more than 4
  trillion call for
• National climate policy to reduce GHG emissions
  60-90 below 1990 levels by 2050
• Realign energy and transportation policy to
  stimulate investment in clean technology
• SEC guidance on climate disclosure

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Future Perspectives

• As effects of climate change continue to be
  magnified
• Augmenting physical manifiestations
• Heightened regulatory risk (Clean Aire Act, etc)
• Growing consumer awareness
• Increasing investment opportunities
• Changing expectations for North American firms
• Positioning themselves to create solutions to
  climate change
• Growing consumer interest in environmental
  products
• Strong investor interest in climate change
• More responsive SEC

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Investment Responses

• Engaging fund managers
• Assessing fixed income managers
• Interest in private equity
• Emerging consensus on energy efficiency in real
  estate
• Carbon implications of infrastructure investment
• Methods and extent of company engagement

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For further information contact Ariane van
Buren, Ph.D. Ceres Director of Investor
Engagement 212-222-0700 vanburen_at_ceres.org www.in
cr.com www.ceres.org