The changing climate of investment



Bio-diversity, climate change, social responsibility, and ecorestoration are not words normally associated with decision-making in the corridors of power in the international finance and investment community. But increasingly there are signs of a greater engagement to mobilize private finance and capital markets in support sustainable development.

Paul Clements-Hunt, Head of the United Nations Environment Programme’s Finance Initiative (UNEP-FI) notes 'It’s been an action-packed and vibrant period for sustainable finance and responsible investment since the UNEP Finance Initiative Global Roundtable held in Melbourne, Australia in October 2007. In just four short months since the UNEP FI gathering, we have seen a series of pivotal international meetings that are starting to forge a new agenda for the financial services sector in coming years that recognizes the need to deal with climate change.

Although the notion of socially responsible investing has been around for some time, the movement only began to accelerate in the last few years. At the United Nations Climate Change Conference held in Bali, Indonesia in December 2007, 37 of the world’s finance ministers (and separately a similar number of trade ministers), met for the first time ever, to discuss the need for a market-based policy framework with incentives to boost financing in all its aspects to deal with climate change.

At UNEP’s 2008 Governing Council meeting and Global Environment Ministerial Forum in February in Monaco, 150 governments gathered to debate 'Mobilizing Finance for Climate Change.' In addition to the Ministerial plenaries and Governing Council meetings, a series of 17 side events explored a broad range of environmental and sustainability issues.

In late February, an OECD - World Economic Forum (WEF) gathering looked at the complex issues around Banking for Development, with particular focus on how multilateral financial institutions and the finance-focused policy community could boost financial flows into effective development activities.

More recently, during an Investor Summit on Climate Risk, held in New York City, nearly 50 U.S. and European institutional investors, representing $1.75 trillion in investments, endorsed a new climate change action plan and pledged to invest up to $2 billion over the next two years in the development of clean energy technology.

The New York event was hosted by Boston-based Ceres and the United Nations Foundation and was attended by more than 450 investor, financial, and corporate leaders from around the world. The action plan emerging from the New York meeting calls for the participating investors to incorporate green principles into their investment decisions and to achieve a 20% reduction in energy used in their core real estate investment holdings over the next three years.

What this string of high profile gatherings of financial sector leaders reflects is the quantum shift in perspective that has taken hold with respect to sustainable development and responsible investing.

Financial institutions are the backbone of the global economy, providing capital for innovation, infrastructure, job creation and affect not only spending by individual consumers, but also growth of entire industries. Banks are also risk management experts which can adequately assess the financial risks of continuing to invest in carbon intensive and less environmentally sound projects.

'There is no question about it: The sustainable movement in investing is picking up momentum,' said by Michael Jantzi, president of Jantzi Research Inc., a Toronto-based investment research house that focuses on evaluating companies’ environmental performance and 2006 winner of the GLOBE Capital Markets Award for Sustainable Investment and Banking.

There are also more sustainable stocks and funds to invest in today, Jantzi said in a recent Globe and Mail article. 'We’re seeing new entries in the market such as water funds and clean technology funds.' Most of the major banks have launched some kind of sustainable fund, he added.

The Bank of Nova Scotia has just launched the Scotia Global Climate Change Fund, the first of its kind in Canada, designed for investors looking for exposure to environmentally responsible companies, without compromising solid returns.

RBC is one of only 15 financial institutions worldwide named to the Climate Disclosure Leadership Index 2007, a prestigious honour roll of world leaders at understanding and managing the financial risks and opportunities resulting from climate change.

Citigroup announced in 2007 that it would spend $50 billion over the next 10 years to address global climate change through investments, financing and related activities to support alternative energy and clean technology among clients and markets, as well as within its own businesses.

GE Energy Financial Services announced recently that it has raised its 2010 renewable energy investing target by 50 percent to $6 billion, and has just topped $3 billion. GE Energy Financial Services, a unit of GE, crossed the $3 billion mark with its single highest-value wind deal, a $300 million investment in wind projects spanning four states.

Last year Morgan Stanley created the Morgan Stanley Carbon Bank to assist clients seeking to become carbon neutral. In conjunction with Det Norske Veritas (DNV), an international provider of emissions data certification, the service provides integrated carbon verification and offsetting capabilities based on recognized international standards.

Three of the world’s leading financial institutions have united to develop The Carbon Principles, a set of climate change guidelines for advisers and lenders to power companies in the United States. These Principles create an approach to evaluating and addressing carbon risks in the financing of electric power projects. The principles also call for banks to promote carbon capture and storage technologies.

The Principles were developed in partnership by Citi, JPMorgan Chase and Morgan Stanley, and in consultation with leading power companies American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Company. The need for the Principles stems from the risks the power industry faces with respect to uncertainties in regional and national climate change policies.

While more and more investors and financial institutions view the environment as a major long-term investing opportunity, that optimism is tempered with concerns about the need for certainty in the policy environments.

As was noted Alain Grisay, chief executive of F&C Asset Management in a GLOBE-Net article last week, 'Investors and industry need certainty over what the regulatory regime will be over the next two to three decades in order to release the billions of investment capital that will finance the shift we need to make to a low-carbon energy system'

'Leveraging the vast energy efficiency opportunities at home and abroad holds especially great promise for investors,' said Mindy Lubber, president of the Ceres investor coalition and director of the Investor Network on Climate Risk.

The shift in perspective in the normally conservative financial sector is part of a larger redefining of the role of business and its place in society. As the World Business Council on Sustainable Development (WBCSD) notes, societal perceptions of the role of business have shifted markedly in the last two decades. 'While the core functions of business remains innovation, technology development, capital investment and the implementation of sound management capability for wealth creation, business is increasingly being looked upon as a bringer of solutions to global problems.'

How this finds expression in the world of investment financing was summed up by Michael Jantzi in the above-noted Globe and Mail article 'Companies used to say that they weren’t interested in green or socially responsible investing because they had to first consider their fiduciary duty to their investors and shareholders.'

Now notes Jantzi they’re saying, '’The world has changed and if we are not evaluating the environmental risks of the companies we’re investing in, then we’re not doing our fiduciary duty.'

A comprehensive survey of the world’s largest institutional investors released in July 2007 showed that the global giants of investing are actively integrating environmental, social and governance (ESG) issues into their investment policies and engagement strategies. The report notes that eighty-eight per cent of investment manager signatories to the Principles for Responsible Investment (PRI) launched in April 2006 by UN Secretary-General Kofi Annan, are conducting at least some shareholder engagement on ESG issues, while 82% of asset owners are doing so.

UNEP-FI Head Paul Clements-Hunt, a scheduled speaker at the upcoming GLOBE 2008 Conference in Vancouver, noted in an address last month in Norway the period from late 2006 to the end of 2008 will be recognized as a pivotal moment when mankind finally began to understand more fully the economic, social and environmental implications of the threat that global warming.

'For the leaders in global financial services the concepts of Value at Risk and financial materiality are well understood,' he noted. 'Now, the different parts of our financial services system - - asset owners, asset managers, banks and insurers - - will have to work hard to understand how Natural Value at Risk will impact their business within both short and long-term horizons.'

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