Increasing public interest in environmental, social and corporate governance issues led to a flurry of media attention in 2007. Much of this focus was on the environment, and climate change in particular. Everyone from actors and rock stars to celebrity politicians and CEOs are adding their name to the cause. Indeed, these new players are gaining prominence in fields previously reserved for academics, scientists and policy experts (and Al Gore).
For example, at a recent U.N. debate on climate change, Virgin Group CEO Richard Branson proposed setting up an “environmental war room” to lead the world's efforts to find a fix for global warming. He suggested it should be run by a world figure in global warming and could serve as “a tool for the U.N.” to ferret out good ideas and calculate each nation's costs.
Mr. Branson is not alone in wanting to allocate resources to addressing climate risk. Businesses and investors have recognized that climate change is an increasingly important factor in everything from corporate strategy to investment strategy. Within the investment community, environmental concerns, while highlighting certain financial risks, have largely acted as a catalyst for innovation and opportunity.
2008's call to action
In February, during the Investor Summit on Climate Risk at the United Nations, some 50 U.S. and European institutional investors managing a total of more than $1.75 trillion in assets released a “climate change action plan.” Noting that climate change presents both material risks and significant opportunities, the investors pledged:
•to collectively invest $10 billion in clean technology opportunities over the next two years;
•to require that asset managers, consultants and financial advisers consider climate risks and opportunities;
•to incorporate green building standards into real estate portfolios and investment decisions; and
•to reduce energy use in core real estate holdings by 20% over the next three years.
Additionally, the plan calls for policy actions aimed at the Securities and Exchange Commission and Congress, engagement with companies to improve their disclosure and responses to climate change, and encouraging others in the industry — such as analysts, rating agencies and investment banks — to consider climate investment risks and opportunities.
This framework adds structure to the kinds of actions that we increasingly see investors take around the world. As global focus on climate risk continues to accumulate, investors are increasingly looking to diversify their portfolios with “green” or “clean” products — more often for financial than ethical reasons. This demand has led to the emergence of investment strategies in areas such as clean energy, carbon trading and clean tech (broadly defined as a range of products, services and processes that reduce or eliminate ecological impacts and/or provide superior performance while using fewer resources).
Given the state of the industry, the proliferation of investment options in these areas is paralleled by a frequent lack of track record and poor understanding of associated real risks and opportunities. Accordingly, challenges arise in the effective implementation of an investment in the area.
Nonetheless, we consider that clean-tech investments can play an important role in a long-term investor's broader investment strategy. These products can offer clients the potential to add alpha using new strategies, especially within the private equity market; diversify an existing opportunistic allocation within the portfolio; and allocate assets to “responsible investing” concepts.
Client interest in clean-tech investment is growing, and so responsible-investment consultants are investigating questions around low-correlation strategies, climate-change opportunities and responsible-investment approaches more broadly. In anticipation of this growing interest, we've been researching the current universe of existing investment opportunities.
For example, the proprietary desk of a major investment bank recently commissioned research on clean-tech investment opportunities for an eco-investment portfolio it has established. Mercer executives believe there are quality investment options in many of the asset classes and subclasses under the clean-tech umbrella. To date, our clients have shown the most interest in carbon credit, clean-tech and water products.
We expect clean-tech investing to continue on a rapid growth path in 2008, driven by public sector funds in the United States, Europe and Australia, followed by allocations within the endowment and foundation sector. We anticipate that more robust research will become available on clean-tech investing options, risks and returns. Still, significant investment commitments are needed to fund the technological developments and innovations required to enable deep cuts in greenhouse gas emissions around the world. The gain for investors who take up the call for action will be both financial and environmental.
Jane Ambachtsheer leads Mercer LLC's global responsible investment business, and Craig Metrick is Mercer's U.S. head of responsible investment.