Asset owners and money managers moving now to address climate change risks to institutional portfolios called President Donald Trump's rejection of the Paris climate accord a setback, but one likely to be more than offset by the growing recognition of those risks among investors in the U.S. and abroad.
Analysts say the improving cost-competitiveness of wind and solar power, together with the prospect of better disclosure by corporations regarding the risks their businesses face from climate change, will contribute to a continued pickup in momentum for asset owner efforts to climate-proof their portfolios.
There's no way “to sugar coat it — it's definitely a bump in the road,” but it won't “derail the conversations and the strategies we're pursuing with investors who get it,” said Liqian Ma, a managing director with investment consultant Cambridge Associates, whose areas of focus include renewable energy.
The May 31 vote by shareholders of Exxon Mobil Corp. — calling on the oil giant to assess how the Paris call for action by signatory governments to limit the rise in global temperatures to 2 degrees Celsius will affect its business — found large U.S. pension funds among the ranks of those who believe climate change risks need to be addressed.
Executives at the $322.3 billion California Public Employees' Retirement System, Sacramento, and the $192 billion New York State Common Retirement Fund, Albany, hailed the vote as recognition that climate change risks are real.
The Exxon shareholders' vote shows “there is growing support in the business and financial community for the goals of the Paris agreement,” said CalPERS CEO Marcie Frost in a statement Thursday following Mr. Trump's decision. Ms. Frost said CalPERS will continue to support the Paris agreement.
“The Paris agreement enables us to manage material risk and build opportunity in our investment portfolio. Supporting its goals ultimately benefits our members and their long-term retirement security,” Ms. Frost said.
Mr. Trump's decision Thursday to quit the Paris accord will make the outlook for policy steps around the globe to stay below that 2-degree ceiling less certain, adding to the challenges asset owners face in grappling with long-term climate change risks in their portfolios, analysts say.
While the U.S. exit from the Paris accord won't short-circuit the momentum that's bringing investors to a “tipping point” now in addressing climate change, “this political volatility on the issue” is in no one's interest, said Emma Herd, CEO of Australia's Investor Group on Climate Change.
It muddies the outlook on policy for asset owners who are looking to build their response to climate change risks on two foundations — clarity on the steps governments need to take to stay within the 2-degree target and sufficient disclosures from the companies in which they invest to be able to tilt toward those most likely to thrive in a low-carbon environment, said Andrew Gray, senior manager, investments governance, with A$100 billion ($74.4 billion) AustralianSuper, Melbourne.
Ms. Herd said the policy setback comes as “non-traditional political players,” including investors and businesses, are poised to take the lead in addressing climate change risks, helped by the establishment of a framework for corporate climate risk disclosures due out at the end of June from the G-20's Taskforce on Climate-related Financial Disclosure.
The climate change debate has evolved from a qualitative discussion in the days before the Paris accord to one focused on quantitative analysis today, said Ms. Herd. That important transition has left private players poised to “drive economic transformation,” she said.
Mr. Trump's decision will have a negative impact, but the momentum behind moves to make portfolios more resilient to climate change risks should prove stronger, agreed Jennifer Anderson, responsible investment officer with the £9 billion ($11.5 billion) multiemployer plan TPT Retirement Solutions, Leeds, England. The U.S.'s stepping off the Paris train could even prove a spur for investors and businesses in the U.S., prompting them to redouble their efforts, she predicted.
In any case, the move to renewable energy from fossil fuels is “happening anyway,” driven as much by the economics of wind and solar, and growing demand for electric cars, as by policy, she said.
Jack Ehnes, CEO of the $206.5 billion California State Teachers' Retirement System, West Sacramento, said in a statement Thursday that the pension fund remains committed to “advancing long-term sustainability on a global scale,” despite Mr. Trump's decision to withdraw from the Paris accord.
New York state Comptroller Thomas P. DiNapoli said in a statement that as trustee of the York State Common Retirement Fund he will “continue to seek out sustainable investments and changes in corporate behavior that help the promise of the Paris agreement become a reality.”
Added New York City Comptroller Scott M. Stringer, fiduciary for the $170.6 billion New York City Retirement Systems, in a separate statement: “To be clear, the shift to a low-carbon economy is inevitable — it cannot and will not be stopped. We're going to fight back, lead by example and work towards a sustainable future in every capacity we can. If Washington works to turn back the clock on the environment, cities like New York will continue to stand up and protect it.”
Jacques Gordon, global strategist at LaSalle Investment Management, said there is already a “powerful movement” toward sustainability in the real estate sector that is driven by market forces and not regulation.
“Sustainability is good for employees and is good for the planet,” he said. “That's true of big companies and small companies.”
LaSalle executives believe the best and smartest workers prefer to be in green or sustainable buildings, Mr. Gordon said: “I don't think that will get undone by the exiting the Paris accord.”
Karen Wong, head of equity portfolio management and manager of carbon efficient strategies at Mellon Capital Management, said: “Despite President Trump's controversial withdrawal from the Paris agreement, we believe investors and companies will continue to make strides to address climate change-related risks. Collective actions now matter more than ever, and most investors recognize the impact and power from such actions.”
Meanwhile, Goldman Sachs Group (GS) Chairman and CEO Lloyd Blankfein took to Twitter to voice opposition: “Today's decision is a setback for the environment and for the U.S.'s leadership position in the world.”
David Sheasby, Martin Currie's head of governance and sustainability, said in an emailed statement that “there is little doubt that this will neuter U.S. foreign policy further” and added that “although we are disheartened by the announcement, (we) will continue to rigorously assess how the companies we invest in are prepared for the eventual demise of the fossil-fuel era.”
On May 25, 22 Republican senators, including Majority Leader Mitch McConnell, told Mr. Trump in a letter to leave the Paris accord, which they said would make it hard to fulfill his pledge to undo clean air regulations passed by the previous administration, without being sued. “Because of existing provisions within the Clean Air Act and others embedded in the Paris agreement, remaining in it would subject the United States to significant litigation risk that could upend your administration's ability to fulfill its goal of rescinding the Clean Power Plan,” the letter said.
Environmental Protection Agency Administrator Scott Pruitt agreed, while Secretary of State Rex Tillerson did not.
Sen. Heidi Heitkamp, D-N.D., whose state is a major energy producer, said in a statement Thursday that, “diplomatically, the United States is retreating. … The United States can’t remain an energy leader if we aren’t even at the negotiating table…. with this move, the United States is ceding its leadership role to China … it shows a lack of commitment to a true all-of-the-above energy strategy, investment in U.S. companies and good American jobs across all energy sectors.”
House Democratic Leader Nancy Pelosi of California said: “Democrats will join with states, cities, local groups and the private sector to fight to protect the future of our climate and our planet, regardless of the reckless and short-sighted actions that the White House takes.”
A report last month by UBS, subtitled “How investors can leverage carbon data,” noted the cost of wind power in the U.S. has fallen by 75% over the past seven years to $15 to $25 per megawatt-hour from $60 to $100. That makes new wind power cheaper than the $55 to $65 cost of a new natural-gas-fired plant, the report said.
Over that same period, the cost of a large solar installation dropped to $40 to $70 per MWh, from $100 to $300, the UBS report said.
Even the politics of the U.S. energy market should soften any fallout for renewables from Mr. Trump's action, analysts say. Research by Cambridge Associates showed “most of the jobs” created by wind and solar power are in Republican districts, making it unlikely tax credits on renewables could be in danger at the federal level, said Mr. Ma.
Meaghan Kilroy, James Comtois, Hazel Bradford and Arleen Jacobius contributed to this story.