Hey, is it hot in here?

LONDON — Global warming is permeating the portfolios of institutional investors, driven not only by a social conscience but also by regulatory changes and skyrocketing oil prices among other economic factors.

"The socially responsible side is not a core theme," said Ian Simm, chief executive of London-based Impax Asset Management Ltd., a specialist in environmentally friendly strategies with about $550 million under management. "The need to cut carbon emission is very real and increasingly becoming a competitive investment activity due to high oil prices and such. You can accept those drivers as a way of gaining (investment) returns irrespective of the moral authority behind it."

It is not known how much capital has been invested in strategies to reduce worldwide carbon emissions, Mr. Simm and others said. Investors are gaining a stake directly through various specialist pooled funds, but more often, they're indirectly exposed through hedge funds, commodities and infrastructure funds as part of a broader strategy.

Estimates by the Investor Network on Climate Risk, Boston, placed U.S. institutional investments in greenhouse gas reduction strategies around $1 billion, still relatively small compared with other energy-related strategies. In Europe, the market could be as much as four times higher because of a more developed socially responsible investing setting, according to estimates from some asset managers in the sector.

Strategies vary widely, but they generally combine one or more of the following categories — giving preference to companies that have made efforts to report and reduce global carbon emissions; speculating in businesses linked to alternative sources of energy; supporting investments aimed at cleaning up polluted industrial plants in developing countries; or trading in carbon credits, also known as certified emissions reduction, or CER, contracts.

While eco-friendly strategies are not new, recent events have pushed climate change to the forefront of many institutional investors' agendas. Anchoring the efforts is the Kyoto Protocol, an international accord ratified by about 140 countries to cut greenhouse gas emissions. The U.S. did not ratify the Kyoto accord, but high oil prices, Hurricane Katrina and the call by President Bush to lower America's dependence on fossil fuels are forcing U.S. companies to pay more attention to carbon-dioxide emissions.

"We're definitely seeing increased interest in climate change and climate-related impacts on investments," said Jane Ambachtsheer, global head of responsible investment for Mercer Human Resource Consulting Inc., Toronto. "What most (investors) are doing is looking at their existing portfolio and seeing how they relate to climate risks. There's not that much demand in proactive allocations yet, but we will expect to see more."

Among the investors in this arena:

• The $208.3 billion California Public Employees' Retirement System, Sacramento, has $185 million invested in its AIM Environmental Technology Program, which includes reducing emissions as part of a thematic platform addressing environmental issues. Managers are: NGEN Partners; Paladin Private Equity Partners LLC; Carlyle/Riverstone, a joint venture between Carlyle Group and Riverstone Holdings LLC; DJF Element; RockPort Capital Partners; and VantagePoint Venture Partners.

• The Environment Agency Pension Funds, Bristol, England, committed £20 million ($35.5 million) earlier this year to a private equity strategy aimed at businesses that develop technology to reduce greenhouse gas emissions. The move was part of an overhaul of its £1.3 billion portfolio in 2005 toward a socially responsible investment strategy.

• The £3.5 billion London Pensions Fund Authority Pension Fund is investing £10 million in a pooled fund managed by Impax focusing on renewable energy.

• Fonds de Reserve pour les Retraites, Paris, invested €600 million ($745 million) in socially responsible strategies that include reducing heat-trapping gasses as one of several investment principles.

"Global carbon dioxide emissions is a very important investment theme for us," said Nada Villermain-Lecolier, head of manager selection and SRI policy for the €28.2 billion pensions reserve fund. "Our chosen SRI managers will have to take it into account explicitly and invest in companies that have taken important steps in reducing emissions."

Sitting on the fence are the €196 billion ($241 billion) Stichting Pensioenfonds ABP, Heerlen, Netherlands, and the €71 billion Stichting Pensioenfonds PGGM, Zeist, Netherlands. Neither has invested in specific strategies to reduce carbon emissions, but officials at both said they are investigating the possibilities.

Some investors are wary of carbon-reduction investment strategies because of the risks in an area that is largely driven by regulatory developments, which are subject to revisions as governments change hands. Another is illiquidity compared to other investments; energy projects focusing on reducing emissions are by their nature, long-term investments.

"No one knows how it is going to play out in the long term," Impax Asset's Mr. Simm said.

The "cap and trade" system of carbon credits has spurred a range of investments related to CER contracts. As companies reduce greenhouse emissions, they can sell unneeded carbon credits under the European emissions trading scheme. Another strategy is to invest in clean energy projects in developing countries, capturing the difference in carbon emissions in the form of CER contracts and then selling them. A carbon credits futures market also is emerging.

Since trading began in January 2005, CER contracts have doubled in price, said Phil Brown, U.K. director of the European Climate Exchange, Amsterdam, which handles about 40% of the global CER market. The pan-European exchange is owned by the Chicago Climate Exchange to trade greenhouse emission credits. On April 22, 2005, the right to emit a ton of carbon traded at €16.85, and reached a high of €31 at the market close on April 19, 2006. However, because of reports that some countries had more CER contracts than needed for 2005, prices plunged to close at €16.70 on April 27.

A similar cap-and-trade system could be formed among eight U.S. states that voluntarily agreed to reduce greenhouse gases through the Regional Greenhouse Gas Initiative. Dan Bakal, director of electric power programs for CERES, a Boston-based coalition of investors and other interest groups dedicated to tackling global warming, believes the U.S. will eventually catch up with Europe in the carbon trading market.

"The need for capping carbon emissions (in the U.S.) is building momentum," Mr. Bakal said. "Even if prices don't go as high as in the EU, the amount of tons will be very significant and it will drive a lot of investment activities."

David Bates, CEO of London-based Carbon Trading Ltd., is also expecting "huge growth" in the clean energy sector internationally, including Asia.

In June, the company is launching one of the first SRI hedge funds with 100% of its assets invested in green technology companies and carbon credits, which will comprise at least 40% of the portfolio. The fund is hoping to initially raise about €125 million, and already has commitments from three unidentified pension funds.