Global Investment Portfolios Filled with 'Hidden' Climate Risks

Global Investment Portfolios Filled with 'Hidden' Climate Risks

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Investment portfolios around the world are filled with "hidden risks" because their managers do not consider climate change when making investment decisions -- largely because asset owners aren't asking them to.

In a survey of some of the world's largest asset managers, nearly half said climate change was either not on their client's radars, or had just surfaced as a concern. A trend toward short-term financial performance also make climate change assessment -- a long-term threat -- less likely.

"Despite the growing recognition of the far-reaching impacts climate change will have on the global economy, only a handful of asset managers are integrating climate risks and opportunities throughout their investment practices," Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk, which commissioned the survey, said in a statement Wednesday. "These findings make clear that the investment community is overly focused on short-term performance and ignoring longer-term business trends such as climate-related risks and opportunities. The recent subprime mortgage meltdown is a painful reminder of the fallout for investors who ignored 'hidden' long-term risks."

Nearly 75 percent of asset managers in the survey expressly exclude climate change in their overall due diligence. This is despite the fact that nearly half see significant climate change risk exposure for some sectors.

Yet not all asset managers are ignoring climate change investment risks. The California State Teachers' Retirement System (CalSTRS), the second largest public pension fund in the U.S., said Wednesday it would engage its active equity managers on their climate change analysis and push each manager to cultivate climate change and sustainable investment expertise and also tweak corporate governance voting processes to consider and address climate change.

"As a long-term investor, CalSTRS wants to invest in well-managed companies that can address the physical risks of climate change and adapt to the changing regulatory and market realities of a carbon-constrained economy," CalSTRS CEO Jack Ehnes said in a statement. "Our asset managers need to ask the right questions and critically evaluate how companies are positioned so that we're sure that our investments will produce outstanding risk-adjusted returns for our members." 

More than 80 asset managers responsible for $8.6 trillion in assets completed the survey, which was conducted in early 2009 at the request of INCR.

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