UK Funds Are Hampered by Carbon Rules, But Will US Funds Face Similar Pressures?

(April 12, 2011) — Stricter carbon emission rules are hampering United Kingdom (UK) corporate profits and hurting local pension schemes who ignore such rules when investing. Will American retirement funds soon face similar pressures?

Carbon Footprint Investments, a UK-based specialist company working with BNP Paribas to produce investment products, is asserting that more stringent carbon emission rules are hampering corporate profits, and, by extension, UK pension schemes that fail to factor in climate change issues when deciding investment strategies. It is in the best interests of schemes to avoid the “wait and see” approach in favor of a more active and aggressive strategy, the investment firm said. “There is a feeling that climate change is an issue for the future – the truth is that corporate profits are already being affected, yet we are only at the beginning,” chief executive Ralph Pettengell said, according to Professional Pensions. He explained that rising energy prices and taxes would have a compounding effect on some stocks. Pettengell added: “Our message is that anyone involved in pension fund investment strategies needs to be reworking their portfolios to reflect this change or over the long term they can expect significant underperformance.”

Yet American funds — operating under a different regulatory regime — are unlikely to see similar pressures anytime soon, says Mercer Consulting’s Craig Metrick, an acknowledged expert in the field. Without a doubt, institutional investors around the world have been more aggressive in keeping ESG factors in mind when making investment decisions, Metrick says. But, while there has been a greater recognition globally to reduce emissions, the US is still lagging behind the UK, largely due to the UK’s more supportive regulatory environment. According to Metrick, Principal and US Head of Responsible Investment for Mercer, one of the reasons that US institutional investors have not been as aggressive in investing in renewable energy compared to their European counterparts is because of a lack of legislation. “In Europe, there are certain regimes for reducing carbon emissions, fostering a better legislative environment, whereas the debate on climate change and renewable energy has been very politicized in the US,” he says.

This doesn’t mean American pension funds aren’t proactively acting at all, of course. Metrick indicates that the consultancy’s clients are generally investing more heavily in renewable energy and clean tech through private equity funds. “In Europe, however, there may be more direct deals than there are in the US,” he tells aiCIO, noting that investing directly in clean tech requires a different level of due diligence. “In the US, funds may have the expertise to invest directly but it is more time and resource efficient to invest via private equity funds.” In February, a Mercer study — titled Climate Change Scenarios – Implications for Strategic Asset Allocation — asserted that institutional investors could lose trillions of dollars over the coming decades as a result of “continued delay in climate change policy action and lack of international coordination.” Opportunities, the report said, lie in an increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets, with investment opportunities in low carbon technology reaching up to $5 trillion by 2030.

This action has been seen elsewhere. Jennifer Urdan and Alexandra Readey of Cambridge Associates last month told aiCIO that their clients have become increasingly interested in Environmental, Social and Governance (ESG) factors, upping their allocations to renewable energy in recent years. “There is significant investment by institutional investors and corporate investors globally, reflecting the migration of the energy infrastructure and development of renewable alternatives in the US. Institutional investors have played a major role in that process and are continuing to do so,” they said at the time.

The launch of the Carbon Footprint Investment study reflects an effort that involved 14 global institutional investors as well as support from the International Finance Corporation, a member of the World Bank Group, and Carbon Trust.