Largest Investors Say Private Sector Investment on Climate Change Is Essential

(October 19, 2011) — The world’s largest investors — worth a total of $20 trillion — have stressed the urgent need for policy action to encourage private sector investment on solutions to climate change.

Private sector investment creates jobs and is essential for ensuring the long-term sustainability and stability of the world economic system, the group of 285 investors said in a joint statement, which is set to be delivered to the G20 and other governments ahead of the United Nations Framework Convention on Climate Change conference at Durban in the next two months. The report by the group of investors highlights the need for institutional investors to allocate capital toward climate change solutions, such as encouraging government incentives to compensate for greater risk and sufficient scale of technology deployment, the group said.

“Policy risk has a critical influence on investment in low-carbon growth areas such as renewable energy,” asserted Stephanie Pfeifer, Executive Director at the European Institutional Investors Group on Climate Change (IIGCC). “Attracting capital at the scale required to meet climate change goals will only be possible when low carbon investments are seen as attractive relative to higher carbon investments. Determined leadership on national and international climate and energy policy will be fundamental in shifting this risk/return balance in favor of low carbon investments.”

The initiative to promote private sector investment is led by three investor groups: the Investor Network on Climate Risk (INCR), the European Institutional Investors Group on Climate Change (IIGCC), and the Investors Group on Climate Change (IGCC) in Australia and New Zealand, along with the United Nations Environment Programme Finance Initiative (UNEP FI) and the Advisory Council of the Principles for Responsible Investment (PRI).

Since 2008, investor support for climate change action has more than doubled, according to the UNPRI. But while the International Energy Agency considers a $500 billion per year investment in low-carbon technology and infrastructure in order to hold the increase of global average temperatures below 2 degrees Celsius, the current level of investment in the sectors is substantially lower.

In June, a report on the topic of climate change concluded that environmental, social, and governance (ESG) factors must play a bigger role in investment decisions. Research conducted by Colonial First State Global Asset Management (CFSGAM) revealed that the top-rated ESG stocks in its Global Listed Infrastructure portfolio outperformed the bottom-rated stocks by more than 20% over a three year period to May 2010. The results gave further weight to the argument that ESG factors and performance are interlinked, the report claimed.

In its fourth annual Responsible Investment Report, Australia-based CFSGAM said that the short-term nature of investing is inhibiting the consideration of ESG issues in asset allocation decisions. Long-term, the firm said, investment performance could be harmed if ESG factors are ignored.