Investors and Climate Change: In It for the Long Haul

Long-term investors recognize the need to be focused on issues beyond the quarterly noise. The ever-increasing speed (and absurdity!) of the daily news cycle can be addictive, but like a long-haul trucker, institutional investors need to keep their focus on the ultimate destination far off in the distance.

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The long-term impact of climate change is one of the most significant issues facing investors, such as foundations, pension funds, and other asset pools with decades-long, even perpetual, investment horizons. But its effects are already being felt. This summer, intense and catastrophic wildfires scorched California, Sweden, and many other parts of the world that hadn’t previously coped with fires of that breadth and strength. Similarly, hurricanes ravaged the Southeast, while historic droughts are impacting countries throughout the world.

As chair of Callan’s Environmental, Social, and Governance (ESG) Committee, I have written a paper that provides a framework for considering the long-term investment risks posed by a changing climate, and the opportunities that may arise.

In the paper, available here, I urge asset owners to look beyond catastrophic weather headlines and stay informed on the climate change issues that relate to investors and their responsibilities, including regulatory changes, product availability, and new ways to measure and manage the risks associated with a changing climate.

Other recommendations:

  • Consider joining industry groups that are relevant to your fund to learn from peers (e.g., Principles for Responsible Investment, Intentional Endowments Network, Council of Institutional Investors, or U.S. SIF) to tap into networks encountering the same challenges.
  • Decide if a strategic approach to climate change is right for your fund. Document the discussion and modify language in your investment beliefs or investment policy statement to reflect the fund’s view of the systemic risks of climate change and how it should be considered in the investment frame­work. Consider whether your organization has the resources to implement your approach.
  • Talk to your investment managers and other service providers about how they are addressing climate change concerns.
  • Consider changes to your investment process—asset allocation, manager selection, benchmark­ing, and reporting—that are in line with your fund’s approach to climate change.

At the annual PRI in Person conference, which took place in September in San Francisco, climate change was front and center for the assembled community. We heard progress updates on the Task Force for Climate Related Financial Disclosures (TCFD). Started just three years ago, the TCFD now boasts more than 500 supporters from the financial industry and other business sectors that support voluntary recommendations on climate-related information that companies should disclose to help investors, lenders, and others make sound financial decisions. We also heard about the Climate Action 100, a related group of investors focused on engaging with the 100 companies that generate two-thirds of global emissions to hasten the transition to a low-carbon economy. And the topic of fiduciary duty was top of mind, as usual; the financial materiality of many of these issues—climate change in particular—makes it difficult for fiduciaries to ignore how these factors will impact the companies in which they invest.

Climate change is a complex issue that poses challenges across cultures, societies, businesses, and investments. This global macro trend will have consequences, many of which are uncertain in scope (e.g., rising sea levels). But the implications of climate change will affect the investment opportunities and risks for all investors, regardless of whether they subscribe to ESG principles. Like long-haul truckers intent on delivering cargo on time and intact, fiduciaries who aim to meet their investment goals need to keep focused on their long-term destination. We don’t want to be caught asleep at the wheel!