Climate Investing Not Bad for Returns

December 18, 2013 ( – Selecting low-carbon investments and meeting other sustainability standards has little impact on returns, according to analysis from the Asset Owners Disclosure Project (AODP).

Results from the AODP’s 2013-2014 Global Climate Index survey suggest there is no correlation between an investor’s decision to actively overweigh low-carbon investments and the likelihood of experiencing lower returns.

AODP researchers argue that climate-based investing strategies become essential to protecting returns when considering the long term.  That’s because the risk attributes of climate change have a high likelihood of occurring not just in isolated regions or economies, but across nearly all geographic locations.

Currently, as much as 55% of all global investments are exposed to climate risk, according to the AODP’s survey. That’s compared with just 2% of investments that can reasonably be classified as low-carbon.

“Such is the sheer scale and potential reach of climate risk that any fund cannot claim to be looking after the long-term interests of its beneficiaries if it is not managing the components of climate risk,” argues John Hewson, chiar of the AODP.

The primary hurdle for sustainable managers to overcome, on the AODP’s analysis, is that long-term risk strategies must play out in a financial marketplace that has become more concerned with short-termism and trading opportunities than long-term risk management or value creation.

“Civil society, assisted by a hungry media fascinated as to how the world’s largest industry will manage its own redevelopment, will continue to create new pressures on laggard funds,” Hewson warns. “There will be no escape.”

Proof of No Negative Effect

The annual survey polls the world’s 1000 largest asset owners, as tracked by the AODP. Respondents answer 50 multiple-choice questions covering the five main areas of a fund’s operations and investments. These include transparency, low-carbon investment, active ownership, risk management and investment chain alignment.

Analysis of investment funds earning the survey’s top AAA shows none of the most sustainably run pension, superannuation, insurance and sovereign wealth funds are near the bottom quartile of returns in their respective countries.

Only five out of 1000 funds surveyed achieved the AAA rating. First on the list was the UK’s Environment Agency Pension Fund, which achieved a 14.2% net portfolio return in 2013. The second-ranked fund, Australia’s Local Government Super, did even better, with 16.13% returns so far in 2013.

The California Public Employees’ Retirement System (CalPERS) earned an AAA grade and placed third on the list. CalPERS’s net portfolio returns so far in 2013 are 12.4%.  

A total of 27 asset owners scored an A rating or above on this year’s survey, compared to 22 last year. This group as well did not see strong correlation between higher sustainability and lower returns. The AODP considers these funds to be generally well-positioned to face increasing investing challenges and risks posed by climate change.

On the other end of the spectrum, the lowest rating of X was given to 173 of the largest asset owners, or about 38% of survey respondents. The X rating was awarded when AODP researchers could discover no positive evidence that a fund was managing climate change risk.

An additional 191 funds, or 41.5% of respondents, scored the next-lowest D rating, implying they are poorly positioned to face expanding climate risks.

The complete 2013-2014 survey results are available here.