Carbon risk evident in UK funds

There’s a wide range of carbon footprint exposure among the UK’s institutional equity funds, according to a new study conducted by Mercer and Trucost on behalf of WWF. That’s not much of a surprise, considering that the fund’s managers do not actively consider climate change factors such as greenhouse gas emissions as part of their investment process.

The report, Carbon Risks in UK Equity Funds, reveals that greenhouse gas emissions in 118 equity portfolios varied from 209 to 1,487 tonnes per million pounds invested. “A wide variation of carbon exposure was identified between companies in the same carbon-intensive sectors such as utilities, basic resources, construction and materials, oil and gas, and food and beverages.”

Asset managers do not consider climate change for a variety of reasons, including a belief that governments will not achieve emissions reduction targets or establish a global carbon price, short-term pressure to generate returns and the lack of a standardized reporting framework needed to deliver accurate data on company’s greenhouse gas emissions, the study says.

However, it adds that asset managers could dramatically reduce the carbon footprints of their funds through stock selection without the need to alter sector weightings or their overall investment strategy; they could also engage with portfolio companies and support government introduction of mandatory reporting requirements for corporate greenhouse gas emissions that would make carbon management easier and more effective.

Pension funds and fund managers could also integrate climate change criteria such as carbon performance into financial analysis, stock selection and active ownership practices, the report suggests, as well as invest in renewable energy and other energy efficient technologies.

“The results of our research with WWF and Trucost indicate that the investment management industry has a long way to go before pension funds can feel reassured that sufficient attention is being paid to the investment implications of the shift to a low carbon economy, “says Mercer principal Danyelle Guyatt, “It is important for pension funds to be aware of these potential risks and opportunities, and to manage these proactively through their strategic asset allocation decisions and the way they review and select fund managers."

The report outlines how fund manager complacency on corporate carbon performance could put pension fund assets at risk as carbon-intensive companies face rising carbon costs and their company valuations fall in the short-term in anticipation of future carbon risk.

“Fund managers “wait and see” approach to company exposure to carbon costs could expose pension funds to financial risk and result in mixed opportunities to position portfolios for a carbon-constrained economy.”

The full report is available here.