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Institutional Investors Factoring in Climate Change

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(A. Kotok)

19 Feb. 2020. A survey of institutional investors shows these money managers for financial institutions are starting to take climate change impacts into their investment decisions. Results of the survey appear in the 14 February issue of The Review of Financial Studies (paid subscription required).

The authors, professors of finance at universities in Germany, Switzerland, and University of Texas at Austin, aim to uncover the extent of awareness and actions taken by institutional investors as climate change becomes a more immediate crisis for all sectors of society. A total of 439 institutional investors responded to the survey, which the authors say is the first poll asking this group of money managers at banks, insurance companies, mutual funds, and pension funds about climate change’s effects on their investment decisions.

The results show almost universal awareness of a changing climate but generating more mixed and nuanced responses in their actions, seeking more to manage risk rather than divesting assets. Nearly all, 97 percent, of respondents agree that global temperatures are rising, yet only 10 percent rate climate change as a leading concern, along with standard financial and operating considerations.

In most cases, however, institutional investors are noting increasing risks and negative outcomes resulting by climate change, including in today’s environment. More than half (55%) of money managers say current regulations responding to climate change imposed by authorities are already affecting the finances of clients.

Moreover, two-thirds (66%) of survey respondents expect physical consequences of climate change, such as wildfires and rising sea levels, will affect assets in their portfolios within two years. And nine in 10 money managers (91%) expect climate change to materially affect their investments in the next five years, with nearly eight in 10 (78%) anticipate seeing green technologies replace legacy processes that burn carbon or emit greenhouse gases in that period.

“The Paris accord means that different countries are going to have to start regulating carbon emissions more,” says Laura Starks, professor of finance at UT-Austin and co-author of the paper in a university statement. “The industry, as a whole, is just in the early stages of tackling this issue.”

Other responses in the survey indicate some of those early-stage actions by money managers. About four in 10 money managers are discussing climate risks with corporate managers (43%) or analyzing carbon footprints in their own portfolios (38%). And while percentages are smaller, some respondents say they’re taking more concrete actions.

For example, about one-third (32%) of money managers are proposing specific steps to shrink their carbon exposure, and a quarter (24%) are considering climate risks in screening new investments. Plus, a few respondents, 13 to 17 percent of the total, consider oil, electric utility, and auto maker shares overvalued if climate change factors are fully considered.

“If you’re an automaker, the gasoline engine is going to be on its way out,” notes Starks in a university blog post. “You may have to go more towards electric vehicles. Are you being managed so that you can adapt to these changes?”

The authors say the survey respondents are a high-powered group of financial executives. Nearly half (48%) of the respondents manage more than $100 billion in assets, and three in 10 (31%) are senior executives.

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