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fund managers need to move into political arena

February 2007

Investors must make it clear they require governments to take the lead on global warming, says Rory Sullivan

Climate change is rapidly emerging as our greatest environmental and economic challenge. It is widely recognized that we cannot rely on markets alone to deliver the substantial cuts in greenhouse gas emissions necessary to minimize the likelihood of catastrophic climate change.

To ensure that companies reduce their greenhouse gas emissions, governments need to establish a long-term policy framework that provides appropriate incentives and investment certainty. Without policy certainty, companies, particularly in energy-intensive sectors, will find it difficult to make decisions that properly account for the risks associated with climate change policy. Stronger and clearer policy is also critical to strengthening investor confidence in areas such as renewable energy, where companies' business models are critically dependent on the existence of a supportive long-term policy environment.

Recognizing these problems, institutional investors - pension funds and asset managers - have started to play a greater role in public policy debates on climate change. The Institutional Investors Group on Climate Change (IIGCC), for instance, has a specific programme of public policy engagement and a key commitment of the IIGCC Investor Statement on Climate Change - now supported by 16 institutional investors managing assets worth £850 billion - is that the signatories will engage with public policy makers on climate change issues.

The IIGCC's engagement with UK and European policy makers has emphasized the importance of governments specifying and committing to meeting long-term policy goals as an essential requisite for companies to make economically efficient investment decisions that properly incorporate climate change factors. The IIGCC has explicitly supported the UK government's policy target of, by 2050, reducing UK greenhouse gas emissions by 60 per cent compared with 1990 levels.

Expressing support for stronger climate change policy may seem a surprising position for a large institutional investor to adopt, especially when this may impose additional costs on at least some of the companies in which they are invested. However, the reality is that investors' interests are threatened by the potential for climate change to materially and severely impact on economies as well as individual companies. Therefore, many institutional investors now accept that public policy engagement is entirely consistent with their fiduciary responsibilities to maximize long-term returns. Given that many business voices continue to oppose more robust climate change policy, it is essential that investors clearly communicate their view both to companies and to policy makers on this most important of issues.

Rory Sullivan is head of investor responsibility at Insight Investment, the asset management arm of HBOS




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