Financial gatekeepers are blocking green investment – study

Pension funds and investment consultants are passive on climate risk and locked into short-termism, say researchers

 (Flickr/steve p2008)

(Flickr/steve p2008)

By Megan Darby

Investment consultants are holding back finance into low carbon sectors by failing to consider the long term, according to a study from Oxford University.

Acting as gatekeepers for major funds like pension providers and insurers, investment consultants have a key role in determining where money flows.

Yet they are rewarded for performance over the short term, which gives them little incentive to consider long term risks like climate change, researchers found.

Ben Caldecott, director of the university’s stranded assets programme, said: “Investment consultants are evaluated according to short-term appraisal cycles.

“Even when longer-term perspectives are clearly superior, they may be compelled to press for alternatives that perform ‘better’ in the short-term. Pension funds should alter mandates to avoid this.”

Analysis: Do asset managers have a duty to reduce their climate risks? 

For their part, Caldecott said pension funds were confused about whether their fiduciary duty allowed them to act on climate change.

It does, he argued, but “investment consultants are not pressing as proactively as they should be, which might be seriously harmful.”

In the past, fiduciary duty has been narrowly interpreted to mean funds should focus solely on financial returns for their pension holders, to the exclusion of sustainability considerations.

On the contrary, UN climate chief Christiana Figueres has argued, it is a breach of duty for investors not to green their portfolios.

Addressing an investment summit in New York last year, she said: “Investment decisions need to reflect the clear scientific evidence, and fiduciary responsibility needs to grasp the intergenerational reality: namely that unchecked climate change has the potential to impact and eventually devastate the lives, livelihoods and savings of many, now and well into the future.”

Terrifying math: How Carbon Tracker changed the climate debate 

This is particularly important for fossil fuel assets, which may be overvalued by advisors focusing on the short term.

Traditionally seen as safe investments, coal, oil and gas companies are on a collision course with climate action.

To limit warming to 2C above pre-industrial levels – as agreed by governments – scientists calculate more than a third of oil, half of natural gas and 80% of coal needs to stay in the ground.

That is at odds with the business plans of energy majors, who forecast continued demand growth for decades.

As long as large sums of money remain locked into such companies, it limits the finance available for low carbon sectors like renewable energy.

Some big investors, notably Norway’s US$900 billion oil fund, have started divesting from their most carbon intensive holdings in recognition of this clash.

Recent analysis has shown portfolios that excluded fossil fuel holdings would have outperformed the market over the last five years, challenging the idea that green investment means sacrificing returns.

Caldecott said investment consultants were jeopardising their reputations if they failed to prepare clients for risks like climate change which, he said, “are having significant impacts much sooner than previously anticipated.”

Read more on: Climate finance |