Trends Corporate strategy 3/4
close. Investors need a new lens through which they can evaluate potential investments and avoid the risks of stranded assets, i.e. those investments whose value could be dramatically influenced when major externalities, such as the price of carbon or water, are taken into account. Indeed, ecosystem degradation is becoming an increasingly serious and expensive concern. According to a study commissioned by United Nations Environmental Programme Finance Initiative (UNEP FI) in 2010, environmental damage caused by human activity in 2008 was estimated to be $6.6 trillion, equivalent to 11% of global GDP – a huge economic impact, that cannot be ignored. The significance for institutional investors is their exposure to rising environmental costs that contribute to economic and market risks, which can affect asset values and investment fund returns. It is naturally in the interests of investors to reduce the risks and costs associated with externalities within their investment portfolios. The risks to investor funds are not just the direct environmental costs; future cash flows and dividends could also be impacted by reduced productivity and increased input costs, such as higher taxes, levies and insurance premiums. Further impacts could include falling revenues, unplanned capital investments and increased costs of capital driven by higher risks and lower potential returns. UNEP FI provides some useful guid- ance for investors, for their direct con- sideration, but also to help influence the necessary systemic change:
1. Evaluate impacts of investee compa- nies on natural resources.
2. Incorporate information on environ- mental costs and risks into engagement and voting initiatives and seek to reduce environmental impacts of portfolio companies.
3. Join other investors and engage collaboratively with companies through platforms such as PRI Clearinghouse to address key issues.
4. Engage individually or collaboratively with public policy makers and regulators to encourage policies that promote the internalisation of costs and establish clear regulatory frameworks.
5. Request regular monitoring and reporting from investment managers on how they are addressing fund exposure to risks from environmental costs and
how they are engaging with portfolio companies and regulators.
6. Encourage rating agencies, sell side analysts and fund managers to incorporate environmental costs into their analysis.
7. Support further research to build capacity and improve understanding of the relationship between corporate externalities, ecosystem goods and services, company financial risk and portfolio returns.
Further support for change in the investment model comes from Al Gore, chairman of Generation Investment Management, and Former Vice President of the US, with his call for responsible, sustainable capitalism. This he describes as a framework that seeks to maximize long-term economic value by reforming
The risks to investor funds are not just the direct environmental costs; future cash flows and dividends could also be impacted by reduced productivity
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