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Natural Capital Is One of the Critical Investment Themes for 2015

smart_laurenThe use of natural capital indicators by investors to measure and manage financial risks and opportunities is one of the big themes of the year, according to a conference held last week by the UN’s Principles for Responsible Investment initiative.

The PRI, a network of more than 1,300 investors with $45 trillion in assets, looked at a range of emerging themes for investors committed to incorporating environmental, social and governance best practice into their asset management strategies.

One topic was progress with the PRI’s Montreal Pledge, which requires signatories to measure and disclose the carbon footprint of their investment portfolio. Launched in September last year, the initiative aims to get investors worth a total of $3 trillion to make the pledge before the Paris UN climate change conference in December. A good start has been made with 39 financial institutions signing up including CalPERS, Secom, the Environment Agency pension fund and Joseph Rowntree Charitable Trust. But many more are needed.

Some investors have concerns that carbon footprinting is difficult to do, lacks accuracy and has limited value to the business. But several speakers allayed these fears.

Antti Savilaakso, responsible investment director at Nordea, said that forming a consensus on what was the right responsible investment strategy to take was very difficult — but robust measurement of carbon was an action on which everyone could agree. It gives clients the information they need to choose how to manage the issue.

Delegates debated the merits of divestment versus engagement as strategies to reduce financing of carbon-intensive companies. There is a growing divestment campaign focused on encouraging investors to stop investing in fossil fuel activities such as coal-fired power generation and oil exploration. Nevertheless, research by the University of St. Andrews presented at the conference found that of 380 organizations considering divestment, only 3 percent had done so. Student activists at universities and colleges such as Stanford and Glasgow appear to be leading the charge.

Many investors prefer engaging with companies to make the case for improvements in environmental performance or even a change in business strategy. They argue that by divesting from a company, influence is lost, and the investor will simply be replaced by another — potentially one that is less responsible.

The balance of opinion seemed to be that choice between whether to divest or engage was false. An effective strategy could include both, for example, by rebalancing investments away from the worst performing companies in their sectors toward the best. There was a call by the PRI for investors to talk much more about the benefits and achievements of engagement.

Lauren Smart
Lauren Smart is an executive director at Trucost, heading the company’s financial institutions business globally and heading business development across the company. She also serves on Trucost’s board and senior management team. She is an expert in sustainable finance, and over the last decade has advised leading fund managers, pension funds and banks globally on how to integrate natural capital analysis into their investment decision making. Prior to joining Trucost, Lauren was a senior investment associate in global equity research at Putnam Investments and was a consultant at the UK Department for International Development. Lauren holds a bachelor of arts (Hons) and master of arts from Cambridge University in archaeology and anthropology and an master of science in anthropology and international development from the London School of Economics.
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