Few Companies Make The Hard Tradeoffs To Reduce Carbon Emissions
The law firm Crowell & Moring recently released a survey-based report that looked at how companies are navigating pressures to improve their environmental performance. The company surveyed 225 executives whose jobs included environmental, social, and governance issues. 56% of respondents said their company does NOT measure its carbon footprint.
What may surprise many people is that increasing pressure from investors is the third most common reason – cited by one third of respondents – for companies to adopt environmental goals. This is surprising because investors only care about the bottom line, right? It turns out, pension funds often approach investing differently.
Pension Funds are Focusing on Sustainability
Mutual Funds that are actively managed try to pick firms that will be winners. They seek to understand the upside potential and the downside risks of individual firms.
Pension funds are different, they are so big that they invest in whole sectors. The Japanese pension fund, the Government Investment Pension Fund (GPIF), owns 7% of the Japanese equity market and about 1% of the world’s equity. Pensions often invest in multiple passive funds. These passive funds hold every available stock in an industry or class of investments. These sector specific funds are designed to track that performance of that whole swath of firms, not to beat the market. So, for a pension fund, the main risks are not company specific risks, but systemic risks. Systemic risks are so large that virtually every firm will be negatively affected if that class of risk manifests itself.
For pension funds, one of the largest systemic risks is the risk of climate change. Sustained climate change could lead to a world in which almost all firms perform worse. In effect, some pension funds, seek to improve the performance of the pension by lowering risks across the entire economy.
Here is how the Norwegian pension fund explains it: “Our motivation for responsible investment is to achieve the highest possible return with moderate risk. Companies’ activities have a considerable impact on society and the environment around them. Over time, this could affect their profitability and so the fund’s return. We therefore consider both governance and sustainability issues and publish clear expectations of companies in the portfolio.”