{"id":10028,"date":"2016-11-03T23:31:54","date_gmt":"2016-11-04T03:31:54","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/the-climate-change-challenge-for-institutional-investors\/"},"modified":"2016-11-03T23:36:05","modified_gmt":"2016-11-04T03:36:05","slug":"the-climate-change-challenge-for-institutional-investors","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-climate-change-challenge-for-institutional-investors\/","title":{"rendered":"The Climate Change Challenge for Institutional Investors"},"content":{"rendered":"<p><a href=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-10085\" src=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped-300x220.jpg\" alt=\"office-building_cropped\" width=\"300\" height=\"220\" srcset=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped-300x220.jpg 300w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped-768x562.jpg 768w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped-1024x750.jpg 1024w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped-600x439.jpg 600w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/office-building_cropped.jpg 1135w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><\/p>\n<p><strong>Pension Funds and Climate Change\u2019s Threat to the Future <\/strong><\/p>\n<p>Though climate scientists agree that greenhouse gas emissions have already begun to irrevocably alter the world climate, economists disagree as to how to value the economic risk these changes pose. In particular, these estimates vary depending on the discount rate chosen, as this dramatically affects how the predicted economic losses over many decades should be valued in present terms.<a href=\"#_edn1\" name=\"_ednref1\">[i]<\/a> Regardless of what discount rate is chosen, however, highly long-term investors\u2014such as pension funds\u2014face a particular need to take the threat seriously given their mandate to ensure stable returns over an extremely long time horizon.<\/p>\n<p>CalPERS, which manages over $300Bn to provide for the pensions of the state of California\u2019s public employees, issued new policy guidelines in 2008 which identified three core threats to its financial returns connected to climate change:<\/p>\n<ul>\n<li><strong>Regulatory Risk<\/strong>: should federal legislation to restrict carbon emissions occur in the future, the additional cost of carbon would likely reduce the earnings of CalPERS portfolio holdings<\/li>\n<li><strong>Physical Risk: <\/strong>The physical consequences of climate change\u2014such as increased extreme weather, threats to world food supplies, and rising sea levels, would cause tremendous economic harm and impact CalPERS portfolio assets<\/li>\n<li><strong>Reputational Risk:<\/strong> As public support for anti-climate change action grows, the likelihood of public action to punish unresponsive companies\u2014including negative ads or boycotts\u2014could hurt companies that CalPERS has invested in.<a href=\"#_edn2\" name=\"_ednref2\">[ii]<\/a><\/li>\n<\/ul>\n<p>Over the past decade CalPERS has emerged as a leader among the institutional investor community for ambitious action against climate change, including:<\/p>\n<ul>\n<li>A mandate to its investment professionals to consider climate change impact as a factor in choosing investments. In particular, it has shifted its real estate portfolio toward holdings with a lower carbon footprint.<\/li>\n<li>Commitment of $1.7Bn in funds to invest in clean energy and other low-carbon industries<\/li>\n<li>Membership in a series of investor industry groups that lobby policy-makers as well as the investor community to support climate protection policies<\/li>\n<li>Leading shareholder actions (an area in which CalPERS is particularly known as a leader) to lobby companies to adopt more sustainable practices, including supporting 66 shareholder proposals related to sustainability in 2014<\/li>\n<\/ul>\n<p>The result, CalPERS would argue, is a concerted effort to wield the fund\u2019s substantial industry clout to shift capital toward climate-mitigating economic activity and to promote a more climate-friendly policy agenda.<\/p>\n<p><strong>The Fossil Fuel Divestment Debate <\/strong><\/p>\n<p>However, the fund has resisted substantial political pressure to take an additional action in the form of divesting more than $80 million in current holdings in the fossil fuel industry. Divestment activists and the state government of California\u2014which passed a law in 2015 mandating that CalPERS divest\u2014argue that divestment would help to further weaken the power of fossil fuel companies in the economy. However, the fund has claimed that its fiduciary mandate to maximize returns for beneficiaries compels it to keep oil and gas in its portfolio. Furthermore, CalPERS argues, in today\u2019s global equity markets, any holdings sold off would be instantly bought up with no impact to gas companies.<a href=\"#_edn3\" name=\"_ednref3\">[iii]<\/a> In contrast, the fund argues that it wields greater influence on the industry as an investor, and can in fact point to recent shareholder initiatives which forced energy firms such as ExxonMobil and BP to adopt stricter reporting standards around climate risk and to explore alternative fuels.<a href=\"#_edn4\" name=\"_ednref4\">[iv]<\/a><\/p>\n<p><strong>The Fiduciary Argument for Divestment <\/strong><\/p>\n<p>While limited evidence exists of divestment\u2019s economic or policy influence,<a href=\"#_edn5\" name=\"_ednref5\">[v]<\/a> as the climate policy landscape shifts CalPERS should reconsider leaving fossil fuels precisely in pursuit of its fiduciary duty. In particular, most investor models do not account for the possibility that, if policymakers truly take steps to limit carbon consumption to the levels required to limit warming to 2 degrees, that will require that vast fossil fuel assets currently held on global balance sheets remain \u201cstranded\u201d in the ground and never consumed. Such policies could, by some estimates, impact 40-60% of the current market value of the oil and gas industry.<a href=\"#_edn6\" name=\"_ednref6\">[vi]<\/a> If this risk were properly accounted for, therefore, it could dramatically diminish the projected value of the stock. CalPERS should consider divesting from fossil fuels, therefore, not to achieve influence but to maintain its commitment to high returns for its beneficiaries.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"#_ednref1\" name=\"_edn1\">[i]<\/a> William Nordhaus, \u201cCritical Assumptions in the Stern Review on Climate Change,\u201d <em>Science Magazine<\/em>, Vol. 317, 13 July 2007.\u00a0http:\/\/science.sciencemag.org\/content\/317\/5835\/201<\/p>\n<p><a href=\"#_ednref2\" name=\"_edn2\">[ii]<\/a> \u201cThe Importance of Corporate Engagement on Climate Change,\u201d <em>CalPERS website.\u00a0<\/em>https:\/\/www.calpers.ca.gov\/docs\/corporate-engagement-climate-change.pdf<\/p>\n<p><a href=\"#_ednref3\" name=\"_edn3\">[iii]<\/a> Michael Hiltzik, \u201cWeighing the Cost and Benefit of Divestment,\u201d <em>Los Angeles Times, <\/em>January 15, 2016.\u00a0http:\/\/www.latimes.com\/business\/hiltzik\/la-fi-hiltzik-20160117-column.html<\/p>\n<p><a href=\"#_ednref4\" name=\"_edn4\">[iv]<\/a> \u201cThe Importance of Corporate Engagement on Climate Change,\u201d <em>CalPERS website<\/em><\/p>\n<p><a href=\"#_ednref5\" name=\"_edn5\">[v]<\/a> William MacAskill, \u201cDoes Divestment Work?\u201d <em>The New Yorker, <\/em>October 20, 2015.\u00a0http:\/\/www.newyorker.com\/business\/currency\/does-divestment-work<\/p>\n<p><a href=\"#_ednref6\" name=\"_edn6\">[vi]<\/a> Rebecca Henderson, Sophus Reinert et. al., \u201cClimate Change in 2016: Implications for Business,\u201d <em>性视界 Business School Teaching Note<\/em>, Rev. October 14, 2016.<\/p>\n<p><strong>(792 words, excluding footnotes)<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Climate change poses a wide-ranging danger to the entire global economy. As such, even the most diversified investors cannot ignore the risks of climate change. Leading long-term focused investors, including the California Public Employees\u2019 Retirement System (CalPERS), have taken decisive action to wield their economic influence in support of climate mitigation efforts. To date these have stopped short of divesting from fossil fuels, though the fund should re-consider divestment in light of the fiduciary risk that policy changes might pose to the fossil fuel industry.<\/p>\n","protected":false},"author":2091,"featured_media":10086,"comment_status":"open","ping_status":"closed","template":"","categories":[380,1406,1267,1544,1545,1546],"class_list":["post-10028","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-financial-markets","category-fossil-fuel","category-international-climate-policy","category-investment","category-pension-funds","category-stranded-assets"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/climate-change-challenge-2016\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The Climate Change Challenge for Institutional Investors - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-climate-change-challenge-for-institutional-investors\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Climate Change Challenge for Institutional Investors - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"Climate change poses a wide-ranging danger to the entire global economy. 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