On May 26, Responsible Investor reported on a new study calling for pension funds to better prepare for climate change. Pension trustees may even have a fiduciary duty to account for climate-related risk, according to study authors Craig Mackenzie and Francisco Ascui of the University of Edinburgh Business School.

Investor Leadership on Climate Change, written on behalf of the United Nations Principles for Responsible Investment (PRI), explores the role of investors in reducing global carbon emissions. As reported by RI's Hugh Wheelan, the study finds that this role will be immense:

"$10 trillion in capital, much of it expected to be private, will be required by 2030 to maintain carbon dioxide emission levels at a stable 450 parts per million in the atmosphere."

The authors of Investor Leadership on Climate Change argue that this is achievable, but add an important caveat:

"The good news is that even such large sums of money are within the long-term capacity of the financial sector, as long as the appropriate public policy incentives are in place."

In "The Long-Term Investment Case," a preamble to their study, Mackenzie and Ascui explain why trustees must prepare for climate change, and why their preparedness depends on government action. A Universal Risk for "Universal Investors" Why must pension funds, in particular, confront climate change? The authors argue that these funds' long-term perspective exposes them to "systemic risks":

"[Climate change risks] will have impacts across the entire economy. This will make them difficult to hedge or avoid…. "Pension funds, particularly large pension funds, are universal investors, and they are so large that they tend to have long-term investment exposure to the whole economy…. Prudent pension funds have good reason to pursue cost-effective strategies to support climate change mitigation and adaptation."

Neither the Public nor Private Sector Can Go it Alone Mackenzie and Ascui confront the argument that climate change and carbon regulation are beyond the ken of fund trustees. They describe the assumptions behind "business as usual":

• "['Business as usual'] assumes policy-makers will deliver the appropriate carbon pricing regimes....
• It assumes capital markets will be efficient at pricing risk and allocating capital....
• It forgets that equity investors are not merely providers of capital – they are shareholders and therefore owners of companies. …They have a unique position of leverage over the entities that, in one way or another, are accountable for most of our carbon emissions."

Investor Leadership on Climate Change explores the risks inherent in these assumptions, and how investors such as CalPERS are actively preparing for such risks. This preparation necessarily includes support for national and global carbon-pricing schemes. As Hugh Wheelan wrote, "Investors need to collectively influence public policy to correct what [the PRI report] says is an inability of markets to properly price climate change-related systemic risk."

For more information, see Investor Leadership on Climate Change at the PRI site.