Investment managers need to become shareholder- activists on climate, or their wealth, and that of their clients could go up in smoke. Photo: Drax Power Station by Ian Britton via Flickr (CC BY-NC).
Fund managers: campaign on climate, or face lawsuits
12th February 2016
Fund managers who neglect their 'duty of care' to clients by failing to put pressure on the companies they invest in to reduce their carbon emissions and prepare for a fossil-free future could be sued for their negligence, say respected experts in law, environment and finance.
To produce a wholesale change in attitude, a court ruling on the obligations of fiduciary investors to control systemic climate risk will probably be needed. This will not be an easy case to bring. But we expect that such a case will ultimately succeed.
Systemic climate risk is an issue that fund managers, who have duties of care to their clients, now ignore at their peril.
The warning comes in an article for Nature published this week by investment manager Howard Covington, environmental lawyer James Thornton and climate economist Professor Cameron Hepburn. They write:
"Senior lawyers have concluded that those who manage other people's money have a duty to control for 'material risks'. In finance, that means risks that might trigger a 5% or more loss in investment value. Climate damage in the future is expected to be one such risk. "
Bringing the first such action to court would not be simple but could nonetheless succeed given the advanced state of scientific knowledge about climate change, and of its potential for economic disruption - which has even been warned of by the Governor of the Bank of England, Mark Carney.
"To produce a wholesale change in attitude, a court ruling on the obligations of fiduciary investors to control systemic climate risk will probably be needed", the authors state. "Because of the uncertainties in estimating future climate damage, this will not be an easy case to bring. But we anticipate that such a case will ultimately succeed."
Covington, trustee of the environmental law organisation ClientEarth and founding chair of the Alan Turing Institute said: "Clients of investment firms and beneficiaries of pension funds might have a legal case to bring if those who manage money for them stand idly by as emissions erode the value of their stock. We are currently exploring such a possibility."
Listed companies account for a quarter of global emissions
The largest 500 companies on the world's stock markets account for about half of market value and 14% of global emissions. Steel firm Arcelor Mittal, utilities firm RWE and oil giant ExxonMobil are among the top ten.
Extending this ratio of emissions, all listed companies probably account for around one-quarter of global emissions. Many of these companies are multinationals, and are not party to the climate deal made in Paris last December, so they could resist or even challenge government plans to reduce emissions.
Systemic climate risk for investors can be expressed as the likely reduction in the value of a diversified investment portfolio due to expected future climate change. Initial estimates point to a potential value reduction of 10% - pointing to a potential loss of US$7 trillion of the US$70 trillion of shares on the world's equity markets.
Hepburn, professor of environmental economics at the Smith School at the University of Oxford said: "The risk exceeds the legal test of materiality and should be too large to ignore. In practice most investors neglect it entirely.
"Because it arises from damage to the economy as a whole, the risk cannot be reduced by hedging investments or by limiting exposure to particular assets. Rather, investors should actively encourage the companies they own to disclose their business strategy for a net zero emissions world, along the lines of the principles of the Oxford Martin Net Zero Carbon Investment Initiative."
Wanted: climate activist shareholders
The Paris Agreement has provided a major incentive for carbon intensive firms to assess and report on the risks and opportunities facing their organisations as a result of climate change. But many multi-nationals are not signed up.
James Thornton, ClientEarth CEO said: "The Paris agreement was a diplomatic triumph. But it will remain largely voluntary until countries translate the promises, their Nationally Determined Contributions (NDCs) into their own legal systems. We will be monitoring their progress so that citizens can hold them to account."
Covington added: "Investors will play a major part in reducing future emissions, either voluntarily or because they will eventually be forced by the courts to manage climate risk."
Legal rulings about duties can have such far-reaching consequences. In June 2015, a Dutch court found that the government has a duty of care to its citizens to minimize the risk of climate change, and ordered the Dutch government to go beyond its current plan to reduce the country's greenhouse-gas emissions. Pending an appeal hearing, the government is now working towards a 25% reduction by 2020.
In another incident last year, a case brought by ClientEarth, the United Kingdom's Supreme Court found that the British government has a duty to obey its own air-quality laws. Because this case involved the European Court, the rulings of which bind all European Union member states, ClientEarth is preparing a slew of parallel legal actions in other EU countries.
Ten such cases were filed in Germany in November of last year. One has already reached judgement, resulting in a court order to the city of Wiesbaden to take all necessary action to clean up its air. The Chinese judiciary has sought views from ClientEarth on how legal action against emitters could help to address China's air and other pollution challenges.
ClientEarth has recently assisted investors responsible for more than $8 trillion to co-file shareholder resolutions which call on mining giants Anglo American, Glencore and Rio Tinto to be more transparent over climate change risks. The resolutions received support from four of the world's ten largest pension funds.
The paper: 'Shareholders should vote wisely' is by Howard Covington, James Thornton and Cameron Hepburn and published this week in Nature.
Principal source: ClientEarth.
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