Fiduciary Duty Seen As Key To Climate Future At UN Institutional Investor Summit

Bob Massie

January 19, 2010

At this past week’s high-level Institutional Investor Summit on Climate Risk in New York City, more than 500 financial leaders heard both how far the world has come in addressing climate risk – and how far it still needs to go.

Meeting at the vast temporary conference hall erected at UN headquarters while the main buildings undergo renovations, the participants’ enthusiasm was dampened by the confusion many felt about the results of the Congress of the Parties in Copenhagen and by the massive tragedy in Haiti in which more than a hundred UN employees were missing and presumed dead.

This was the fourth summit in a series that began in late 2003. The purpose was, as it has been in the past, to bring together large asset owners – such as state treasurers and other trustees of major U.S. pension funds – and the portfolio managers who work for them to consider the long-term impact of climate risk on their portfolios.

In the early days many trustees hewed to the false assumption that fiduciary duty actually barred them from considering climate risk; today the consensus is rapidly emerging that trustees are in fact required by law to consider it. In the words of Howard Jacobs, a trustee of the UK University Superannuation Scheme, “fiduciary duty is a complete dodge at this point if it is used to avoid assessing climate risk.”

The focus of this fourth summit was also notable in its emphasis on the urgent need for countries – particularly the United States – to introduce economic rationality to the markets by setting a price for carbon. This, they argued, would unleash a flood of private capital that is currently hesitating to make major clean tech investments because they cannot calculate the likely returns. To spur action, a large subset of the participants – including US, European, and Australian investors worth more than $13 trillion – released a joint statement at the summit calling for rapid action by governments on emission reduction targets, price signals on carbon, improved energy and transportation policies, new financing mechanisms, and adaptation measures.

Many speakers focused on the practical question of how to achieve change. During the keynote speech at lunch, former U.S. vice president and Nobel Peace Prize winner Al Gore, in his fourth summit appearance, pointed to the need to shift the compensation structures of asset managers from quarterly horizons to targets such as a rolling three year average, the mechanism used by Generation Investment, the firm he chairs. “One of the things that I have learned in business,” he said, “is that people tend to do what they are paid to do. If you want people to invest for in the long-term success of the low carbon economy, you have to compensate them for that.“

Despite its substantial achievements, the summit sponsors missed several opportunities to build even greater support for their consensus views. For seven years the events have taken place under the shadow of White House resistance to climate action; as a result, the gatherings have been tightly focused on a few immediate objectives with regard to U.S. energy policy. The evolving summit agendas have been slow in showing how both the cause and the solution to the climate crisis link to other major concerns in politics and sustainability – such as jobs, development, biodiversity, water use, and human rights.

While AFL-CIO General Counsel Damon Silvers, speaking on behalf of his president Richard Trumka, pledged union support for the switch to a low-carbon economy, there was little discussion of how such a global transition would affect jobs in the developing world. Issues that had previously been overlooked were just coming to the fore. As Abby Joseph Cohen of Goldman Sachs noted in her remarks, “deforestation is 20% of the carbon problem,” yet only now, she said, after seven years were summit attendees beginning to pay attention.

The conference was also dated in its organizational design, preferring to pack the day from morning to night with speakers, thus missing the opportunity to get specific feedback – and commitments – from the participants through some of the many interactive conference technologies that are now available.

In sum, the achievements on INCR and the Investor Summit are substantial, but to be completely successful they must make the case that a transition to a global low-carbon economy will achieve many global objectives, not just those identified by the developing world in the aftermath of its orgy of carbon intensive wealth creation. The sense that the developed world, despite its own poor record, is still preoccupied with defining the terms and the outcome of the debate was partly responsible for the difficulty experienced by Denmark and its allies in making a persuasive case for binding commitments in Copenhagen. The suspicions and self-interest of poorer countries will only be overcome if the developing world demonstrates that it understands and occupies the moral high ground of embracing all the interdependent sustainability challenges facing the leaders of the world.

As one speaker aptly put it at the conference, “physics does not pay attention to politics,” meaning that the rapid degradation of the world’s biosphere will continue unless strong actions were taken. At the same time, the inverse adage – “politics does not pay attention to physics” – is also true in a world of turbulent and immediate human needs. Advancement will require, as Howard Jacobs also noted, “a language that unifies the world.” Until advocates for action on the climate crisis anchor their arguments in the broadest frame of full sustainability, they will continue to find it difficult to bring many political leaders and investors on board.

Robert Kinloch Massie was the president of Ceres for seven years beginning in 1996 and first suggested the idea of the Investor Summit on Climate Risk to its founding organizations in 2003. He joined the Volans Advisory Board in January 2010.