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Sustainable investors could spawn ‘self-fulfilling’ carbon bubble in 2014



Sustainable investors could bring about radical changes to the way the financial community values fossil fuel assets, if enough become concerned about a potential bubble.

According to index provider MSCI’s environmental, social and governance (ESG) arm, debates in 2013 and a growing social movement means that investors are becoming increasingly aware of the risks and as a result are investigating their investments.

The 2014 ESG Trends to Watch paper adds that the number of investors interested in how their portfolios are exposed to risks associated with climate change and unsustainable business practices is predicted to increase over the next year.

In 2013, several pension funds came under fire for investing in fossil fuels, leading to high-profile calls for divestment – most notably from the environmentalist Bill McKibben and, the NGO he founded. Whilst divesting might seem “drastic”, MSCI global head of research Linda-Eling Lee points out in the paper that the scientific consensus is that atmospheric carbon dioxide levels need to be kept under 450 parts per million (ppm). However, they have continued to rise, reaching 400ppm in May.

Lee writes, “Purely from a financial perspective, even the outside chance that some reserves could become ‘stranded assets’ if a red line is breached should prompt a hard look at the assumptions underlying the valuation of fossil fuel producers.”

This movement has led to expectations that investor interest in measuring portfolio exposure will continue to escalate. MSCI ESG Research expects to see investors explore four different approaches to address this issue. Analysis found that taking a low-carbon approach, which excludes the biggest carbon reserve owners and the largest carbon emitters, showed the highest active returns.

A separate approach could also see investor engagement increase. Lee said, “One of [the] scenarios could well be that if enough investors become concerned about a potential carbon bubble, there could be a self-fulfilling prophesy to how the financial community values current and future carbon reserves.”

Investors can play a vital role in the sustainability of a company. Research published in October last year found that just 12% of CEOs regard investor pressure as the chief motivator on sustainability and only 23% see investors as an important stakeholder in guiding their approach to sustainability issues. Increased levels of engagement could improve how CEOs view investors and boost sustainable practices as a result.

The 2014 ESG Trends to Watch also looks the sustainability of emerging markets, the green bond market, the sustainability of differing sectors and the effect of tax avoidance hitting the headlines in 2013.

Further reading:

Islamic finance industry to be worth ‘$2 trillion’ by the end of 2014

US firm launches $100m green bonds for low carbon investment

Sustainability top priority for quarter of British small businesses

Research links sustainability initiatives to investment stability

A simple chart that proves sustainable investment pays off