Annual cost of global environmental damage? 11% of world GDP. And investors need to sort it out.

November 3, 2010

     By Duncan Green     

universal owners coverEver wondered how much global environmental damage is caused by human activity? A new study puts it at 11% of global GDP ($6.6 trillion), a third of it caused by the world’s 3,000 largest companies.

The study was commissioned by two UN-backed initiatives, Principles for Responsible Investment and the UNEP Finance Initiative with a clear purpose in mind. They are trying to get the really huge institutional investors to take environmental stewardship seriously.

Their argument is, I think, a good one: the big investors, like large pension funds and insurance companies, hold shares in companies operating in every business sector, and increasingly with a global spread. That means they are ‘universal owners’ – the fate of their investments depends on whether the global economy as a whole prospers or sinks, not on whether one or other company does better or worse. That means if a company does well by messing things up for everyone else (e.g. by pollution, or dodging competition rules, or evading tax), a universal owner should be worried about the impact on its overall portfolio. In effect, it should think more like a responsible government, than a short termist investor. In economic terms, there are no externalities for a universal owner. The bible on this issue is ‘The Rise of Fiduciary Capitalism’ by James P. Hawley and Andrew T Williams, which I recommend.

Here’s how they reached the $6.6 trillion figure – as you can see two thirds of it came from carbon emissions, but water abstraction is a notably high second place.

Trucost envtal impacts

So what should universal owners do? The report recommends they first make it their business to evaluate the impacts and dependence on natural resources of the companies they hold shares in.

They should then incorporate information on environmental costs and risks into their engagement with the companies, the way they vote at shareholder meetings etc in order to try and reduce the environmental impacts of portfolio companies.

They should also join forces with other investors to engage both with individual companies and with public policy makers and regulators, to encourage policies that promote the internalisation of costs and establish clear regulatory frameworks.

If their shareholdings are managed by investment managers, universal owners should demand regular monitoring and reporting on how they are addressing fund exposure to risks from environmental costs and how they are engaging with portfolio companies and regulators.

They should also encourage rating agencies, sell-side analysts and fund managers to incorporate environmental costs into their analysis.

and, (of course), they should support further research – anybody ever seen a research report that concludes no further research on the issue is required?

[h/t Hugh Cole]

P.S. The vote box on the right for yesterday’s post went up late, so I’m running it til the end of today – click on whether NGOs should spend more money campaigning with older people

November 3, 2010
Duncan Green