Environmental externalities and institutional investors

The UN Environment Programme Finance Initiative is a collaboration of between UNEP and the financial sector that aims to improve the understanding of the connections between environmental and financial performance.

A new report Environmental externalities for institutional investors from UNEPFI and the UN endorsed Principles for Responsible Investing group estimates the costs to the global economy from environmental damage, in terms of consequences for investors and company profits, by synthesizing current estimates of the consequences of climate change, resource depletion, biodiversity loss and water use.

The report proposes that:

Large institutional investors are, in effect, “Universal Owners”, as they often have highly-diversified and long-term portfolios that are representative of global capital markets. Their portfolios are inevitably exposed to growing and widespread costs from environmental damage caused by companies. They can positively influence the way business is conducted in order to reduce externalities and minimise their overall exposure to these costs. Long-term economic wellbeing and the interests of beneficiaries are at stake. Institutional investors can, and should, act collectively to reduce financial risk from environmental impacts.

And concludes that:

  • US$ 6.6 trillion was the estimated annual environmental costs from global human activity equating to 11% of global GDP in 2008.
  • The most environmentally damaging business sectors are: utilities; oil and gas producers; and industrial metals and mining. Those three accounted for almost a trillion dollars worth of environmental harm in 2008. The top 3,000 companies by market capitalisation, which represent a large proportion of global equity markets, were responsible for $ 2.15 trillion worth of environmental damage in 2008.
  • 50% of company earnings that could be at risk from environmental costs in an equity portfolio weighted according to the MSCI All Country World Index.
  • Environmental damage costs are generally higher than the cost of preventing or limiting pollution and resource depletion. The costs of addressing environmental damage after it has occurred are usually higher than the costs of preventing pollution or using natural resources in a more sustainable way.

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