Wall Street Journal APRIL 27, 2015 - by Michael J. Casey


A pair of not-for-profit agencies with some well-funded backers is ramping up a legal strategy to goad big investment funds to offload their holdings of fossil fuel-dependent companies - a move that, if successful, could profoundly disrupt world asset markets.

The London-based Asset Owners Disclosure Project, which rates funds on their readiness for climate change, last week formally teamed up with Client Earth, an environmentalist group founded by legendary musician-producer Brian Eno and Coldplay front man Chris Martin, to launch what they've dubbed the Climate and Pensions Legal Initiative. Client Earth is backed by the Children's Investment Fund Foundation, the philanthropic arm of London hedge-fund manager Christopher Hohn.

The goal of the new initiative, says AODP Chief Executive Office Justin Poulter, is to work with fund investors to pressure their trustees and portfolio managers into giving proper consideration to climate change risks in designing their portfolios. The AODP is basing its push on the grounds that the trustee boards that administer the pension funds are in breach of a fiduciary duty to do this kind of forward-looking risk assessment, given the length of their investment horizons.

In keeping with that mission, the AODP on Monday released its latest ranking of five hundred of the world's biggest funds by the climate-change preparedness.

Only nine funds - a group led by the Local Government Super Fund of Australia and which includes the Californian Public Employees Retirement System, or CalPERS, and the New York State Common Retirement Fund - earned the AODP's top AAA rating. By contrast, a hundred and ninety-two earned a "D" - effectively a fail - based on the feedback and public information they provide on their preparation for climate change. A further two hundred and thirty-two funds that are deemed to have done nothing at all to weigh climate change risks earned an "X". Among that latter group are some of the giant sovereign wealth funds from China, Abu Dhabi and Russia, as well as teacher pension funds from New Jersey and Illinois and the employee retirement funds of big companies such as Alcoa, Hewlett-Packard and Verizon.

Only thirty-five of the surveyed funds calculate their carbon footprint, seventeen have a systemic scenario analysis on climate change and seven have a target to reduce their footprint, the AODP says. That leaves a lot of fund trustees in the two organisations' crosshairs.

"The people that got those [low] ratings are going to be the people we are focusing on next," Mr. Poulter said of the strategy to enlist members to lobby their funds' trustees. "The ideal outcome is that there is no [legal] case and the funds realize that they can do better in managing the funds for their members," he added.

Although four funds were new entrants into the "AAA" ranks this year, Mr. Poulter sees that improvement from the 2014 rankings as the nascent emergence of an awareness of the risks to their portfolios. He said the past year's fall in the oil price may have been a catalyst for some funds to reassess the longer term risks of holding stakes in oil producers.

That oil price collapse also meant that more environmentally friendly portfolios have likely paid off better than some of their more carbon-heavy counterparts. Among the nine recipients of the "AAA" rating, portfolio performances in the last fiscal year ranged from 6.5% for CalPERS to 15.7% for Fjärde-AP Fonden from Sweden.