When it comes to what institutional investors think about climate change and how it impacts the valuation of companies, there are two ways to view it. The first approach is to limit the risk associated with current business models. The growing rejection of the carbon economy could leave fossil fuel-intensive companies on life support – “stranded assets” in financial vernacular. Therefore, climate change risk transparency is increasingly becoming an expectation for investors. With the second approach, investors are also drawn to the compelling potential of new sustainable business models that might one day come to dominate their sectors.
The appeal of most institutional investors for climate-friendly portfolio companies is not altruistic. It is just a profitable business approach. Take Vanguard, the largest U.S. mutual fund by assets, regarding its response to sustainability-related shareholder proposals. “Our support for these proposals is not a matter of ideology, it’s a matter of economics,” Glenn Booraem, Vanguard’s investment stewardship officer, stated in an interview. “To the extent there are significant risks to a company’s long-term value proposition, we want to make sure there is long-term disclosure of those risks to the market.”
