Reflecting on Environmental Alpha


Angelo A. Calvello, PhD
Editor in Chief, Journal of Environmental Investing



Three things have become clear to me in the years since the publication of Environmental Alpha: Institutional Investors and Climate Change.*

  1. My reason for writing the book (and starting the JEI) have proven correct: Institutional investors, specifically asset owners, needed (and still need) help understanding the risks and opportunities associated with climate change.
  2. I was early to the trade: When I was writing the book, there was a growing optimism that civil society, with the strong participation and support of asset owners, would act to reduce greenhouse gas (GHG) emissions. President Obama was beginning his first term and had made clear statements that he would act to stem GHG emissions. His appointment of Steven Chu, Carol Browner, John Holdren, Jane Lubchenco, and others signaled the strength of his intention. We were heading into COP15 with momentum. But exogenous factors, especially the financial crisis of 2008 and the ensuing economic collapse, the recalcitrant Republican opposition to climate change, the war of terrorism, and the failure of COP15 soon derailed meaningful actions.
  3. “The global concentration of carbon dioxide in the atmosphere-the primary driver of recent climate change-has reached 400 parts per million for the first time in recorded history,” according to data from the Mauna Loa Observatory in Hawaii. The recent Paris Agreement signals good intentions but, in the words of some academics, offers only “false hope.” The actions agreed to represent a diplomatic success (and signal that further climate action will best be achieved through more peer-to-peer global solution networks), but the actions are simply too weak to get anywhere near the global warming targets of between 1.5 and 2 degrees C. Moreover, the pledges are not sufficiently binding and require no immediate action. This leaves us in a rather dangerous situation, given the increase in emission in the past five decades and the convexity of carbon dioxide. Imminent action is required and, from where I sit, such action is unlikely. (Here in the United States, a leading presidential candidate, Ted Cruz, continues to maintain that climate change is a “pseudo-scientific theory.”)

So I was right, early and late, all at the same time.

The challenge for investors, specifically asset owners, is to now recognize the temporal exigency associated with climate change and, like good quants, accept the evidence presented by climate science: There is consensus among researchers that greenhouse gases have been rising and, correlatively, global average temperatures have been rising and that a primary source of these emissions is human activities.One of the best reflections of that scientific consensus is found in the Climate Change 2014: Synthesis Report released by the Intergovernmental Panel on Climate Change (IPCC). Three international working groups contributed their expertise to the measured analysis:

Anthropogenic greenhouse gas emissions have increased since the pre-industrial era, driven largely by economic and population growth, and are now higher than ever. This has led to atmospheric concentrations of carbon dioxide, methane, and nitrous oxide that are unprecedented in at least the last 800,000 years. Their effects, together with those of other anthropogenic drivers, have been detected throughout the climate system and are extremely likely to have been the dominant cause of the observed warming since the mid-20th century.

Specifically, asset owners should recognize that carbon emissions are embedded throughout their portfolios and pose a material risk to the performance of the underlying assets. They should understand their exposure to carbon, quantify the associated risks, and manage this risk, just as they would manage other systemic, materials risks. Such action is clearly in line with their fiduciary duty. However, every person has a part to play in this, so they should be held accountable too. For example, those who have recently embarked on a long journey have probably added to carbon emissions. Whether the journey was by car or plane, there still would’ve been emissions. To try and lower carbon emissions, companies like Cool Effect are allowing people to buy their carbon offsets to fund the company’s carbon-reducing projects. That is one way that everyday people could also acknowledge their carbon emissions. It’s not just the bigger business owners that are adding to climate change.

However, asset owners do probably play a bigger part. Asset owners should also recognize that there are bona fide climate-related investment opportunities, investments that can present robust returns-per-unit-of-risk and orthogonal exposures. I am not suggesting asset owners engage in some type of grave dancing but, rather, that the dire circumstances we face require the development of technologies to mitigate greenhouse gas emissions and allow us to adapt to the consequences of changes in climate. There is simply no way governments and NGOs can provide the capital necessary to develop and deploy the needed technologies at scale and scope. Investment from asset owners is required-but these investments should only be made if they meet their investment and risk targets and policies are firmly in place to support such investment decisions. Beneficial investing is a fiduciary, not philanthropic, activity.

(As a side note, I believe that from an investment perspective, the fossil-fuel-divestment movement will prove impotent but it is at least raising the awareness of asset owners to climate risks and opportunities. See my article, “Divestment as Capitulation.”)

So while my assessment might sound a bit bleak, I remain hopeful that the combination of collective political will and the collaboration of various stakeholders, including the active engagement of asset owners, will lead to a global solutions network that will enable us to avert the most devastating of consequences to physical and human systems.

Regardless of whether my hope is fulfilled, you can continue to count on the JEI as a clearinghouse of valuable, sound information on all aspects of environmental investing.

In closing, I want to thank the contributors to this issue for their thoughtful essays. I also must express my heartfelt gratitude to BE Bio Energy Group AG, our steadfast sponsor for the past five years. Their unwavering support of the JEI has allowed us to explore our own editorial vision, engender critical discourse of all aspects of environmental investing, and provide readers with open access to our content. Readers might not know this firm but BE Bio Energy was an early actor in environmental investing and continues to contribute to the reduction of GHG emissions.

Best wishes,


*Environmental Alpha: Institutional Investors and Climate Change, edited by Angelo Calvello. Hoboken, New Jersey: John Wiley and Sons, Inc. 2010.


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