Thinking through climate risks


With climate change in the news on a daily basis, it’s natural for investors to reflect on how this risk may play out across investment portfolios in the future.

On a global level, many institutional investors have signed up to the UN’s Principles for Responsible Investment. These six guidelines give investors insight into how they may be able to factor in environmental, social and governance (ESG) considerations when making investment decisions.

Additionally, BlackRock, the world’s largest fund manager, has recently announced it will reduce its investment in thermal coal, taking the view, “sustainability should be our new standard for investing.”

In a letter to investors, CEO Larry Fink said, the fund manager is, “removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020.”

A sensible approach to climate change is, however, a balancing act. Markets could be destabilised if investors abruptly turns their backs on companies such as coal businesses that contribute to climate change through their carbon emissions. Conversely, inaction is also a risk because it could lead to further environmental damage. So investors must be cautious about overreacting, but also make sure they take the appropriate steps so they are not allocating funds to assets that exacerbate climate risks.

Nevertheless, it’s important to be aware of trends in this area. Research by Mercer indicates average annual returns from coal could fall by between 18% and 74% over the next 35 years. In contrast, returns from renewable investments such as wind and solar power could rise by between 6% and 54% over 35 years. This dynamic is something investors may consider when deciding how to allocate their capital.

Given heightened climate risks, investors may also consider stocks, exchange-traded funds and managed funds with an ag tech – agriculture technology – focus. Many businesses in this sector focus on making crops more resistant to drought conditions, which may be important in the future.

It’s still early days when it comes to assessing the risks and opportunities climate change presents. The idea is for investors to keep a watching brief on this issue to help protect returns and reduce risks to which their assets are exposed over time.

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.

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