How Climate Change is Affecting Your Portfolio. And What To Do About It
It’s fair to say 2022’s climate has not been kind. From record-shattering heatwaves in Europe, to devastating floods in Pakistan and hurricanes in Florida, it’s all a sobering reminder that a warming planet creates tangible impacts on our day-to-day lives.
Climate change is also affecting our economic fortunes. And it’s no small fortune to consider: according to one of the world’s largest insurance companies, the impact of climate change could reduce global economic output up to 14% by 2050.
This will affect a wide variety of sectors, but perhaps none more than energy. Global asset manager Mercer predicts that annual returns from the coal sector alone could fall by between 18% and 74% over the next 35 years, depending on how dramatic the climate changes are; by contrast, the renewable energy sector could see returns rise by between 6% and 54% over the same time horizon.
In times of turbulence, some investors prefer to stick with more traditional investments, and although ESG has been around since the 1960s, it has really only become more widespread in recent years. But even though there are challenges confronting this investing category, there are also many reasons it’s here to stay.
A climate-focused investing strategy
For those who want not just to react to a changing world but also invest proactively and make a difference, a climate-focused investment strategy could be the ticket.
That sort of strategy can take several forms. For some investors, it might mean a broad commitment to ESG principles: investments that hit benchmarks for Environmental, Social and Governance best practices.
For others, it can dive even deeper: a commitment to exclude certain types of sectors or industries, such as the fossil-fuel industries, that have a clear negative impact on our world. And for yet others, it could mean a commitment to invest in specific sectors, such as renewable energy, that have a positive impact on our world.
Portfolio manager Stephanie Tsui is part of the Genus team that is working to effect change in the world by pairing clients with environmentally focused investing strategies that reflect their values. One example is Genus’ Fossil Free High Impact Equity Fund, which invests in global companies that are building a sustainable future through renewable energy, energy efficiency, and other climate-positive initiatives. “First, I sit down with clients to understand their objectives and investment needs,” says Tsui. “Some clients are very specific: they don’t want their investments to contribute to climate change, or they want investments to fund solutions that actually fight climate change.”
She points to one of her institutional clients that has a specific goal of promoting biodiversity in their portfolio: “That client is really into habitat conservation and maintaining biodiversity. And so they want us to put together a plan to make sure they can achieve concrete outcomes in advancing biodiversity.” (Note that this level of portfolio customization is only available to our Impact Investment Council members).
Seeking resilience in an uncertain world
Of course, you also need to ensure resilience in your portfolio — and while the trendline with climate change is clear, nobody can predict exactly what the world will look like in 10, 20 or 30 years’ time.
Investing is all about those longer-term time horizons, so it’s important to understand how various sectors or asset-classes might be affected. With the Paris Agreement setting legally binding targets for greenhouse gas emissions, any investor holding stock or bonds in corporations or countries implicated by the accord (currently 196 parties have signed on) needs to prepare for the future. And that means guarding against uncertainties associated with high climate-risk exposure.
At Genus, we also pay close attention to the management of companies within our portfolios. “No matter the sector, industry or asset class, we look for red flags from companies that have very high exposure to climate change, or have poor management of risk exposures,” says Tsui. “Even if the risks are not imminent, with poor management these companies are prone to negative impacts when new regulations come into place.”
She notes that the utilities and transportation sectors are particularly worth monitoring, as each is highly carbon-intensive — with massive costs required to replace existing technologies. Even industries such as agriculture are ripe for reinvention: according to the UN’s Food and Agricultural Organization (FAO), dairy and meat production account for a combined 14.5% of global greenhouse gas emissions.
For investors interested in a sustainable approach to investing, the challenge is to keep focused on the big picture — with eyes trained on the horizon. By understanding not only what your investment objectives are today — but also what the implications of a warming world are tomorrow — you can achieve results that are both good for the climate and for your portfolio.
1 Landler, M. (2022, July 19). Europe’s heat wave shatters British records and drives wildfires. The New York Times. Retrieved October 24, 2022, from https://www.nytimes.com/2022/07/19/world/europe/europe-uk-heat-record-wildfires.html#:~:text=At%20Heathrow%20Airport%2C%20the%20mercury,40.3%20degrees%2C%20or%20104.5%20Fahrenheit.
2 Livingston, I. (2022, October 6). What made Hurricane Ian so intense: By the numbers. The Washington Post. Retrieved October 24, 2022, from https://www.washingtonpost.com/climate-environment/2022/10/04/hurricane-ian-statistics-deaths-winds-surge/
3 Flavelle, C. (2021, April 22). Climate change could cut world economy by $23 trillion in 2050, insurance giant warns. The New York Times. Retrieved October 24, 2022, from https://www.nytimes.com/2021/04/22/climate/climate-change-economy.html
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6 Fossil Free & Impact. Genus. (2022, May 12). Retrieved October 24, 2022, from https://genuscap.com/fossil-free-impact/
7 Unfccc.int. (n.d.). Retrieved October 24, 2022, from https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
8 Key facts and findings. FAO. (n.d.). Retrieved October 24, 2022, from https://www.fao.org/news/story/en/item/197623/icode/
9 Genus Capital (2022, September 15). Where am I on the impact investing spectrum? Genus. Retrieved October 24, 2022, from https://genuscap.com/where-am-i-on-the-impact-investing-spectrum/