Turning up the heat on tackling climate change
The success of ‘green’ political parties at the recent European Parliament elections was another sign of the growing importance of environmental issues for electorates in the West. We can attribute this increased engagement, in part, to growing concerns about climate change. In particular, a perceived lack of commitment among governments to take the necessary steps to transition to a low-carbon economy. The 2015 Paris Agreement on climate change stated that nations should limit warming to well below 2°C. However, commentators expect current policies to take us to over 3°C. This dire outlook has led to calls for radical policy action, such as the proposed Green New Deal touted by politicians in the US.
Climate change also has ramifications for asset managers. They are seeing a warming planet and the transition to a low-carbon economy change the risk profile of many of the companies and economies in which they invest. This could have consequences for investors. As asset managers, it is our responsibility to understand every aspect of these consequences.
How to approach climate change
To support the transition to a low-carbon economy, prudent asset managers must access high-quality data and insights on climate change trends, risks and opportunities. This data can then be integrated into the investment decision-making process. Managers and investors can also seek to align with the Principles for Responsible Investment Investor Agenda. This is an initiative for investors to demonstrate their contribution to transitioning the world’s financial capital to low-carbon opportunities.
Another way to evaluate how effectively a portfolio combats climate change is through a carbon footprint. While this has its shortcomings, carbon footprinting is a good starting point for understanding exposure to climate risks. It also demonstrates a company’s or a portfolio’s impact on the energy transition. Carbon footprinting can help managers identify relatively carbon-intensive companies as part of their approach to climate-risk management.
A world of opportunities
The energy transition also presents investors with considerable opportunities. Achieving the 2°C Paris target depends on whether the world is able to quickly deploy large amounts of private capital to construct renewable energy infrastructure, low-carbon transport and improve energy efficiency. A move away from coal, as well as rapid deployment and falling costs of clean energy technologies, are notable trends. According to the International Energy Agency, the cost of the transition will be around $3 trillion per year. The private sector is expected to finance the majority of this. The long-term opportunity will involve channeling capital flows from clients to projects and businesses that will drive the development of a low-carbon economy.
In 2018, greenhouse-gas emissions hit a record high. With emissions continuing to increase in many regions, the scale of the climate-change challenge is immense.
In 2018, greenhouse-gas emissions hit a record high. With emissions continuing to increase in many regions, the scale of the climate change challenge is immense. Unsurprisingly, more and more people are putting this challenge high on their list of priorities. The range of products available to investors who wish to see their concerns reflected in their investments is growing. Already, a number of products enable investors to transition away from carbon-intensive industries. This includes impact investing, which can focus on companies that provide clean energy and energy-efficient products and services. Other products screen companies based on climate-related criteria, such as power generation and revenue from fossil fuels.
As major investors and stewards of capital, we recognize the important role asset managers can play. We need to support the energy transition through our capital-allocation decisions and develop solutions that meet the demands of our investors. We are already making great strides in this area. We will continue to do so in order to help address this vital issue.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.