Investors ignore climate change risks at their own peril, according to Dustyn Lanz, CEO of the Responsible Investment Association (RIA) which promotes investments that incorporate environmental, social and governance factors.
“Prudent investors should always be mindful of big changes that are happening in the market, and climate change is one of the biggest drivers of change in the world economy today,” Lanz says.
As Lanz explains, climate-related financial risks fall into three categories: physical risks such as floods and wildfires, transition risks that result from an adjustment toward a low-carbon economy, and liability risks that come from people seeking compensation for losses they suffered as a result of climate change.
“Prudent investors should always be mindful of big changes that are happening in the market, and climate change is one of the biggest drivers of change in the world economy today."
While the concept of “climate risk” may seem abstract, it’s easy to see how these risks might apply to your portfolio. What happens to oil and gas company stock prices when governments, as some have already done, start pricing in carbon emissions? How will insurance companies fare when the global temperature is 2 degrees higher and they have no reliable data for weather patterns?
What about the liability issues that come from people seeking compensation from losses suffered as a result of climate change? As Lanz points out, “New York is already suing Exxon Mobil, claiming the company misled shareholders about how climate change could impact its business.”
“It would be reckless for an investor to ignore these issues,” Lanz says. “There are a wide range of financial risks for investors to consider.”
The Financial Stability Board, an international body, established the Task Force on Climate-related Financial Disclosures in 2015 to push companies to voluntarily disclose the issues they are likely to have in a warmer world so that investors can attempt to protect themselves by choosing businesses who are taking action to minimize that risk.
Based on these disclosures, some of the largest and most sophisticated institutional investors are already taking action on climate change. The second-largest pension fund in Canada, the Caisse de dépôt et placement du Québec, for example, plans to reduce the carbon intensity of its portfolio by 25 percent by 2025 and plans to invest $8 billion in renewable energy over the next three years and boost its low carbon investments by 50 percent. Other major institutional asset owners — such as BCI, AIMCo., OPTrust, Bâtirente, and the Ontario Teachers’ Pension Plan — are also making climate change a priority.
Lanz observes concern about climate risk among retail investors too. The 2018 RIA Investor Opinion Survey found that 81% of Canadian retail investors are concerned about climate change and the environment. And about three-quarters believe it’s likely that climate change will create risks for the global economy within five years.
"What’s missing is the knowledge about green or responsible investment options, which highlights an opportunity for financial services providers to present these options to their clients."
“What’s missing is the knowledge about green or responsible investment options, which highlights an opportunity for financial services providers to present these options to their clients,” says Lanz who recommends talking to a financial services provider as a first step.
“I think a lot of retail investors are intimated to have these discussions, but it’s your money and you’re in the driver’s seat. If you are concerned about climate risks, tell them. If you want to invest in green companies or green bonds, tell them,” Lanz says.”If they’re unwilling to listen or can’t answer your questions, then it might be time to find a different advisor.”
Lanz and his team are working hard to educate advisors about issues such as these. While there is still progress to be made, nearly 400 advisors have earned one of the RIA’s financial designations, signalling that there is indeed a growing awareness of risks and opportunities related to environmental, social and governance (ESG) issues. For investors looking for a new advisor or products, a good place to start is the RIA’s recently launched RI Marketplace which includes a directory of responsible investment advisors and investment products that can be filtered by various ESG screens and strategies. For example, you can select “Impact Investments” and find information about CoPower Green Bonds and other high-impact investments.
“If you are concerned about climate risks, tell your advisor. If you want to invest in green companies or green bonds, tell them."
Some investors and advisors may also be hesitant because they mistakenly believe that a fund that incorporates environmental factors are going to be less profitable. That’s just not true -- in fact, the data says just the opposite:
A 2012 paper by professors at Harvard and London Business School compared 180 US companies and found that corporations that voluntarily adopted sustainability policies by 1993 significantly outperformed their counterparts over two decades — investing $1 in the beginning of 1993 in a value-weighted portfolio of high sustainability companies would have grown to $22.6 by the end of 2010 but only $15.4 in a low-sustainability portfolio.
In Canada, a 2015 Carleton University study examined 32 socially responsible Canadian mutual funds and found that they outperformed their respective benchmarks around 63 percent of the time, and had more downside protection.
So in the long-term, companies that take into account the risk of climate change are the ones that are going to be prepared -- and profitable.