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Down but not out for climate risk

Good returns beat feeling good about your investments for the majority of investors, according to new research from the Association of Investment Companies. It asked investors what was most important to them in choosing an investment and close to 60 per cent of respondents ranked ESG as the least important of five factors (this was the case regardless of age). More than a third said they didn’t consider ESG at all when making investment decisions. In one way that’s not surprising – the whole purpose of investing is to grow your money, and it is perfectly possible to do your bit for the planet while not being too concerned about the ESG qualities of your portfolio.

But as we stressed in our cover feature a couple of weeks ago investors cannot ignore the climate change issue – it is a huge risk for shareholders, for companies and for governments. 

Governments understand the enormity of the climate change challenge – from the increased risk of global conflict all the way through to additional costs (for example decommissioning oil and gas installations, pipes and wells in the UK is expected to cost at least £25bn in tax relief). But as we saw at the COP26 gathering, some prefer to avoid the risk of economic disruption and shock even though climate change itself presents a potentially bigger, and uncontrollable threat to economic and financial stability.

Companies are increasingly proactive about addressing climate risks – several companies in the FTSE 100 even use climate targets to help set chief executives’ incentive pay. They don’t of course have much of a choice as the nets of legislation and court action close in on them, as Shell has discovered. Volkswagen is being targeted in the same way by activists. Many of you already assess your investments in light of this growing threat, and we have been rebuked by some readers for failing to ensure that we underline the risks each time we write about certain companies, or sectors, such as palm oil producers. Palm oil production has soared in recent years and it’s a major driver of deforestation – something 100 governments have now agreed to end and indeed reverse by the end of this decade. 

The risk, however, is everywhere. While companies involved in carbon intensive activities, and the financial groups that support them, face risks such as stranded assets and being shunned and stigmatised, other companies will pay a price, too – for example through the soaring cost of in-demand metals essential for the production of clean energy. And the climate change finger is now being pointed at sectors such as the semiconductor industry some of whose carbon emissions are estimated to be higher than car makers’. 

Many of you also pour money into ESG funds and investment trusts (as the success of fund management groups such as Impax Asset Management attest) – for a mix of reasons: to offset risks to the remainder of a portfolio, to capture the rewards of an outperforming sector or simply as a way to take positive action. 

As John Baron highlights, there are plenty of positive impact opportunities and these will increase. The International Energy agency has pointed out that most of the current reductions in CO2 emissions will come from existing readily available but by 2050, almost half the reductions come from technologies that are currently only at the demonstration or prototype phase. As a side note here, the OECD reckons that if If the two degree scenario is achieved by 2050, that could have a net positive effect on global GDP of up to 5 per cent.

Spotting opportunities and polluters is relatively straightforward. What’s more difficult is policing your portfolio for lurking climate crisis threats, but it is something that we will aim to highlight more, and we will be addressing how you can effectively assess that hidden risk in a forthcoming issue.