The impact of climate change on future portfolio returns is yet to really filter through. But, as Lynn Strongin Dodds discovers, investors ignore the risk of changing weather patterns at their peril.
“We do not think just divesting sectors is a good strategy. It will hurt returns for investors and it doesn’t encourage companies to mend their ways.”
Climate change is far from being a new issue, but it has become a hot topic for the investment community. Once the domain of educational endowments, religious- based and specialist ESG (environmental, social and governance) funds, mainstream institutions are becoming interested in the impact changing weather patterns could have on portfolio returns.
This is particularly true of the so-called stranded assets – listed oil, coal, mining and other fossil fuel companies that have embedded carbon reserves that will become “unburnable” due to public policy restrictions on carbon. In June, the G7 reaffirmed its commitment to keeping the globe’s average temperature from rising past 2ºC and all eyes will be on whether countries at the Climate Conference in Paris this December can deliver on the promise to phase out fossil fuel power by the end of this century.
Stranded assets account for more than 10% of the worldwide equity market value. To put that into an investment context, the University of Oxford’s Smith School of Enterprise and Environment estimates divestment of oil and gas companies could range from $240bn to $600bn, and about half that figure for debt holdings out of the $12trn assets of combined US, UK and other regional public pension funds and university endowments.
To date, only a small but growing number of investors have taken action. The most recent examples include Norway’s $880bn sovereign wealth fund, which is set to divest over $8bn (£5bn) in coal-related investments while Axa, Europe’s second largest insurer, is doing the same to the tune of €500m.
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