Dustyn Lanz is Chief Executive Officer of the Responsible Investment Association.
Let’s cut to the chase: 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.
The Intergovernmental Panel on Climate Change (IPCC) – a United Nations body that analyzes the science of climate change – says surpassing 1.5°C of warming over the pre-industrial era will drastically increase the frequency and severity of storms, droughts, floods, and other extreme weather events while putting hundreds of millions of people at risk of poverty and displacement.
So, it is rather alarming to know that we’ve already reached 1°C, and current policy commitments will likely send us north of 3°C in this century. To stay below the 1.5ºC threshold, we need to cut global carbon emissions in half by 2030, which climate scientists say will require rapid and unprecedented changes in all aspects of society. No wonder the youth are taking to the streets.
Why climate change matters for your investments
Investors need to recognize that climate change is not just an environmental or societal issue; it is an economic issue with serious implications for markets. The transition to a sustainable economy will expose companies and investors to a wide range of financial risks and opportunities.
Broadly speaking, there are three categories of climate-related financial risk for investors to consider.
First, and perhaps most intuitively, are the ‘physical risks’ associated with rising sea levels, wildfires, storms, floods, droughts and other extreme weather events. These events can all have devastating social consequences, and they can disrupt business operations and destabilize supply chains, which leads to financial risks for companies and their shareholders.
Second are the ‘transition risks’ that result from an adjustment towards a low carbon economy, such as changes in public policy, production methods, and consumer preferences. Market changes such as carbon pricing, the shift away from coal, and the growing demand for eco-conscious products serve as just a few examples of how the transition will create winners and losers in the market.
And third, ‘liability risks’ come from people or groups who seek compensation for losses suffered as a result of climate change. For example, the State of New York has filed a lawsuit against ExxonMobil, claiming the company defrauded shareholders by downplaying its exposure to physical and transition risks. And ExxonMobil is not alone: over 1,200 climate change actions have been filed against governments and corporations in over 30 jurisdictions including Canada, the United States, Australia, the UK, the EU, New Zealand, Brazil, Spain, and India.
A proliferation of physical, transition, and liability risks could make investors nervous about holding high-carbon stocks, leading to a decline in the value of those assets. A rapid devaluation of high-carbon assets could destabilize a national economy, which is why the Bank of Canada has identified climate change as a vulnerability for the Canadian economy and financial system.
Investors are already concerned
Investors are already concerned and bracing for disruption. At a recent conference hosted by the UN-backed Principles for Responsible Investment, a panelist asked a room of about two hundred institutional investors how they expect the climate transition to unfold. The responses, which attendees entered into a mobile app, were unsettling: 58% of respondents expect a delayed, forceful policy response leading to economic disruption, while 26% expect a complete failure to transition leading to a climate breakdown. In other words, 84% of sophisticated investors in that room are predicting economic disorder brought by climate change.
And it’s not just institutional investors who are worried: a 2018 Ipsos poll of 800 Canadian individual investors, commissioned by the Responsible Investment Association and AGF Investments, found that 81% of respondents were concerned about climate change and the environment. The survey also found that about three-quarters of respondents believe that climate change will create risks for the global economy within five years.
Climate strategies for Canadian retail investors
The time for climate-proofing your portfolio is now. Fortunately, there are plenty of investment products available for individual Canadians (known as “retail” investors) to manage their exposure to climate risk and tap into the opportunities. While the list below is far from comprehensive, it provides a useful starting point for climate-conscious investors.
Low carbon funds
A fund that is marketed as “low carbon” will typically exclude or reduce exposure to companies that emit a lot of carbon. This filter can be applied to an entire industry, such as fossil fuels, or it can take a more complex approach known as “carbon efficiency” or “optimization,” which means increasing exposure to carbon-efficient companies and decreasing exposure to high carbon emitters across sectors. Below are three examples of funds with one of these low carbon strategies.
- Desjardins RI Canada - Low CO2 Index ETF – A portfolio that is constructed to achieve a reduced weighted average carbon intensity.
- IA Clarington Inhance Global Equity SRI Class – A portfolio that excludes coal, oil, and gas companies.
- RBC Vision Fossil Fuel Free Global Equity Fund – Excludes companies directly engaged in the extraction, processing and transportation of fossil fuels such as coal, oil and natural gas.
Environmentally themed investments
While there are many climate-related risks for investors to consider, there are opportunities as well. The transition to a low-carbon economy is already underway, creating financial opportunities for companies that are developing environmental solutions. In Canada, there are numerous investment options focused on climate change and other environmental themes. These products typically invest in a portfolio of companies focused themes such as renewable energy, water & waste management, sustainable agriculture, clean technology, energy efficiency, and more. Below are three examples of environmentally themed investment options available to Canadian individuals.
- AGF Sustainable Growth Equity Fund – Focused on sustainable energy and power technologies, water solutions, waste management, pollution control, health and well-being.
- CoPower Green Bonds – A portfolio of loans to clean energy and energy efficiency projects.
- NEI Environmental Leaders Fund – Focused on water infrastructure, energy efficiency, waste recovery, sustainable food.
Shareholder engagement
In addition to the targeted climate strategies noted above, Canada is home to numerous investment fund managers who practice shareholder engagement, which refers to the use of shareholder power to improve a company’s sustainability performance. For example, you can invest in a fund that submits environmental proposals at corporations’ annual meetings and engages in dialogue with the companies to encourage the adoption of more sustainable practices.
Getting started
Here are three ways to start aligning your investments with a low carbon future:
1) Talk to your advisor
If you are concerned about climate change and your investments, tell your financial advisor or financial institution. You don’t need financial expertise to have this conversation; that’s their job. You just need to tell them what’s important to you, and ask for suitable investment options to help manage your exposure to climate risk and tap into opportunities.
2) Find a responsible investment advisor
If you don’t have an advisor, or if your current advisor is unable to help you build a climate-conscious portfolio, then you may wish to find a new one. The Responsible Investment Association provides a free online directory of Canadian financial advisors who practice and support responsible investing. You can find that directory in the RI Marketplace at www.RIMarketplace.ca.
3) Find responsible investment products
If you are a more sophisticated or self-directed investor, you can also find a directory of responsible investment products and services in the RI Marketplace. You can filter products by product inclusions such as clean technology or renewable energy, and strategies such as thematic investing or shareholder engagement.
Conclusion
Climate change is the defining global crisis of our time, and it is showing no signs of slowing. The transition to a low carbon economy is already underway, as governments are pricing carbon emissions, renewable energy costs are dropping, consumers are buying more sustainable products, and some heavy carbon emitters are getting sued. It would be reckless for an investor to ignore these issues. The climate is changing, and so should our investments.