In the past ten years, we have experienced eight of the warmest years on record.
It is not a coincidence. Thermometer readings around the world have increased since the Industrial Revolution, and evidence suggests humans are primarily to blame.
Heat-trapping greenhouse gas emissions make it more difficult for Earth to return heat from the sun back into space. This increases the likelihood of serious and irreversible environmental consequences – from catastrophic forest fires and droughts to more severe storms and rising sea levels.
How could this impact my investments?
Climate change poses significant risks for carbon intensive sectors such as oil, gas, coal, heavy industry and transport. For example, this increases the risk of so-called “stranded assets”. This is where a company’s assets lose value or become obsolete. Stranded assets caused by environmental problems, such as climate policy changes aimed at reducing emissions, are becoming increasingly apparent.
Some could also be victims of the physical impacts of climate change, such as coastal oil refineries or nuclear power plants, which are vulnerable to sea level rise.
The risks to your investments are potentially more extensive than those directly exposed to fossil fuels. In the future, all companies, regardless of their industry, could face restrictions and fines related to their carbon footprint.
The European Union Emissions Trading System is currently the most established carbon pricing regime in the world, covering the major energy and carbon intensive companies in Europe. But several other countries, including the United States, are considering whether to introduce carbon pricing systems to help reduce emissions. An expansion of carbon pricing could have an additional impact on cash flow, earnings, and stock prices of high-emitting companies.
The road to net zero
In 2015, world leaders signed the Paris Agreement, an international agreement to limit the rise in global temperature to “well below” 2 ° C above pre-industrial times. In November, world leaders will gather in Glasgow for the 2021 United Nations Climate Change Conference (also known as COP 26). It should be used as an opportunity to review what has been done since the signing of the Paris Agreement and to lay out more plans to help achieve the goal.
In 2019, the UK became the first major economy to adopt a net zero liability in law. This means that emissions will have to be avoided completely or – if that is not possible – offset by planting trees or sucking CO2 from the atmosphere. Since then, several other countries have taken similar steps, and many more are considering doing so.
However, countries are not the only ones with net zero commitments. Many companies, both in the UK and overseas, have also adopted net zero targets. Companies that do not do enough to reduce their carbon emissions could risk losing customers and therefore revenue.
Climate change is not the only environmental risk
Climate change is arguably the most important and pressing environmental risk facing investors, but it is far from the only one.
The loss of biodiversity is also a major challenge, for example. Biodiversity underpins a variety of ecosystem services, from food and drinking water to flood protection and climate regulation. But the exploitation of the environment by large-scale infrastructure and agriculture unbalances things.
The effects are already being felt in industries like fishing. But other areas like agriculture, forestry and tourism also face these risks. Companies that depend on deforestation in their supply chains could also experience supply disruptions, increased costs and damage to their reputations.
Waste management is another environmental consideration. Increased consumption puts increased pressure on landfills, which in turn leads to increased taxes on landfills. This, combined with stricter regulations on how waste is treated and managed, will have a severe impact on companies with less sustainable business models.
What can investors do?
This week is Happy Money Week. This is a national campaign aimed at raising awareness of responsible investment. We believe this might be the perfect time to check whether your portfolio is ready for the environmental challenges that we will face in the decades to come.
If you want to invest from an environmental perspective, but don’t have the time or the knowledge, a fund may be a good alternative. We take a closer look at two below.
Both funds have the ability to invest in emerging markets and derivatives, which adds risk. Remember that all investments can go down as well as up, so you might get back less than what you invested.
Investing in funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with theirs and there is a specific need for the type of investment being made. Investors should understand the specific risks of a fund before investing and ensure that any new investment is part of a diversified portfolio. This article is not personal advice. If you are not sure whether an investment is right for you, seek financial advice.
Legal & General Future World Climate Change Equity Factors Index
The Legal & General Future World Climate Change Equity Factors Index fund aims to invest in the benefits that climate change could bring to certain companies. It does this while reducing the money invested in people involved in the fossil fuel industry or who emit higher levels of CO2 than usual.
It invests in over 2,200 companies around the world and aims to track the FTSE All-World ex CW Climate Balanced Factor Index.
The index is weighted more by companies that help tackle the impacts of climate change, resource depletion and environmental erosion. Less is invested in companies that produce fossil fuels or emit high levels of CO2. The index also places greater emphasis on companies that perform well on four factors: value, quality, low volatility and small size.
Legal & General are experienced tracker fund managers. However, the index tracked by the fund looks very different from the global stock market as a whole, so we would expect it to behave differently as well.
Find out more about the Legal & General Future World Climate Change Equity Factors Index, including fees
Pictet’s global environmental opportunities
The team behind the Pictet Global Environmental Opportunities fund believes that population growth and rising living standards will place increasing pressure on the world’s finite resources. They think it could lead to scarcity and quality issues.
Companies seeking to solve environmental problems through innovative technologies and smart use of natural resources could therefore generate above-average growth in the long run.
The fund invests in companies around the world that make a positive contribution to the environment, operating in areas such as pollution control, water supply, renewable energy, waste management and sustainable agriculture. .
Executives also like financially strong companies with a unique competitive advantage and a business model that does not rely on government grants. This is how the fund currently invests in the main sustainability themes.
Current fund investments
Source: Pictet Asset Management. Correct as of 07/30/2021.
Current investments include Danish energy company Ørsted. Ten years ago it was one of the most energy intensive energy companies in Europe. It is now ranked among the most sustainable companies on the planet. It holds 30% of the offshore wind market and 90% of the energy it produces comes from renewable sources.
Please note that the fund may invest in smaller companies which adds risk. It is also an offshore fund, so investors are not normally protected by the Financial Services Compensation Scheme.
Learn more about Pictet’s global environmental opportunities, including fees
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If you would like to learn more about Responsible Investing, check out the new Responsible Investing section of our website.