With the United Nations Climate Change Conference (COP 26) nearing, severe weather events causing havoc on a global scale and mass climate change protests, it’s clear this year is going to be a key year for action on the environment.
“Climate change is not something that’s only going to happen in Australia or some small islands in the Pacific Ocean. It is going to affect all of us,” says Esmé van Herwijnen, responsible investment analyst at EdenTree.
“From an investment perspective, even if the majority of your investments are only in the UK, climate change is still going to be a risk for any investment portfolio. It is hitting the most vulnerable people, but it is also hitting companies and their supply chains. This will affect companies’ physical assets. Do they know whether they are exposed or not? Have they got any mitigation processes in place?
“No matter whether you’ve already taken a stance on fossil fuels or don’t have a policy yet, climate change will still have an impact. The physical risk of climate change will still be there.”
Types of risk
Van Herwijnen says that the costs and disruption of adapting to climate change will impact companies and their investors. “It could be a voluntary transition, but I think it is more likely that we will see this transition risk coming from regulation. That could be because of new commitments made at COP 26 or by individual jurisdictions.”
The UK, for example, is the first country to legislate for net zero carbon emissions, and that necessarily means that companies will have to adapt. “What does it mean for their business models?” asks van Herwijnen.
Some business models may not even be viable under new legislation. “There are technological risks – companies and the products and services that they are selling today may no longer be relevant in a net-zero world. Do they need to change their products and services?”
According to Van Herwijnen, an interesting way to look at this from an investment perspective is to think that a portfolio can contribute to the solution. By holding companies that provide services which help to mitigate climate change, or are trying to adapt, investors can help drive positive outcomes for the environment.
“Sectors that lead to resource efficiency, for example, or new energy sources, products and services that have a lower carbon footprint – these are interesting options worth looking at. Regulation could be a driver for change, but it’s also really encouraging to see that some companies aren’t waiting for the government to tell them what to do. Those are the companies that we are particularly interested in.”
Science-based metrics
The danger of course is that companies can skew data to improve their green credentials or fail to act on prior commitments. Van Herwijnen says that greenwashing can be avoided to some extent by applying rigorous science-based targets.
“For the last four years, we have been evaluating the carbon footprints for our portfolios, where we have measured the emission intensity of the portfolios versus the emission intensity of the benchmarks. And we’ve used that to identify the highest emitting companies in our portfolio.”
This allows the asset manager to exert pressure on companies to operate best green practices. “Globally at the moment, 826 companies have taken science-based climate action and that is clearly not enough. That is why we have engaged with those companies to encourage them to further reduce emissions. Ideally, we need to see all companies make progress if we want to stay within the targets set by the Paris climate accord.”
Van Herwijnen says it is key that all the companies in a portfolio are going in the right direction. “Some are more advanced, of course, and already have a large range of products that contribute to mitigating climate change, or are reducing emissions or selling products that have lower carbon intensity. There are other companies that are not quite there.
“Year-on-year, we can track where they are investing their money, and whether those investments are going towards renewables or whether they are still investing in new coal plants, for example. The companies that we have in our portfolio might not be entirely there yet but, because of the metrics that we are looking at, we can see whether or not they are on the right path.
“Ultimately, when investing for charities, we seek to consider all the risks, including climate change, and deliver our clients profit with principles on their investments.”
Esmé van Herwijnen is the Responsible investment analyst at EdenTree
This content has been supplied by a commercial partner.
Related articles
