Why climate change should influence your investment decisions
Climate change and unclear policy responses by governments to climate change, including the Australian government, pose a significant risk to investment returns.
According to a report released by investment consulting firm JANA, which has approximately $600 billion in total assets under advice, it is time for investors to think about ensuring climate-related financial risk is adequately considered and monitored in their investment decisions.
This would be an important step forward for investors as climate change is likely to influence all parts of the global economy.
For instance, after facing criticism about its environmental record, the $1.3 trillion capped online retail giant Amazon (NASDAQ: AMZN) launched a $2 billion venture capital fund as part of its Climate Pledge announced in September 2019. The fund will invest in clean energy and other technologies to reduce the impact of climate change. For Amazon investors, that could be a double positive.
The report released by JANA titled ‘Climate change – implications for investment strategy’, examines current climate change policies, that, if continued, could have a detrimental impact on many investments.
The impact of policy changes and the potential costs of physical changes resulting from climate change are high.
The light at the end of the tunnel is the inevitable transition to a less carbon intensive world, leads to medium and longer-term financial risks and opportunities for investors.
“We expect climate change and climate-related transition and physical risks to impact on future investment returns. The financial risks associated with climate change have immediate implications for investment governance and process, and will become more influential on investment strategy over time,” JANA’s Head of Responsible Investment Research, Tim Conly said.
“Investors should integrate climate change considerations into their governance frameworks, investment decisions and monitoring activities. This includes looking to target investments that would benefit from the transition to a low carbon economy. However, for larger scale investment in particular, policy and regulatory uncertainty needs to be overcome,” he said.
Modelling was prepared by JANA in conjunction with specialist researcher Climate Insight and was based on two International Energy Agency scenarios assessing a range of potential impacts on risk asset returns over the medium and longer-term.
The first scenario, Stated Policy Scenario, anticipates limited global policy co-ordination and the continuation of currently announced policies, which would equate to 3 degree increase in global temperatures. The second, the Sustainable Development Scenario, models a more aggressive – and critically at this stage, hypothetical – policy response and emissions technology developments, which limits long-term temperature rise to 1.8 degrees.
According to Dr Danyelle Guyatt from Climate Insight, “the physical and transition risks of climate change are expected to have a significant negative influence on investment returns over time, but the Stated Policies Scenario is worse from an investment perspective. The cost of doing nothing is projected to be greater in the long term.
“This reinforces a need for portfolio diversification to build resilience across a range of climate-related scenarios,” she said.
The overall expectation is policy and technology developments will gradually shift the relative risk/return prospects in favour of ‘’green’’ (lower emissions) versus ‘’brown’’ (emissions intensive) assets.
However, the longer this takes, or is delayed, the likelihood of the impacts of climate change becoming more material is greater.
Companies are improving sustainability initiatives
Investors shouldn’t find it too difficult to diversify their investment portfolio when looking at companies with a growing green focus.
Amazon is one of the more high profile examples.
You wouldn’t think McDonalds is in on the green action, but even that company is going green by incorporating the outcomes of fast foods on people’s health while reducing their overall energy consumption.
It is also using energy-efficient appliances to cut energy wastage by 25% during business activities. In some cases, McDonald’s has also set up green parking lots by preserving them for only hybrid vehicles.
Google constructed the world’s most energy-efficient data centres. It campaigns for the use of renewable energy sources as well as clean energy products and has supported and funded green energy projects by buying and installing numerous windmills and solar panels.
Tesla and Honda are making eco-friendly cars. In fact, most car manufacturers are moving to energy efficient vehicles.
Even Brooks has developed a completely biodegradable running shoe.
You can invest in all of these companies except for Brooks, proving that there are a range of green investment opportunities to consider if looking to move your portfolio, or part thereof, into that space.
Reaction to climate change is inevitable and as such, there will be plenty of investment opportunities for astute investors.
This update is not financial advice. This article is general news and information.
Home Loans: The comparison rates are based on a secured loan amount of $150,000 and a term of 25 years.
Personal Loans: The comparison rates in this table are based on a loan of $30,000 and a term of 5 years unless otherwise indicated in the product name with^, in which case, the comparison rate is based on a loan of $10,000 and a term of 3 years. The comparison rates are for unsecured personal loans only for the relevant amounts and terms. The comparison rates for car loans and secured personal loans are for secured loans unless indicated otherwise.
WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.
The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements
InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible.
The information contained on this web site is general in nature and does not take into account your personal situation. Do not interpret the listing order as an endorsement or recommendation from us. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.