In the past ten years, we have had eight of the hottest 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.
Emissions of heat-trapping greenhouse gases make it harder for Earth to reflect heat from the sun back into space. This increases the likelihood of severe and irreversible environmental consequences – from catastrophic wildfires and droughts to more severe storms and rising sea levels.
What impact could this have on my investments?
Climate change poses significant risks to carbon-intensive sectors such as oil, gas, coal, heavy industry and transportation. For example, it increases the risk of “stranded assets”. This is where a company’s assets lose value or become obsolete. Locked assets caused by environmental issues, such as changes in climate policy to reduce emissions, are becoming increasingly apparent.
Some could also fall victim to the physical impacts of climate change, such as coastal oil refineries or nuclear power plants, which are vulnerable to rising sea levels.
The risks to your investments are potentially greater than those directly exposed to fossil fuels. In the future, all companies, regardless of their sector, could face restrictions and fines related to their carbon footprint.
The European Union Emissions Trading System is currently the most established carbon pricing scheme in the world, covering 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 further impact the cash flow, earnings and stock price of high-emitting companies.
The road to net zero
In 2015, world leaders signed the Paris Agreement, an international agreement to limit global temperature rise 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 present further plans to help achieve the goal.
In 2019, the UK became the first major economy to adopt a net zero commitment into law. This means that emissions will have to be completely avoided 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 alone in making net zero commitments. Many companies, both in the UK and overseas, have also adopted net zero targets. Companies that don’t seem to be doing 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 biggest and most pressing environmental risk facing investors, but it is far from the only one.
Biodiversity loss 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 infrastructure and large-scale agriculture upsets the balance.
The effects are already being felt in sectors such as fishing. But other areas such as agriculture, forestry and tourism also face these risks. Companies that rely on deforestation in their supply chains could also suffer supply disruptions, increased costs and reputational damage.
Waste management is another environmental consideration. Increased consumption leads to increased pressure on landfills, which in turn leads to increased landfill taxes. This, combined with stricter regulations on how waste is handled and managed, will have a big impact on companies with less sustainable business models.
What can investors do?
This week is Happy Money Week. This is a national campaign that aims to raise awareness of responsible investing. We think now could be the perfect time to check whether your portfolio is ready to meet the environmental challenges we will face in the decades to come.
If you want to invest from an environmental perspective, but don’t have the time or knowledge, a fund could be a good alternative. We take a closer look at two of them below.
Both funds have the ability to invest in emerging markets and derivatives, which adds risk. Remember that all investments can fall or rise in value, so you might get back less than you invest.
Investing in funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with their own and if 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 unsure whether an investment is right for you, seek financial advice.
Legal and 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 amount invested in those involved in the fossil fuel industry or emitting higher than usual levels of CO2.
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 towards companies that help cope with 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 gives a greater weight to 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 is very different from the global stock market as a whole, so we expect it to behave differently as well.
Learn more about 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 put increasing pressure on the planet’s finite resources. They think it could lead to shortage and quality issues.
Companies seeking to solve environmental problems through innovative technologies and smart use of natural resources could therefore generate above-average growth over the long term.
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. .
Leaders also value financially strong companies with a unique competitive edge and a business model that doesn’t rely on government subsidies. Here’s how the fund currently invests in key sustainability themes.
Current fund investments
Source: Pictet Asset Management. Correct as of 07/30/2021.
Current investments include the Danish energy company Ørsted. Ten years ago, it was one of the most coal-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 increases risk. It is also an offshore fund, so investors are not normally protected by the Financial Services Compensation Scheme.
Learn more about Pictet Global Environmental Opportunities, including fees
You want to know more ?
If you want to learn more about responsible investing, check out the new Responsible Investing section of our website.
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