The Impact of Climate Change on Investment Portfolios

Enjoy this post to learn while climate change introduces new risks for investors, it also presents new opportunities.

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    The Impact of Climate Change on Investment Portfolios

    The Impact of Climate Change on Investment Portfolios

    The value at risk to investment assets due to climate change is estimated to be $4.2 trillion in present value terms, with a tail risk approaching $14 trillion, or 30 percent of the world’s manageable assets, according to the Economist Intelligence Unit.Climate change will surely impact investment returns in the years ahead. Consequently, asset managers and financial advisors will need to incorporate climate change as a new risk input into their investment process.

    While climate change introduces new risks for investors, it also presents new opportunities. These market risks and opportunities can be grouped into four basic categories:

    • Physical Impact—The damage done to physical assets due to extreme weather events or permanent change in climate conditions
    • Government Policies—New regulations, changes in the tax code, and the elimination or introduction of subsidies each can meaningfully impact corporate profits
    • Technological—Investments in technology designed to support a low-carbon economy, such as energy storage, energy efficiency, alternative energy sources, electric vehicles, etc. can represent compelling future opportunities for growth
    • Social Dimension—Evolving consumer preferences and attitudes, coupled with social advocacy can create ripples across industry sectors, especially with fossil fuel producers

    While climate change risks are low in the short term, they can be significant over the longer term. Accordingly, long-term investors looking to protect and grow their retirement savings will need to account for this risk in their portfolio construction and investment selection process.

    Advisors may want to start with adding a section to a client’s investment policy statement that reflects an individual’s climate-related beliefs and objectives, and discusses the climate change risk tools and monitoring that will be done to manage this risk.

    There are a number of ways to accommodate climate change risk, including:

    • Investment policy exclusions of fossil fuels and other sectors
    • Investment in companies with low carbon output or an aggressive strategy to reduce their carbon footprint
    • Investment in passive, low carbon indexes
    • Investing in “Green” bonds
    • Using actively-managed funds with low carbon and/or environmental, social and corporate governance (ESG) selection criteria

    Evidence exists that a low carbon screen doesn’t necessarily mean that long-term performance is compromised. According to a recent analysis by Calpers, the MSCI Low Carbon Target Index outperformed the MSCI ACWI on a one-, three- and five-year basis.2

    Climate change is reshaping the threat and opportunity landscape of investing, and advisors will need to adjust if they are to help ensure clients achieve their long-term financial goals.



    See referenced disclosure (2) at 





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