|June 03, 2019|
Climate change risk is chronic and acute.
|The search for yield can take investors to strange places. But never more so when those same investors also have a goal of helping save the planet.|
Aligning financial interests with reducing the effects of climate change can force upon an investor dichotomies they might never previously have considered. Like, for instance, saying that cruise ships are a better buy than theme parks, because the latter is stationary, the former is not, and being able to move an asset may be advantageous in the not-so-distant future where extreme weather is a threat to us all.
Comparing the relative merits of ocean liners and rollercoasters might get you quoted in the nation's largest paper. But it's a sideshow compared to what's actually needed when it comes to true sustainable investing: a plan that doesn't treat great returns and even better environmental stewardship as a niche service in search of niche investments.
For far too long, climate change investing has been relegated to the larger umbrella of Environmental, Social and Governance (ESG) investing. That is to say, it's something most serious investors only pay lip service to by adding a few ESG funds to their portfolio. A feel-better hedge that also acts as a convenient datapoint when socially-conscious clients ask how the fund is preparing for a warming planet.
There's nothing wrong with providing added capital to renewable energy projects. It's part of what's helped accelerate a cost curve that continues to move in a positive direction.
But easy plays in wind and solar or headline-grabbing reaches for alpha have camouflaged the greater rewards available to investors who don't discriminate. The world isn't black and white and neither should responsible investing be just as binary.
What's needed is a way to quantify climate risk for all securities. Not just emitters, and not just those companies directly involved in energy conversion. But taking each and every piece of the economic ecosystem and measuring three things: a company's sensitivity to resource risk, what they're doing to reduce their footprint, and how those actions better prepare them for the uncertainty ahead.
Such an approach requires first looking at potential climate scenarios related to temperature, carbon emissions but also energy production and consumption. Such an approach allows an investor to address transition risk from a high carbon economy to what everyone should hope will soon be a low carbon economy.
When you look at the markets and create predictive models, you must take into account what is temporal and what is here to stay. In the case of climate change, it's both.
We have acute events, like the wildfires in California that recently bankrupted PG&E , but we also have the chronic emerging pressure of a changing climate. Investments cannot be sustainable by focusing merely on only one or the other. Betting on the shocks climate change brings to the markets, and benefiting from those shocks, will not insulate funds from chronic exposure to climate risk.
Best Buy 's incredible five-year turnaround at a time of pervasive retail collapse has been driven in large part by smart decisions by a new executive team, like a new price-match policy to keep customers from buying on Amazon . Less heralded, though, was their commitment to reduce carbon emissions by 20 percent, a goal they've since exceeded. Retrofitting stores with more energy-efficient lighting and storage systems didn't just save money in the short term. It also better insulated the retailer from the potential shocks of an acute event.
That ability to weather the storm extends into sectors that aren't normally considered green, like air travel. A renewed focus on lesser fuel usage was originally promoted by United Continental as a responsible move for the atmosphere. But the effects were felt most strongly by the company's investors. United managed to save $343 million in a single fiscal year. It also allowed the company to raise its profit outlook this year even after a sudden rise in fuel prices. Whether chronic or acute, the risks faced by the airliner are far lower than its competitors because of investments it made half a decade ago.
Having a plan to deal with climate risk is fortunately no longer the domain of managers running obscure ETFs and mutual funds. When even Oreo cookies are expected to have some environmentally-friendly component, you know an idea has gone mainstream.
But investments meant to account for a changing world need to get more worldly. The narrow bets of the past need to become broad investments in the sorts of companies environmentalists would normally avoid. And every sector, every industry, and every company has to be able to be measured against how it would perform in the best and worst case scenarios, and everything in between.
Nobel Prize winning scientist & Senior Climate Researcher at JPL NASA, Dr. David Schimel has extensive knowledge of statistical concepts, climate modeling, scientific computing and research methodologies. Thomas Stoner has 25 years of executive leadership in environmental and energy industries, including one IPO on the LSE-AIM and CEO of an NYSE-Arca traded technology company. Stoner and Schimel are leadership members at Entelligent.