A recent report released by BlackRock suggests that investors need to start thinking about how climate change will impact their portfolios. The report highlighted how increased instances of catastrophic weather events and rising temperatures create very real economic risks, particularly to "coastal real estate, agriculture and companies with supply chains in geographically vulnerable areas."
However, the report did also state that investing around these factors does have its challenges - but is that the only reason that more advisors are not helping their clients build ‘green’ portfolios? “The reluctance on the part of advisors to offer a low-carbon option appears to stem from uncertainty regarding performance and the cost of implementation,” explains Yasser Mawji, Director of Research at Wealthsimple. “While these concerns are valid, they are relatively minor in our experience… creating a low-carbon portfolio has never been cheaper, thanks to the availability of socially responsible ETFs.”
Although knowledge of climate change and its impacts has grown significantly over the past decade, most individual investors remain unaware about the environmental risks in their own portfolios. “One reason is a lack of transparency, but that is beginning to change,” Mawji says.
Investing in companies that develop renewable power and technologies that aim to reduce carbon emissions is an effective way of integrating climate change into a portfolio’s strategy. In the fixed income space, green bonds, which fund climate-friendly projects, are becoming increasingly popular. “Renewable power has the potential to fundamentally reshape the world economy, with gains accruing to both society and investors,” Mawji says. “But investors also need to be mindful of several caveats. Historically, disruptive technologies have been characterized by “winner-take-all” dynamics: Among the many firms vying for dominance, only a few emerge as winners, with the remainder falling by the wayside.”
Wealth professionals now have access to a wide range of tools to help them create climate-friendly portfolios. “Sustainability scores on mutual funds, ETFs and individual firms are available from multiple providers, who continuously track carbon emissions and other applicable metrics,” Mawji says. “Furthermore, investors can choose from several inexpensive ETFs with a low-carbon mandate.”
For climate-aware investing to become the norm, Mawji believes there needs to be a strong feedback loop between carbon emissions and company profitability, and a global adoption of carbon pricing. “Firms would be incentivized to reduce their carbon emissions in order to improve profitability -- and by extension, investment performance,” he says. “Due to its direct link with investment performance and social outcomes, climate-aware investing would then become the norm.”
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