Invest to mitigate climate risk, not exclude polluters

Leading analyst tells WP how to flip the impact investing formula to include forward-thinkers

Invest to mitigate climate risk, not exclude polluters

Climate change is exposing investors to a huge range of risks, across a vast array of industries. One leading analyst thinks it’s up to investors to make sure companies are mitigating those risks.

Sarah Keyes, principal at ESG Global Advisors, believes that just about every investment is exposed to a climate change-related risk. She cites research by the sustainability accounting standards board that shows fully 93% of US equities are exposed to at least some kind of climate change-related risk.

In a preview of her upcoming talk on climate change at the WP Invest ESG forum, Keyes told WP that she splits those risks into two categories: transitional and physical. Transitional risks are the financial losses that might come with the “decarbonization” of the global economy as countries strive to meet their Paris Agreement promises. Physical risks are driven by extreme weather spikes, like the ongoing fires in Australia, that can fully destabilize a region.

“If you don't pay attention to climate-related risks in your portfolio, you may not actually see an exposure that you have in terms of a physical asset,” Keyes told WP. “If you’re invested in a coastal hotel chain, for example, rising sea level and coastal erosion and more extreme weather events raise the risk of flooding those assets. You could take an impairment or see an increase in operating costs just to try and keep these assets safe from these growing physical risks.

“If you have not factored that in, you may be taking on a risk within your investment portfolio that you're not getting paid for.”  

Keyes sees ESG investing as a means to protect yourself and your portfolio from the risks of climate change. Her view of ESG investing, though, is not about excluding firms that might contribute to climate change. Rather, she looks at ESG as a way of assessing how firms are preparing for the looming risks of climate change. She flips the old exclusionary formula of “impact investing” and Corporate Social Responsibility (CSR) towards and inclusionary formula, taking on companies that are minimizing their exposure to climate-related risks.

Keyes wants more investors to take this view of ESG investing and push the companies they’re buying to get ready for climate change-related risks. She’s seeing a push for enhanced disclosure, companies fully explaining their own exposure to climate-related risks. She looks for signs from company governance around these risks, and whether the board has identified them and made someone responsible for managing them. Investors can use disclosure calls as a “lever” to push companies to better prepare for climate change.

If companies aren’t disclosing enough, Keyes thinks investors should push them and engage with high-level leaders at the company. That can even take the form of proxy voting and shareholder proposals, like the climate-change driven shareholder proposal Suncor faced. In that case Suncor worked with its advisors and turned a confrontation into a “win-win”, that saw the company begin to minimize its climate change-risk exposure.

“What investors are most interested in is how climate change risks are going to impact the company's value across a time horizon, as opposed to how the company is impacting the climate change crisis,” Keyes said. “The vast majority of investors that are looking at ESG integration hold companies in energy and mining.

“They're most interested in understanding how the company is going to respond to the impacts of climate change on their business.”

Keyes will be sharing more of her insights into climate change, decarbonization, and ESG investing at WP Invest ESG, on March 25th in Toronto.

Register here.