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Investors can’t afford to ignore climate change

Declaring a climate emergency challenges investors by highlighting the future impact on corporate operations and profitability.

By John Berry

OPINION: This week, our government announced a climate emergency, following the lead of the UK, France, Canada and Argentina. This reinforces our target to be carbon neutral by 2050 and supports our Paris accord commitments.

Declaring a climate emergency challenges investors by highlighting the future impact on corporate operations and profitability.

Fortunately, there are a range of strategies and tools for investors to measure the risk of companies in relation to climate change, to assess opportunities for better investment returns and to encourage companies to transition to a lower-carbon world.

Using these strategies and tools will be better for long-term investment returns as well as better for our planet and people.

The most widely used tool for investing responsibly is exclusions. This means avoiding investments that cause harm, and is typically applied to weapons, gambling and alcohol companies.

In relation to climate change, exclusions can focus on two areas. The first area is fossil fuel companies like oil, coal and gas companies, while the second area is high-emissions industries (like airlines) or high-emissions companies (like those burning coal in their production process).

But simply avoiding companies will not bring change. For this reason, exclusions do not go far enough.

A positive lens to investing can be applied by using environmental, social and governance (ESG) factors to assess companies alongside traditional financial metrics. There’s plenty of research globally showing this analysis helps create lower risk, better performing portfolios.

Adopting this approach makes sense intuitively as companies looking after their employees will have stronger staff retention, fewer sick days and higher productivity. So it’s good for staff and good for shareholders.

Where companies need a nudge from shareholders to transition faster towards a lower-carbon future, shareholders can engage with a company. This includes voting as a shareholder to effect change or direct communication with management.

Oil companies globally have been surprised by the depth of shareholder feeling around climate change with companies like BP and Chevron being told by shareholders to lift their game.

Shareholders are increasingly asking for emissions targets, better carbon disclosure and spending transparency for lobbying around climate issues.

A relatively new strategy for measuring the climate change risk of companies is to assess their carbon emissions and review their plans to transition to a low carbon world. This is not without challenges given it can often be hard to get full data from many companies.

In addition, it is essential to compare a company’s carbon footprint with equivalent peers. There is no point in comparing the carbon emissions of a transport company like Mainfreight with an energy company like Meridian.

A final strategy for responsible investors concerned about climate change is to narrow the investment universe only to positive themes that benefit our planet. These themes could include water companies, forestry and renewable energy like wind and solar manufacturers.

A narrower investment universe gives a strong focus on ‘good’ companies. However, it may also result in a less diversified risk profile for the portfolio.

The long-term stability of our climate is changing. Long-term investors with a focus on both their pocket and our planet need to change as well. Investors can no longer afford to ignore our climate emergency.

John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.

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