Are you a climate change enabler?

Joe Biden has won the presidential election and in 2021 we’ll see the US rejoin the Paris accord. This is a critical shift and recognizes how the global effects of climate change are widely understood.

Joe Biden, and governments worldwide, are developing a sense of urgency to change behaviour, meet emissions targets and mitigate the worst environmental and economic impacts of climate change.

Many of us are already conscious consumers. We avoid products that do harm to the environment and society, we are careful in how we spend our consumer dollars.

Clearly, this approach works in the retail space as there are many examples of companies changing behaviour to stay relevant (and to stay profitable). Cosmetics that aren’t tested on animals, products with less packaging and more locally produced products are all a response to conscious consumer decisions.

But have you thought about being a conscious investor as well? It is easy to think about climate change as just having an impact on the environment, but as a saver for retirement, you really need to think about how climate change will impact your investments.

There will be big corporate winners and losers as climate change makes an impact. There are direct costs – more storm and flood damage, changes in agriculture to adapt to different temperatures and precipitation patterns, and the need to move infrastructure (roads, ports, airports and even cities). All these add up to serious financial risks for companies and investors.

Change is already happening rapidly as technology improves, as consumers demand less carbon-intensive products and as Governments use regulations to change corporate behaviour.

A great example is the coal industry. In 2011 US coal companies had a stock market value of US$37 billion. Today they are worth just US$2 billion. If your KiwiSaver fund has been invested in the coal industry, that is a direct loss of your retirement savings.

Over the last 10 years, demand for fossil fuels has grown at a rate of 1.6% per annum, whereas renewable electricity generation has grown at 6.4% per annum. Why invest in low growth areas when there are more attractive high growth areas available? The average investor has done four times better in the renewable sector than in the oil and gas sector.

And it isn’t just companies in the fossil fuel sector that you should avoid. Big banks around the world lend billions to fossil fuel companies. This is a major risk given that many oil, gas and coal projects have multi-decade investment horizons.

With the speed at which consumer preferences and government regulation are changing, how can any lender be comfortable with long term risk that is tied to digging coal or extracting oil? Joe Biden is about the accelerate the change and increase the risk for fossil fuel companies.

Over recent years, 4 banks (JPMorgan Chase, Wells Fargo, Citi and Bank of America) have lent over $800 billion to fossil fuel companies. Will they get that back? Maybe, but also maybe not. There is a move to avoid investing in the big lenders to fossil fuel companies as well as the fossil fuel companies themselves.

What can you do as an individual investor? Ask your KiwiSaver manager what they are doing about climate change investing. What are their policies and what are examples of companies they do or don’t invest in?

If you don’t like their answers, switch to a provider that does give you a better answer. Don’t enable investment into companies that aren’t serious about climate risks. Make no mistake, climate risks are fast becoming serious financial risks, and serious financial risks are bad for your retirement savings.

Paul Brownsey is Chief Investment Officer 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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GENERAL INFORMATION ONLY

This information is general information only and does not take account of your individual investment objectives or financial situation.
Pathfinder Asset Management encourages all investors to seek independent financial advice prior to making investment decisions.