The savvy investor and climate change

Guest columnist John Berry says investment markets already believe in climate change - even if you don’t.

As an investor, it’s not relevant whether you believe the science of climate change stacks up. The weight of evidence is compelling, but set that aside. The world has changed, your investments are already starting to price in climate change.

Carbon credits are now currency in today’s economy and therefore a company’s carbon footprint is starting to become as important as its profits, for assessing a share’s value.

High carbon companies will be forced to reorganise their activities, or they will be sold down by investors.

Those positioning their investment portfolios to recognise this should win, whether global warming actually happens or not.

The catalyst for change is the Paris Accord, where over 150 countries, including New Zealand, have committed to limit global warming this century to less than two degrees Celsius.

It is a long-term goal needing action now. And investors, regulators and large corporations world-wide are taking notice.

In a hugely ironic step, the US$1 trillion (NZ$1.35t) Norwegian sovereign wealth fund, which was established from Norway’s North Sea oil riches, has begun divesting fossil-fuel based assets because of the investment risk.

Norges Bank Investment Management (which manages the fund) contends the move will make Norway, which is still heavily reliant on North Sea Oil, less exposed to a permanent drop in the world’s oil price.

Closer to home, the New Zealand Super Fund’s outgoing head Adrian Orr recently noted, in relation to climate change, ‘‘we don’t need to rely on the science’’.

The fund believes, from a longterm investment perspective, that reducing carbon exposure in portfolios is effectively a one-way bet.

Recently it joined more than 220 of the world’s largest institutional investors to form Climate Action 100+, which is seeking to engage with the world’s 100 largest greenhouse gas emitters and strengthen climaterelated disclosure and governance.

With more than US$26t of funds under management, the group is driving changes in corporate behaviour.

But even ahead of the formation of this group, companies were taking notice. Fossil fuel giant Exxon Mobil, for example, was this year forced in a landmark shareholder vote to take account of carbon impacts in long-term planning.

Climate change is also attracting the attention of the financial regulators that oversee the world’s banks and insurance companies.

The Bank of England and the Australian Prudential Regulation Authority (APRA) both see climate change as a major risk that could challenge the financial system.

Rising sea levels could, for example, lead to massive insurance claims.

Stock exchanges like the NZX have adopted new disclosure rules covering environmental, social and governance (ESG) matters. These changes are forcing companies to take ESG factors, including their carbon footprints, into account.

Failure to disclose carbon intensity will, in the minds of investors, increasingly be seen as an unquantified risk.

For companies, this means at best a lower share price and at worst an inability to raise equity capital.

Companies know they need to embed carbon footprints and climate change impacts into their strategic planning, operation and behaviour.

Waiting for the sea level to rise before you build climate change and carbon footprints into your investment thinking is no longer an option.