Finally, social and corporate awareness of climate change is increasing amid a recent spike in global temperatures. Non-governmental organizations (NGOs), shareholders, activists, and consumers are pressuring companies to make their supply chains more sustainable (e.g., using less energy and water, and producing less waste). The same groups are putting climate change on the agenda of all asset owners.
Market Realist –Social and corporate awareness for global spike in temperatures
According to the Intergovernmental Panel on Climate Change, average temperatures over all land and ocean surfaces have risen 0.74º Celsius (1.3º Fahrenheit) over the last century. Research by the NOAA (U.S National Oceanic and Atmospheric Administration) states that the ten warmest years were recorded since 2000, with the 2015 as the warmest year on record.
The third U.S. National Climate Assessment by the NOAA revealed that human activities, mainly the burning of fossil fuels, are responsible for global warming in the past 50 years. This has called for social and corporate awareness of climate change and regulatory and policy changes, as we saw in Part 4. The above graph shows the forecast path of greenhouse gas emissions under various global temperature scenarios.
Climate-related actions and pledges
NGO’s (nongovernmental organizations), shareholders, activists, and consumers are already prioritizing climate change agenda for asset owners. Some large investors have taken a pledge and are involved in climate-related actions to decarbonize portfolios, disclose carbon footprints, or divest fossil fuel companies. Decarbonizing portfolios could have an opposing effect on fossil fuel (IEO) (GUSH) and energy companies.
Below are a few of the climate-related actions and pledges by investors:
- Montreal Carbon Pledge
- fossil fuel divestment commitments
- Portfolio Decarbonization Coalition
Assessment of climate risks should be done at an industry sector level to optimize climate risk opportunities. The above graph by Mercer from its Climate Change Study 2015 shows the climate impact on returns by industry sector for the next 35 years. The report analyzes various climate scenarios. Depending on those scenarios, returns in the coal sector could fall 18%–74% over the next 35 years.
As you can see in the graph, the minimum impact for the coal sector could be a fall in expected returns from 6.6% per year to 5.4% with an additional variability as low as 1.7% per year over the next 35 years.
Over the same period, oil (XOP) and utilities (IDU) (XLU) could also suffer, with a potential to fall from 6.6% and 6.2%, respectively, to 2.5% and 3.7%, respectively, per year. However, after looking at the graph and the climate scenario assessed, renewables (QCLN) could be a good option for investors. The average expected returns for renewables could rise from 6.6%–10% over the next 35 years.
Next, let’s see how time horizon matters in climate-savvy investing.