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What Role Does Time Play in Climate-Savvy Investing?

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Sep. 27 2016, Published 2:39 p.m. ET

Time horizon matters

The relative importance of the above mentioned four factors depends on the trajectory of the pathway toward a low-carbon world and an investor’s time horizon. The longer an investor’s time horizon, the more climate-related risks compound. Long-term investors are likely more exposed to physical risks and the impact of climate change on economic growth. We also see them as better positioned to invest in new technologies that take the time to bear fruit. However, even short-term investors can be affected by here-and-now regulatory and policy developments, technological disruption or an extreme weather event.

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Market Realist – What are the TRIP factors?

In Mercer’s Climate Change Report for 2015, four climate change risk factors, also known as TRIP (technology, resources, impact of physical damages, and policy) factors, were discussed. In the above graph, the red box implies how the assessment of the TRIP factors could allow investors to limit their exposure to climate risk.

These risk factors increase with the rise in investors’ time horizons. The risk for a long-term investor is not just asset returns volatility but also extreme weather events, which could ultimately cause loss of capital. Extreme weather events could affect the global economy (ACWI) (IVV).

Long-term investors could choose to invest in new technologies that will be advantageous in the future. The technology sector (XLK) (IYW) could benefit investors who are tackling time-related risks.

Short-term investors usually expect climate-related problems to affect their investments in the future and thus ignore the risks. Climate-related risks for a short-term investor include regulatory risks and technological disruption caused by weather events.

However, short-term investors could climate-proof their portfolios by taking into account the ESG (environmental, social, and governance ) scoring framework. They could invest in benchmarks that will enhance their portfolio returns. We’ll take a look at this in the next two parts of our series.

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