Climate change will create investment winners and losers

Climate Week 2013 came to an end on Sunday, with over 3,000 events having taken place across the country during the seven days. Daisy Moore of responsible investment research firm EIRIS reflects on the hot topic of climate change, and explains how it links in with investment.

Around the world, climate change initiatives continue. China’s clean energy market is expanding with investment rising to over $60 billion in 2012.

California’s cap and trade scheme came into force at the beginning of this year meaning companies emitting over £25,000 tonnes CO2e now have to purchase emissions permits. This initiative is set to encourage the power, oil and industrial sectors to reduce their emissions, as well as help raise funds for the state’s budget for investing in transport, electricity and water.

A recent Ernst & Young survey of 300 executives spanning 16 countries and 18 industries found that 70% of respondents planned to increase their climate change areas such as energy efficiency and improved reporting.

In the US, 350.org’s fossil fuel divestment campaign – spearheaded by Bill McKibben – is gathering pace with Seattle mayor Mike McGinn recently announcing that city funds will no longer be invested in fossil fuel companies.

Shareholder resolutions relating to environmental and social issues are increasing year on year, including requests for disclosure on the physical risks posed by climate change, greenhouse gas (GHG) emission reduction goals and energy efficiency strategies. Meanwhile, investor initiatives to tackle climate change are growing.

The Institutional Investors Group on Climate Change (IIGCC) currently has 75 members accounting for €7.5 trillion and the UN-backed Principles for Responsible Investment (PRI) initiative now boasts over 1,000 signatories, with combined assets under management of over $30 trillion.

However this support lacks synergy with the latest news of investment in carbon intensive industries and investment in UK offshore oil and gas is at an all-time high. According to the Asset Owners Disclosure Project, the average pension fund portfolio is estimated to have 55% of its assets invested in high-carbon sectors or sectors greatly exposed to climate change.

Whilst the projected supply and demand of fossil fuels may result in higher prices, there are doubts over the valuations of fossil fuel companies as these valuations are based on their reserves.

Carbon Tracker’s Unburnable Carbon study highlights that if we are to stay within the 2 degrees of warming limit, as agreed upon by governments at COP15, 80% of these fossil fuel reserves need to stay in the ground.

Given such constraints, some have argued that fossil fuel companies are overvalued and investors risk being left with stranded assets. For example, in the UK, recent research by HSBC Global Research concluded that current earnings expectations from coal assets of the four mining majors on the London Stock Exchange could be cut by as much as 44% if it was assumed carbon constraints would come into play from 2020. As a consequence, some investors have begun to review their exposure to carbon intensive industries.

Against a backdrop of increased regulation coming into force to encourage greener energy and promote energy efficiency, and the latest climate talks in Doha resulting in governments concluding to work toward a universal climate change agreement to be adopted by 2015, high-carbon industries may come under pressure.

Obama’s recent State of the Union address indicated strong intent to “pursue a market-based solution to climate change” with or without the support of Congress. His leadership is being encouraged by other international figures, including the likes of Connie Hedegaard – EU commissioner for climate action – who are keen to secure greater international leadership from some of the world’s biggest economies.

And whilst overall investment in clean energy fell in 2012, developments to introduce cap and trade schemes and carbon taxes, such as those being suggested in China, may see fossil fuel assets come under threat.

Congress has some of the latest of political leaders who are speaking up on progress on climate change action. In this environment of pending regulatory crack down, it may prove prudent to assess investments in carbon intensive areas.

It’s clear that climate change will create clear winners and losers across the investment universe. EIRIS has developed a Climate Change Toolkit which enables investors to reduce investment risks by avoiding those companies that are failing to tackle climate change, or engaging with companies to improve their performance.

Our toolkit identifies those companies which are leading in their response to climate change and also enables investors to focus on climate change solution companies which are best placed to benefit from operating in a carbon constrained world.

If you are interested in finding out more about the responsible investment issues surrounding alternatives energy sources to fossil fuels check out our upcoming webinar on unconventional natural energy resources.

Daisy Moore is client relationship executive at responsible investment research firm EIRIS. This blog originally appeared on EIRIS’ website.

Further reading:

Sustainable investment needs to be ‘core to how we live our lives’

Do ethical funds and fossil fuels mix?

‘We need investment that prioritises long-term wellbeing for people and planet’

The Guide to Sustainable Investment 2013