Priorities are changing for long-term investors as the climate change transition really begins to kick into gear with a shift away from the fossil fuel-laden energy sector, and the more diversified investors should ensure that they are evaluating their portfolios accordingly.
Carlo M. Funk, EMEA head of ESG investment strategy at State Street Global Advisors, recently wrote a paper discussing the climate change transition and how to ensure that both advisors and clients are prepared for the changes on the horizon. The following are four different considerations that investors need to be aware of for their portfolios.
- Investors need to be absolutely educated on and aware of the exposure their portfolio and investments have to the fossil fuel sector, as it will most likely carry increasing risks moving forward. Funk anticipates a “massive economic depreciation exercise for carbon-heavy assets” and an inverse appreciation of clean energy and related assets. Understanding the risks that their current investments carry will allow investors to reallocate as necessary to create a more resilient portfolio in the long term as regulations and the economy change. This includes finding the right tools for forward-looking climate analysis.
- Some investors have simply gone the route of divestment within their portfolios to avoid exposure to riskier fossil fuels, and this move may work for some, but a potentially more effective route is investment with engagement. Providing capital to companies that are working to make the clean energy transition will allow for a more successful and rapid transition, but it’s important that investors and advisors engage with the company over their practices, whether through shareholder voting or other means.
- Regulatory changes to ESG reporting and data will ultimately impact valuations and credit analysis for companies. Regulation will most likely bring with it better disclosure practices and new and different financial models built around changing data. For now, “the inclusion of carbon pricing into equities-market valuations still poses modelling challenges for investors,” Funk writes, and keeping up with changing regulations will be important.
- As governments enact decarbonization policies, they could have balance sheet effects for companies via tax increases. Funk explains that “decarbonization is a structural inflation driver for economies, as the inputs and technologies for sustainable businesses are still in their infancy,” and that these could have big impacts on sectors that currently rely heavily on fossil fuels. The flipside is the opportunity to invest in growth potentials within green technology, whether through new, low-carbon products or within technology and AI that will be working within the climate change arena.
State Street Global Advisors offers a wide variety of ESG funds and strategies for investors that range from a broad investment via an ESG lens with the SPDR S&P 500 ESG ETF (EFIV ), to the SPDR S&P Kensho Clean Power ETF (CNRG ), and fixed income investing with the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND ), along with several other funds.
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