Weathered for Climate Risk - latest perspectives from Financial Analysts Journal / CFA Institute

Although many investors look to sustainable investments as a way to enhance returns, many investment managers have taken a more nuanced view in recent years. One perspective is that companies that adopt sustainability objectives, including the development of green energy initiatives, achieve higher stock market and accounting performance because they are more long-term oriented and more committed to measuring and disclosing nonfinancial information than their peers.

The latest issue of the Financial Analysts Journal explores climate risk from the point of view of equity portfolios (Mats Andersson, Patrick Bolton and Frédéric Samama) and from a fixed-income perspective (Marielle de Jong and Anne Nguyen). Both perspectives mention South Pole Group as leading service provider in the area of mitigating the climate risks of investments:

The equity strategy that Andersson et al. emphasise refers to a “free option on carbon"—the idea that should carbon controls be enacted, the low-carbon strategy will significantly outperform, whereas if no action is taken on carbon emissions, the strategy will perform no worse than the benchmark. They argue that standard approaches can subject portfolios to significant risk if investors merely short or divest from companies with a large carbon footprint. Such strategies can earn substantial returns in the event of government action on emissions but can lose considerably should no action be taken. In contrast, fixed-income strategies are structured to avoid the financial risk that arises when climate change policies target carbon-producing firms and the consequent reduction in fixed-income values. Indeed, de Jong and Nguyen observe that rating agencies are starting to pay attention to carbon reduction policies in the belief that such policies could affect credit ratings. In other words, the long-term consequences of climate change events could mean very negative short-term consequences for invested capital.

Download the two articles (Hedging Climate Risk & Weathered for Climate Risk) from the latest issue of the Financial Analysts Journal below.