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.