As awareness of the risks of climate change grows, institutions and governments around the world have been propelled to take action at all levels - from changes in regulation to modifications to investment strategies. Confronted with the possibility of dramatic changes to energy sources and policy, investors worried about the effects of climate change are starting to turn towards indexes that exclude companies with high carbon exposure.
"Global warming is a big challenge - but also a great opportunity: Investors now have the chance to take action on climate, mitigate risks and capitalise on the opportunities created by smart companies who pursue low-carbon investment strategies," explains Dr. Maximilian Horster, Director Financial Industry, South Pole Group. "Low-carbon indexes can help get investors ready for a more carbon-constrained world and its financial implications."
With action on climate dominating the global agenda, the demand for low-carbon indexes is surging. More and more investors are pressured to divest from fossil fuels and evaluate the carbon exposure of their portfolios. Investment strategies based on low-carbon indexes can offer guidance for investors concerned about long-term risks to their portfolios from so-called stranded assets, i.e., assets that might become devalued or obsolete when they cannot be used or sold. When dealing with assets tied to oil, for example, stranded assets could be expected not only if oil prices stay low, which would render the high cost of projects uneconomic. A scenario of sustained higher oil prices would accelerate the transition to renewable energy even faster, as renewables would become the alternative that is more interesting from an economic point of view. To begin to understand the possible financial risk of owning assets that may become stranded, investors need to measure the underlying stores of greenhouse gas (GHG) emissions within the fossil fuel reserves of the companies whose stocks and bonds they own.
"By being able to single out companies best placed to adapt to a low-carbon future, investors can better strategise, mitigate risk, and maximise opportunities," emphasises Horster. "We have been working on climate impact assessments for a long time. Our refined know-how and premium data has helped realise a series of valuable low-carbon indexes…with more to come in the near future!"