What can your portfolio do to tackle climate change?

James McManus


4 min read

Sweltering heat in the south of France, the worst drought in living memory in parts of India, and the insidious retreat of ice floes and glaciers. As one Spanish meteorologist put it, while anticipating Europe’s recent heatwave, “Hell is coming.”

Climate change is one of the largest and most ominous problems facing the globe. It is hard to find a part of the global economy that will not, somehow, be affected by rising temperatures and all the incumbent challenges they bring, from extreme weather events to high sea levels, from freshwater shortages to the depletion of coral reefs and other natural habitats.

The data are startling. The levels of carbon dioxide in the atmosphere are higher now than at any time in the past 400,000 years1. The Intergovernmental Panel on Climate Change (IPCC) predicts that the globe will warm to a temperature 1.5C above pre-industrial levels between 2030 and 20522. Concepts such as the nine planetary boundaries, developed by the Stockholm Resilience Centre, have tried to quantify the risks, and drawn worrying conclusions.

What is the world doing about it? The Paris Agreement, which entered into force in 2016, is an attempt to limit that warming to 1.5C. Setting aside the United States, whose president has vowed to pull his country out, the agreement has broad support from 195 signatories3. At the end of last year, the World Bank doubled the sum it plans to invest between 2021-2025 in measures to mitigate or improve resilience to climate change.

Is it enough? Perhaps not. In fact, we believe the costs and challenges presented by climate change, and the seismic shifts these will create in the global ecosystem, are only just beginning to be realised by governments and companies, let alone factored-in by markets and investors both in terms of risks and opportunities.

Here are just a few of the ways in which we think climate change could affect the global economy:

  • A significant shift in carbon policy by governments globally. Rising temperatures and their knock-on effects are likely to increase migration, increase frequency of natural disasters, alter the ecological construction of habitats and strain economic relations with neighbouring nations. The result will be that governments, regretting their failure to act early, will take drastic measures to rectify the situation. These “disorderly responses”, such as the banning of certain activities or introduction of significant tax burdens, will cause upheavals in industry and consumer behaviour.
  • Supply chains will need to be reshaped. To be resilient in a warming world, manufacturers will need to rethink their networks of suppliers. That could mean buying fewer materials from countries that are vulnerable to extreme weather events or prioritising “localisation”, which has the benefit of reducing the emissions caused by transporting goods around the world. Rising temperatures will affect agricultural supply chains globally, while manufacturing and export hubs in coastal regions will come under pressure from rising sea levels.
  • Globalisation will come under increasing scrutiny. The large advances in material prosperity that many of us have experienced in recent decades have come hand-in-hand with greater interconnectedness between global nations. But globalisation has also been a significant contributing factor to high emissions and waste levels. Climate change could challenge the wisdom of importing goods when they could be manufactured or produced locally; however, a reduction in global trade could reduce the progression of wealth generation and social factors in many emerging market countries.
  • Networks of stranded assets will emerge. If nations are serious about meeting ambitious targets such as zero net emissions, much present-day infrastructure will need to be retooled or abandoned. There would be a large economic cost in writing off the value of coal-fired power plants, diesel-fuelled trucks and petrol-burning tankers. Declining demand ought also to reduce the value of fossil fuel reserves, if not render these assets valueless in the long term (50 to 100 years).
  • Infrastructure must be strengthened. Another huge expense will be incurred by the global fight to become resilient against rising temperatures. Coastal regions may have to spend large sums on tidal defence, while small islands may need to be evacuated. Large areas of the globe may become uninhabitable without large investments in air conditioning or water desalination.

What can investors do?

At Nutmeg, we believe strongly in responsible investment. We launched our socially responsible investment (SRI) portfolios to give our customers the option of investing in a way that better reflects their values.

Using data on environmental, social and governance (ESG) factors provided by MSCI, a leader in the field of ESG research, our SRI portfolios are tilted to hold underweight positions in those companies engaging in controversial activities while holding overweight positions in those that do business in a fair and progressive way, with strong sustainability profiles.

Through our ESG portfolio scoring, you can see how your portfolios stand up against a range of environmental, social and governance issues, including carbon intensity.

 

Sources

  1. https://climate.nasa.gov/climate_resources/24/graphic-the-relentless-rise-of-carbon-dioxide/
  2. https://www.ipcc.ch/sr15/
  3. The United Nations Treaty Collection gives the latest information about the status of the Paris Agreement. At time of writing (9th July 2019), there were 195 signatories. https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-d&chapter=27&clang=_en

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance indicators are not a reliable indicator of future performance.

 

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James McManus

A self-confessed ETF geek, James is head of ETF research at Nutmeg. He joined in 2015 from Coutts & Co, where he was an associate director in the investment office. James holds a Bsc (Hons) in International Business from Nottingham Business School.


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