Proofing your portfolio for a greener future

In August, as Europe was experiencing its hottest summer on record, the release of the Intergovernmental Panel on Climate Change (IPCC) latest climate report gave plenty for the world to ponder. With so much news on the topic of climate change, it can be hard to grasp what the impact is to investments and how to consider the climate when investing.

The IPCC published the report on ‘Climate Change 2021 The Physical Science Basis’ in August. Formed in the late 1980s, the IPCC provides policy makers in 195 member countries with regular science-based assessments on climate change.

One of the opening statements sets the tone for the report where it states, ‘It is unequivocal that human influence has warmed the atmosphere ocean and land’, while the findings were dubbed by the UN Secretary General António Guterres as a ‘code red for humanity’.

What does it say?

The report sets out an understanding of the current state of the climate, possible future climates and what is needed to limit future climate change. It looks at carbon dioxide concentrations, temperature levels, sea ice areas as well as sea level changes. Its key findings include:

• Each of the last four decades have been successively warmer than any that preceded since 1850
• Human activities have caused increases in greenhouse gas concentrations since 1750
• Incidence of extreme weather, such as heatwaves, heavy precipitation in some regions and droughts in others, have become more frequent
• Global temperature rises until at least mid-century are unavoidable while limiting global warming to 1.5 degrees Celsius to 2 degree Celsius will only be achieved with deep reductions in carbon dioxide and other greenhouse gas emissions

This report is one of many that the IPCC are publishing in this reporting cycle. Next year should see the IPCC publish ‘Climate Change 2022 Impacts, Adaptations and Vulnerability’ as well as a report on Climate Mitigation. While the IPCC can set out what is needed, ultimately the policies to adapt to and mitigate climate change are up to policymakers.

Ireland’s policy

In July this year the President signed into law the Climate Action and Low Carbon Development (Amendment) Act 2021 which looks to set Ireland on a path to net zero emissions by 2050 and cut emissions by 51% by 2030.

The Act will ensure the publication of carbon budgets, sectoral emission ceilings as well as a climate action plan. As a precursor to the budget, we have already seen Minister for the Environment, Climate and Communications of Ireland, Eamon Ryan announce new standards for domestic solid fuels which will be brought in within a year.

On the world stage

Irish delegates will join those from around the world at the United Nations Climate Change Conference, COP26 as they come together to discuss what more can be done to address climate change. The conference was last held in Paris in 2015, which saw commitments to limit global warming to 1.5 degrees Celsius to 2 degrees Celsius by 2050 and progresson this aim will be assessed.The rhetoric in the US has changed under the new administration to focus more on what Joe Biden dubsthe “Climate Emergency” while the EU published proposals to transform the economy under its Green Deal earlier this year.

What implications does this have for investments and investors?

The message is very clear, policy needs to and will shift towards more climate friendly initiatives. Governments, with the knock-on effect to industry, will be impacted by this new greener path and it will need to be considered in their attractiveness as an investment opportunity.

There are risks and opportunities across industries and one could approach investing in a “greener” portfolio by simply excluding certain carbon intensive sectors, or countries, but is that far enough? How about also rewarding companies within other sectors that have industry leading environmental practices?

This investment universe is expanding with a range of products to cover multiple approaches. Some investment houses are running dedicated “Climate Change” products by investing in companies that are set to benefit from climate change adaptation and mitigation. While other managers continue to take a whole of market approach but are focused on companies that will be able to sustain profits during the shift to a lower carbon economy.

A key factor for investors to bear in mind is how to measure how “green” an investment product really is. There is a lack of industry standard, but we have seen legislation from the EU this year in the form of the Sustainable Finance Disclosure Regulations (SFDR). SFDR look to help investors understand whether an investment product has a sustainable investment focus.

As we await the roll out of Ireland’s own carbon budget, the aftermath of COP26 and the publication of the next set of IPCC reports we may have a short window of reprieve from the headlines, yet it is undeniable that the policy trajectory has shifted to a greener future.