Climate change becomes prime investment driver

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EPW17-1-Blackrock-sliderBlackRock, the world’s largest private investment fund, has announced that it will include climate change as an important factor in how it assigns risks to its investment portfolio, writes Fereidoon Sionshansi, president of Menlo Energy Economics and publisher of the newsletter EEnergy Informer. According to Sionshansi, this decision has huge implications for the energy sector.

BlackRock is not your average investment fund. With $4.9 trillion in assets, it is the biggest private investment fund in the world. Naturally, what it says, and more important, what it does, matters. In September 2016, it issued a report that, to put it mildly, may become a turning point in the annals of global investing and risk management. In unequivocal language, it said, “Investors can no longer ignore climate change. Some may question the science behind it, but all are faced with a swelling tide of climate-related regulations and technological disruption.”

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Adding, “Drawing on the insights of BlackRock’s investment professionals, we detail how investors can mitigate climate risks, exploit opportunities or have a positive impact. Climate-aware investing is possible without compromising on traditional goals of maximizing investment returns, we conclude. We then reflect on steps that stakeholders in the climate debate are considering, including the use of carbon pricing as a cost-effective way to reduce emissions.”

The bottom line? “Our overall conclusion: We believe all investors should incorporate climate change awareness into their investment processes.”

You might say BlackRock does not mince words.

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Moving forward, BlackRock said it will specifically include climate change as tangible factor in how it assigns risks to its investment portfolio. This, indeed, is a big deal and a tipping point.

Investors and insurers are beginning to experience the impact of a warming climate, for example, in the frequency and severity of climate-related storms.

As part of its new climate risk policy BlackRock will henceforth “calculate greenhouse gas emissions as a % of a company’s sales, estimate firms’ exposures to income shocks from rising temperatures and calculate the sales a company generates with little physical waste.”

This means that for all its investments BlackRock will consider to what extent any enterprise is exposed to climate risks, whether it is climate-proof, or if it may gain from climate change. The implications should be obvious to anyone in the energy sector, in fact, all sectors of the economy since energy is a major input to nearly anything that is extracted, transformed, manufactured, transported, or consumed.

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Assigning a price to carbon, already a reality for companies with long-term investment exposure, is likely to apply to virtually all. And regardless of whether the company applies a price or not, the investment community – such as BlackRock – is likely to do so.

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Today, there is no consensus on what the carbon price is, leaving individual companies to assume prices over a wide range. As time goes on, perhaps more clarity will emerge as to what the appropriate price may be. These are among a number of compelling reasons for the investment community to seek further clarity and consistency in how exposure to carbon and climate change are factored in.

In places where cap-and-trade or carbon trading schemes are already in place, such clarity will emerge sooner than in other places.

BlackRock, of course, is not the least interested to scare away investors. On the contrary, it has decided that the time to sit on the fence and merely talk about climate risk has come to and end. Investors crave clarity, security and transparency above all. And if major funds such as BlackRock can offer these, they will find a receptive audience as the science and the art of assigning risks to various industries and enterprises evolves overtime.

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Already, a number of organizations are beginning to offer ratings of companies based on their environmental record or carbon exposure. One such example is the Carbon Clean 200 list prepared by Corporate Knights and As You Sow. They claim that green and clean companies have in fact outperformed the broader market over the past decade (visual below). If that is indeed the case, it would encourage more investors, and managed investment funds, to migrate to cleaner companies with less risk exposure to climate change, diverting capital and financing from dirty, polluting companies.

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The study released in mid-August 2016, claims, “You probably know that aligning your investments with your values can be both personally and financially rewarding. But did you know that certain clean energy investments have yielded over 19.4% annualized returns? Building a clean energy future while reaping financial gains is possible with the Carbon Clean 200.”

The Clean200 ranks the largest publicly listed companies by their total clean energy revenues. There are many others providing similar information. It says, “If you are divesting from fossil fuels for portfolio risk reduction or for moral reasons, the Clean200 can be a guide along the path of clean reinvestment.”

The pressure on carbon-intensive businesses has only begun and it will intensify over time. Ignoring the carbon/climate risks is no longer optional.

Editor’s Note

This article was first published in the October 2016 edition of EEnergy Informer, published by US-based energy expert and author Fereidoon Sionshansi and is republished here with permission.

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