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What makes for a “climate-friendly” portfolio? For advisors and investors, the answer isn’t always straightforward.
One popular responsible investing strategy is to screen out companies, funds or entire industries associated with high greenhouse gas emissions and poor environmental, social and governance (ESG) performance. The flip side is positive screening to find companies that score well on ESG measures.
These methods can be useful, but climate risk has many facets that can shape investment strategies and outcomes. An organization’s emissions are just one. Assessing overall values, risk tolerance and goals is critical, says Linson Chen, financial advisor and portfolio manager at RGF Integrated Wealth Management Ltd. in Vancouver.
“A lot of times, people just start off with [the fact] they don’t want to own oil companies. That’s where the conversation begins,” he says.
To help inform decisions, more third-party data regarding climate impact and ESG ratings is available to advisors and clients through organizations such as Morningstar Sustainalytics.
”It’s still improving, and we’re getting more and more companies providing that information that investors are requesting,” Mr. Chen says.
In response, some asset managers have introduced mutual funds and exchange-traded funds without any fossil fuel components.
Three years ago, Norway’s $1-trillion sovereign wealth fund attracted significant attention when it blacklisted four of Canada’s largest oil producers from its portfolio – Canadian Natural Resources Ltd., Cenovus Energy Inc., Suncor Energy Inc. and Imperial Oil Ltd. – citing “unacceptable greenhouse gas emissions.”
But some advisors don’t believe eliminating whole sectors because of a few companies has the right impact.
Alexandra Horwood, portfolio manager and investment advisor with Richardson Wealth Ltd. in Toronto, doesn’t often recommend negative screening to her clients.
“We tend to be much more business-oriented, as opposed to including or excluding certain sectors. We’re hiring and engaging active investment managers to do the research and their own ESG model scoring,” she says.
To that end, Ms. Horwood walks her clients through the players that are making significant efforts to limit their environmental impact.
“We want to select businesses we believe to be making meaningful differences to become more ESG-friendly,” she says.
With investors’ growing concern about climate change, many don’t want to take a passive approach, says Tracey Lundell, senior investment advisor with Sea Glass Wealth Advisory Group at Harbourfront Wealth Management Inc. in White Rock, B.C.
”They want to go beyond saying, ‘I don’t want pipelines in my portfolio.’ I tell them we’ll filter out all the stuff you don’t want, but let’s even take it a step further and be more proactive. Let’s see if we can find something where you can actually get your money to work in the communities that you care about or in specific sectors, like renewable energy or sustainable agriculture.”
While sectors such as oil and gas are a focus of investors who want to be more climate-friendly, the potential impacts of climate change on portfolios are wide-ranging, notes the United Nation’s Principles for Responsible Investment Initiative (PRI). For businesses across sectors, climate risks are material risks.
Directly or indirectly, the potential for weather and climate-related damage, disruptions to supply chains, higher carbon emission taxes and a scarcity of resources can affect any business and their asset prices. The PRI’s investor resource guide on climate risk notes that “investors must consider climate risk at the portfolio, sector, asset class and individual security level, while also integrating climate issues into a broader risk assessment process.”
By taking that comprehensive look, advisors can help investors make more climate-aware investment decisions. Whether that means putting more green investments in a portfolio, excluding sectors, focusing on companies whose products or services help mitigate climate change, or using other nuanced analyses, it all starts with knowing what matters to clients.
“There are endless [investment] options for us to put in front of somebody, and the more you know about a person the more you can tailor it to what they care about,” Ms. Lundell says. “Then, they can feel really good about what their money is doing and we, as advisors, can be good stewards of money.”
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