Climate change creates a variety of risks for investors. The United Nations Environment Programme Finance Initiative (UNEP FI) highlighted climate and carbon risks in its 2013 report ‘Portfolio Carbon: Measuring, disclosing and managing the carbon intensity of investments and investment portfolios’.
Climate risks were categorized as physical risks from a warming climate. Carbon risks were linked to reputational risks – from increasing public interest and pressure from industry groups - as well as emerging regulatory risks driven by the implementation of targeted frameworks in many regions.
Such initiatives are likely to have broader impacts due to the inescapable supply chain reach of fossil fuels in several other economic sectors, including smelting, cement manufacturing, energy and transport, exacerbating the extent to which investment funds, and through these funds many more investors, are exposed to the consequences of emerging regulatory risks.
While investors are beginning to recognize the systemic risks presented by climate change, this is by no means universal, and it is likely that very few investors have fully integrated these risks in their portfolio management. In short, both carbon and climate risks are often sources of unanticipated and uncompensated risk for many investors.
The UNEP report concluded that the risk to portfolios makes a clear and compelling case for why investors should start measuring, disclosing and reducing greenhouse gas (GHG) emissions associated with their portfolios.
This case study was intended to summarize how investors can identify and manage carbon liabilities embedded in their portfolios.
Trucost’s analysis found that:
- The Pax World Global Environmental Markets Fund was 25% less carbon intensive than its benchmark, MSCI World.
- This was due to a combination of 37% negative sector allocation effects and 62% positive stock selection effects.
- Trucost’s analysis further identified the largest contributors to Pax’s footprint to support risk mitigation.
- It also identified opportunities for Pax to improve the environmental disclosure of its high impact holdings through company engagement.
- Following Trucost’s analysis, Pax was able to make its Pax World Global Environmental Markets Fund carbon neutral.
- The carbon audit analysis identified that one of Pax’s funds, the growth fund, was more carbon-intensive than its benchmark.
- While that fund was actually the least carbon-intensive of all the funds Pax had analyzed, its benchmark was even less carbon intensive.
- Since the footprint analysis, the fund has divested from seven of the top ten most carbon intensive companies in the portfolio.