Many advisors have had clients who asked them to construct portfolios free of investments in oil and gas companies. That’s because these investors are concerned about climate change — and for good reason.
But this is not an easy task when almost a quarter of all companies on the Toronto Stock Exchange are involved directly in fossil fuel extraction while many more are involved in transportation, financing and other aspects of the industry. Recognizing the threat of climate change and educating your clients about all of the investment options available to manage risk will build credibility and help grow your business.
If you need to be convinced that your clients care about climate change, consider a recent poll conducted by Canada 2020, a progressive think tank, and the University of Montreal in which 76% of Canadians surveyed are in favour of Canada signing on to an international treaty limiting greenhouse gas (GHG) emissions. In addition, 88% of those surveyed agreed that the federal government should take responsibility for addressing the issue of global warming in Canada.
The Pembina Institute, which is devoted to the development of clean energy, points out that there are currently no federal regulations to limit GHG emissions from Canada’s oil and gas sector. Without action, extreme weather events will wreak havoc on business operations and supply chains as well as erode the long-term profitability of companies that aren’t managing the risks.
Mercer, a global investment-consulting firm recently concluded that continued delay of climate change policy could cost global investors trillions of dollars in the coming decades.
Canada’s economy is highly dependent on resources industries — and we’re a major producer and exporter of fossil fuels. Our oilsands are the fastest-growing source of GHG emissions in Canada.
The extent of future climate change depends on what we do now to reduce emissions. Your clients are looking for investment options that will reduce the impact of climate change and provide competitive financial returns.
There are several different strategies employed by responsible investment (RI) funds in Canada: Integrating environmental, social and governance (ESG) factors into the investment-management process addresses climate change from the risk side. Thematic investing — that is, investing in innovative companies that are creating new technologies and adaptive strategies — addresses the solutions. Shareholder action does both.
ESG integration enhances a fund manager’s ability to make more informed investment decisions and mitigate climate change risk. ESG strategies can reveal factors that other investment managers miss.
Many of Canada’s RI mutual fund companies are active shareholders. They engage in dialogue with the companies in their portfolios about climate change risks and opportunities. They’ve been leaders in bringing forward proposals to press companies to consider the risks associated with oilsands production.
And companies such as Suncor and Cenovus have responded, introducing renewable energy strategies and improving environmental monitoring and energy efficiency.
Thematic fund managers invest in sustainable businesses that are involved in energy efficiency, green infrastructure, clean fuels and so on. In other words, the companies that provide adaptive solutions to climate change. They seek out the opportunities presented by the $5 trillion of investment in clean energy that’s needed worldwide by 2020.
RI mutual funds have raised the bar. They have asked companies in every sector to measure and manage their GHG emissions and to develop strategies to reduce the impact of climate change. They have also asked banks to develop risk-management policies that price in risk from climate change.
In addition, they have asked government to take climate change seriously and set reduction targets for GHG emissions and incentives for alternative energy development. Only then will fossil fuel extraction companies have a clear path to transition their energy production to more sustainable alternatives.