An Investment Risk By Any Other Name …

To ask whether climate change investment risk is a risk worth considering is to miss the point.

Whether you, as an individual or institutional investor, believe climate change to be a risk to your portfolio, the fact is that it’s a perceived risk by many. And that means companies and other investors are factoring it into their decision-making. It means it has the potential to move markets and affect your portfolio. And therefore, by definition, it is a risk worth considering.

This is a message I find myself delivering to clients and colleagues time and again. Now, I’ve read the columns in the financial press, listened to the politicians on both sides of the debate and had many private conversations with experienced, long-time investment professionals. What I’ve realized is that somewhere, with all the back and forth, many have lost sight of what is a fundamental building block of investing. There have always been, and always will be companies, industries and countries that certain investors would rather not think about — that they don’t like for one reason or another — but they still have to account for them when making decisions about portfolios.

The Breakfast Club of investor types

These conversations I mentioned earlier have led me to see clients breaking down into three stereotypes. With apologies to John Hughes, I offer how I see them “in the simplest terms, in the most convenient definitions.”

The skeptic is passive and feels that only politicians can and should help the world reach net-zero emissions. Their view is that investors have no dog in this fight. Yes, they need to manage risk in the larger sense, but it’s not on them to change the world. They don’t want to talk about it. In fact, one CIO confided to me that, while she definitely looks to manage climate risk, she doesn’t talk about it at all because no matter which side she comes down on, she says, “I can’t win.”

The divestor stakes out the middle ground, believing firmly in the idea that investors have a real, but limited role to play. That role, as they see it, is to decarbonize their portfolios. For them, this is not just about coloring portfolios a pleasant shade of green. It’s more than that. It’s a belief that pulling capital from certain investments means putting pressure on the real economy by moving money away from the world’s heaviest emitters of greenhouse-gas emissions.

Last on this list is the engager, who comes down hard on the side of action. The engager listens to what the divestor has to say and thinks, wait a minute. Divestment isn’t the answer. If I sell, someone else buys. That’s not pulling capital; it’s just shifting ownership. And while there are some extreme cases where it may make the most sense to walk away, in most cases, it’s better to stay invested and engage with companies and their boards. Shareholders have influence; ex-shareholders do not.

This again?

Regardless of where you fall on this spectrum, in the end, it comes back to a theme I’ve returned to time again in this column. And, yes, I’m going to say it again because it’s important: The basic principles of investing have not changed. Every action, and even lack of action, is a decision investors make, based on collecting, parsing and analyzing all available data.

Of course, the exact questions investors ask, the type of data they examine and the ways they gather it all change. This happens as we continue to see advances in technology, and it happens because the capital markets themselves are ever-evolving.

Over time, investors have “discovered” new worlds while entire industries disappear and new ones take their place. European merchants found value partnering with their neighbors and eventually saw the possibilities of investing in Asia, the Americas and other markets. The horse-and-buggy shop made way for the factory that built combustion-engine-powered cars that, in turn, is ceding ground to the manufacturers of batteries and artificial-intelligence software for a fleet of autonomous electric taxicabs.

Despite all of this constant reformation of available firms to invest in, investment decisions still boil down to assessing potential benefits versus the cost for achieving them — the opportunity versus the risk.

Why approach the issue of climate change any differently?