To Jeremy Grantham, co-founder and chief investment strategist of the Boston asset manager GMO, the earth’s changing temperature is an investment imperative as well as a question of ethics.
“The climate is moving much faster than people think, and the responses are going to move much faster as well”, he says, arguing that measures to help polluters announced last week by the administration of Donald Trump may ultimately prove helpful.
“Doing his absolute worst will galvanise the response”, says Mr Grantham, a veteran investor whose current ideas include buying unloved copper miners for a world where cars are filled with electrical wiring, instead of combustion engines.
Such an approach might strike some as premature, and Mr Grantham has form in being right, but too early, refusing to buy internet stocks long before the crash, for instance.
Yet a US executive order designed to unwind efforts by Barack Obama to cut greenhouse gas emissions from power plants makes the question of timing unavoidable by highlighting questions facing portfolio managers around the world: when, and how, should investors take climate change into account when deciding what to buy and sell?
For many asset managers and pension funds such long-term issues used to be shunted to teams responsible for developing policies on environmental, social and governance issues. Worthy, but perhaps peripheral for those paid according to investment profits.
Climate is becoming unavoidable, however. Mark Carney, governor of the Bank of England, in September addressed the potential consequences for financial stability from climate change, warning that “changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”
Some governments are also forcing investors to act. Norway’s sovereign wealth fund, the world’s largest, last year divested from coal companies on the instructions of its parliament. France requires all asset owners to estimate and disclose the carbon impact of their holdings, or explain why they do not.
Fred Samama, deputy head of institutional clients for Amundi, Europe’s largest asset manager, says clients are caught between two extremes. They can divest holdings, of fossil fuel companies for instance, but then must consider other polluters such as airlines or utilities. “So, at the end you hold nothing in your portfolio,” he says.
The other pole is soft engagement with company management to encourage climate action, leaving most in the middle wanting better options and data. Amundi’s response was to build indices of companies which attempt to replicate stock market exposure to sectors, but exclude those unprepared for a warming world.
For instance Toyota, with its large investments in hybrid cars, would be favoured over Volkswagen, which has admitted to cheating emissions regulations, says Mr Samama.
So far €7bn has been committed to the indices, but Amundi is also part of a “decarbonisation coalition” of 28 asset managers overseeing $3.5tn, which have committed to align $600bn of portfolio assets with the low carbon economy.
The overall extent and pace of divestment decisions varies. According to Arabella Advisors, 688 institutions and 58,000 individuals, representing more than $5tn worth of assets had committed to divest from fossil fuels as of December, with almost half of the institutions based in the US.
The point is that analysis and activism start to collide as investors are forced to consider both the potential effects of climate change and the weight of money taking account of carbon.
For instance, Mr Grantham expects one more big spike higher in the oil price, but argues that share prices for energy companies will not follow it upwards as they did in the past.
He says, “if people see all of these other forces moving, and they see that it is just a question of time, it’s just a window when you’re producing too little oil, but in five years it won’t matter because electric cars will have taken up enough of the slack, how much will the stocks go up?”
Of course, the problem of acting too early remains. Ewen Cameron Watt, a senior director for the BlackRock Investment Institute, says “the stranded asset argument was very strong a few years ago, particularly in relation to coal, then last year you had a massive rise in the coal price.”
Money thrown at new technology, be it for profit or impact from so-called “mission driven investing” can also be bad for investment returns. Big drops in the price of solar power generation or wind turbines were also accompanied by large losses from companies pushing supply into young markets.
Mr Cameron Watt highlights Vestas Wind Systems as a survivor, a Danish turbine manufacturer whose share price has went from SKr600 to SKr25 and back in the space of a decade.
“There are really successful areas to be involved with, but avoiding the losers is just much more important”, he says.