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Is your portfolio climate change ready?
The vast majority of investors believe climate change will have an impact on their portfolio, yet not all investors are readying their asset allocation to take advantage of a net zero world, new research has revealed.
Is your portfolio climate change ready?
The vast majority of investors believe climate change will have an impact on their portfolio, yet not all investors are readying their asset allocation to take advantage of a net zero world, new research has revealed.
A study released by PGIM showed that nearly 90 per cent of global investors believe climate change is important. However, 40 per cent of these investors are not changing their portfolios to include climate risks, which could impact their returns.
“Climate change is the next crisis that will radically reshape investors’ risks and opportunities,” Taimur Hyat, PGIM’s chief operating officer said.
“Investors that take action now can play an influential role in driving the global transition to a low-carbon economy while optimising their portfolios for a greener future.”
While the path to net zero remains uncertain, PGIM believes the transition to a net zero carbon world would also create plenty of opportunities.
“This mispricing of climate risks creates opportunities for active, long-term investors. These range from identifying tech-forward companies adept at transitioning to the new low-carbon economy, to incorporating physical and transition climate risk in analysing real assets, to supporting start-ups engaged with transformative technologies like carbon capture and storage,” PGIM said.
However, investors are being warned not to fall into the trap of the best opportunities being labelled as green.
“A simplistic strategy that divides the investment world into ‘brown’ villains and ‘green’ heroes is not the most effective approach to achieve environmental or fiduciary objectives,” PGIM said.
The research also warned that investors may need to apply a climate change lens to sovereign debt.
“Nearly 25 per cent of investors view climate as a risk for sovereign debt, while only 4 per cent view it as an opportunity,” PMIG said.
“However, countries with similar credit ratings and yields exhibit wide variations in both climate change vulnerability and resilience, allowing investors to take advantage of the eventual repricing of sovereign debt around climate risk.”
PGIM also found the possibility of climate change to have a similar system-wide impact to COVID-19, which impacted industries that were not directly affected by the pandemic but through supply chain disruptions and overall movement restrictions.
“Investors must look beyond the obvious physical risks to uncover ‘hidden’ climate risks across their portfolios. As the coronavirus pandemic has laid bare, supply chains represent key vulnerabilities for manufacturers,” PGIM said.
“Climate change has the potential to unleash the same kind of disruptive impact through supply chains and industries not typically considered as having high climate risk, for example, semiconductors and pharmaceuticals.”
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