Over the long term, we believe that companies and assets facing significant climate risk will price down and those that offer solutions for decarbonization or adaptation will outperform. However, we expect a bumpy road ahead.
Climate investment risk often is expressed in terms of stranded assets, notably those related to fossil fuels. Research shows that most oil, gas, and coal reserves will be stranded as world economies phase in renewables and other lower carbon energy sources. This is expected to, over the longer term, adversely impact the balance sheets of fossil fuel majors. Oil prices currently are trending upward, but this is a function of short-term supply/demand imbalances and geopolitical risks outweighing the longer-term necessity of shifting energy to renewables. All of this could result in a more abrupt transition down the road.
As the London-based think tank Carbon Tracker states in a recent letter to the U.S. Securities and Exchange Commission, oil and gas firms have made net zero by 2050 pledges, but “very few companies reveal whether the prices they use to evaluate oil and gas reserves or test the value of their fixed assets for impairment align with such targets or consider climate-related risks at all.”
Across sectors, companies insufficiently focused on how climate change will impact operations are likely to lose market share, revenues, and profitability. As climate disclosures are mandated, increasing data availability will allow for deeper analysis of company strategies.
Our goal is to encourage advisors and investors to take action to integrate climate change considerations into investment decisions and to align portfolio goals with both profits and the planet. With this in mind, please check out our feature article in the most recent publication of Investments & Wealth Monitor, adapted from our longer paper, The Great Repricing: Financial Advice in the Age of Climate Change, and published by the Investment & Wealth Institute.
____________________________________ “Adapt to Survive: Why Oil Companies Must Plan for Net Zero and Avoid Stranded Assets,” Carbon Tracker Initiative (September 9, 2021), https://carbontracker.org/reports/adapt-to-survive/.  “Letter to the SEC on Climate Change Disclosures,” Carbon Tracker Initiative (June 23, 2021), https://carbontracker.org/reports/letter-to-the-sec-on-climate-change-disclosures/.