ESG Issue Brief: Climate Action

Investors are increasingly including environmental, social, and governance (ESG) into their existing investment frameworks, causing firms to take notice and make sure their investment policies and practices align with that of their investors or potential investors. This article is the first in a series of ESG issues investors are concerned about to help you speak to these concerns and adjust your practices accordingly.

Background

It is widely accepted that anthropogenic (man-made) climate change began in the 19th century with the Industrial Revolution. At the time, labor shifted from human-based to machine-based, and with it, the era of burning fossil fuels began. The burning of these fuels releases various pollutants, including greenhouse gasses. Over the past century, as our population has exploded, we have released increasingly large amounts of heat-retaining greenhouse gasses, and as a result, Earth’s temperature has risen.

ACA’s Data & Analytics Solution, Ethos ESG, provides a comprehensive framework for understanding how companies and funds impact the broad cause of climate action, which includes the sub-causes of disaster readiness and effective aid, reduced greenhouse gas emissions, and renewable energy growth. This issue aligns with the United Nations Sustainable Development Goals 7, 11, and 13. 

There are both financial and ethical considerations related to climate action. We see it as important to address both aspects when talking with an investor, for very few decisions are purely one or the other. 

Ethical case

A recent analysis of over 1,000 impact assessments administered by ACA’s Ethos ESG showed that climate action was the top cause of concern for respondents. Likewise, a recent survey conducted by Nuveen  reveals that 67% of investors are more interested in sustainable investing due to recent climate disasters. These findings are unsurprising considering that natural disasters, exacerbated by climate change, affected 1 in 10 American homes in 2021.  

Climate change is an increasingly charged issue, especially among younger individuals concerned about a permanently diminished quality of life. A United Nations 2021 study shows that urgent climate action has broad support throughout the world, across nationalities, gender, and age. Furthermore, it is a particularly important issue for the under-18 demographic who increasingly voice their concerns to their parents and grandparents. This offers financial advisers the opportunity to deepen relationships by inquiring and listening to client concerns. 

Financial case 

The New York Times estimates that the effect of climate change will shave between 11 and 14 percent off of global economic output by 2050, which amounts to approximately $23 trillion. Rising temperatures will cause crops to fail, diseases to spread, and ocean levels to rise. This last is particularly dire as approximately 40% of the world’s population currently lives within 100km of the coast.  

As a result, it is critical for those rendering financial advice to be familiar with both physical and transition risk associated with climate change. Rising seas and extreme weather present “physical” risk to assets and infrastructure associated with corporations and debt issuers. Those entities whose business models will be disrupted by the inevitable switch to a carbon-free economy are exposed to “transition” risk.  

It is also important to consider varying investor preferences for involvement as opposed to divestment. Many investors want to avoid fossil fuels in their portfolio altogether (reducing the amount of capital available for fossil fuel companies), while others aim to become shareholders of the worst polluters to effect change “from the inside.” Engine No. 1's move in May 2021 resulted in activist investors being elected to Exxon’s board. The fact that an organization with $12.5 million was able to achieve such a feat against a company with a $265 billion market cap is nothing short of impressive.  

How we help 

ACA's new ESG platform, which combines our Ethos ESG acquisition with our advisory services, integrates in-depth, transparent ESG data into your portfolio construction. It can help firms easily conduct ESG risk and impact diagnostics and benchmarks to understand how investments map to widely accepted sustainability frameworks, including: 

• Evaluate investments by their climate action score, an aggregation of over 300,000 data points related to metrics like carbon intensity and deforestation 
• Incorporate the Global Warming Potential analysis into client reports. Show investors how the policies and actions of portfolio holdings align with varying degrees of global temperature increase 
• Find investments poised to benefit from the energy transition by researching the renewable energy growth cause or find those investments most insulated from physical risk by researching disaster readiness and effective aid  
• Utilize impact stories to show investors how investments in funds or companies make a direct impact on addressing the climate crisis 

To learn how we can help your firm, please speak to your ACA consultant or contact us.

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Other climate action resources

Climate Change 2022: Impacts, Adaptation and Vulnerability | Climate Change 2022: Impacts, Adaptation and Vulnerability (ipcc.ch) 

World’s largest survey of public opinion on climate change: a majority of people call for wide-ranging action | United Nations Development Programme (undp.org) 

Climate Change Threatens the Stability of the Financial System - Center for American Progress

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