Climate change must change investors’ portfolios

Climate Change


However investors view the problem of climate change – perhaps as a threat to carbon-intensive industries or as an opportunity to contribute to the greater good – ignoring its effects on portfolios increasingly seems like a short-sighted option. Fortunately, there are many ways investors can incorporate this urgent issue into their strategies.

Key takeaways

  • Global warming is forcing the world to move towards a low-carbon economic model, and that will incur costs that investors must factor into their decisions
  • There are many ways to incorporate climate change into portfolios – including screening out “stranded assets” like fossil fuels, selecting best-performing companies or aiding the “just transition” to a low-carbon economy more holistically
  • At Allianz Global Investors, we aim to accelerate the speed of positive change – particularly within strategies that deliver social or environmental impacts – while enhancing the value of our clients’ assets

Scientists’ warnings about a steadily warming planet have raised awareness about climate change – and the asset-management industry is paying attention. The reason for this growing interest is simple: to slow or even reverse global warming, the world must begin moving to a low-carbon or even carbon-neutral economic model. And that will come at a price for consumers, companies and governments alike.

Clearly, investors are free to choose how to factor these costs into their investment decisions, or they can choose to invest in a way that proactively supports solutions to this global challenge. But ignoring climate change’s effects on one’s portfolio increasingly seems like a short-sighted option.

For example, consider how certain asset classes or sectors could be forced out of business, directly or indirectly, as a result of new policies and regulations meant to curb global warming. This is why some investors screen out fossil fuels as “stranded assets” – assets that could become prematurely obsolete and must be written down or sold off – in their investment models.

Thinking beyond the “good” and “bad” labels

At the same time, some investors are using the issue of climate change to make a positive contribution to the transition towards a low-carbon economy. For example, they may invest in companies that already have low carbon emissions compared with others in their industry, or invest in firms with ambitious plans to reduce their carbon dioxide (CO2) emissions in line with international targets.

Other companies in carbon-intensive sectors offer products and services that make it easier to reduce greenhouse-gas emissions. A portfolio that invests in these firms could, on the surface, look like one that relies heavily on carbon-intensive industries, but in reality it could help lower overall carbon emissions. This emphasises why it is important not to think about climate-change investing in terms of “good” or “bad”, but in terms of the best way to effect real change through the restructuring of business models, manufacturing processes or entire sectors.

How to create positive change

At Allianz Global Investors, the issue of how global warming and climate change affect different asset classes has long been a concern for us, and we continually analyse climate risk at multiple levels.

Yet as an active investment manager, we don’t approach the climate issue by applying “good” or “bad” filters or by solely emphasising exclusion. Instead, we aim to accelerate the speed of positive change while enhancing the value of our clients’ assets within specific strategies – particularly those that deliver an identifiable social or environmental impact for our clients.

One way we do this is by looking at how carbon emissions could affect a particular investment in the past, present and future. For example, the past might manifest itself through litigation or penalties related to previous emissions, the present can be affected by the “carbon price” and the future can be defined by stranded assets and disrupted sectors.

We address the issue of climate change in other ways as well – including by assessing share-price fluctuations related to energy-price volatility and by examining how management incentives are linked to climate-related corporate goals. We also explore how employees are retrained in the course of climate-related restructuring to reflect the “just transition” – a concept promoted by the Principles for Responsible Investment (PRI) that points to the societal costs incurred by efforts to combat climate change.

In addition, we work directly with clients and companies on reflecting climate targets in the framework of their own investment policies. For example, France was the first country to introduce mandatory annual climate reports for investors via their Energy Transition Law. Rather than viewing this law as an onerous restriction, we found that it helped us have more meaningful conversations with clients on how to align their investment policies with climate targets.

The risks of taking no action

Climate change shows that the consideration of ESG (environment, social and governance) factors has become a necessity in long-term value creation for investors. One only needs to look at the “yellow vest” movement in France to see how these issues all intersect. A social movement has grown out of protests against fuel taxes meant to encourage energy conservation and fight climate change. And a policy that French legislators intended to have a positive effect instead sparked a negative backlash that weakened France’s ability to pass further reforms.

For investors, this highlights the need to perform comprehensive assessments of the risks and costs associated with climate-change policies. All of us have an opportunity to help limit global warming, to help promote ecological change in a socially responsible manner and to help preserve the earth as a habitat for future generations. But even investors who operate on a much more immediate timescale must incorporate climate change into their investment decisions. The risks of not doing so will only continue to rise.


Active is: Analysing macro trends

To gauge an economy’s health, watch the “financial cycle”

by Stefan Hofrichter, CFA | 28/02/2019
Financial Cycle


A relatively new metric called the financial cycle can help tell investors more about an economy’s medium-term strength than the business cycle. The financial cycle can illuminate risks worth taking or avoiding, helping investors be more selective and active at a time when passively accepting risk may be detrimental.

Key takeaways

  • One measure of an economy’s health is the “financial cycle”, a metric developed after the financial crisis; we find it to be particularly useful today, when it’s critical for investors to be selective and manage risk actively
  • When financial cycles expand, house prices and private-sector debt have tended to increase, and recessions appeared to be less likely, less deep and less long
  • Our research shows that when the financial cycle was near its peak in a particular country, it historically had a 2/3 probability of facing a financial crisis
  • Monitoring where economies are in the financial cycle can help investors decide which risks are worth taking – a crucial benefit at times like these, when taking no risk may be the biggest risk to a portfolio
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