Why Does Climate Change Matter to Investors?

Back to School Week: Why are investors thinking about climate change and how can they can incorporate it in their portfolios? Guest host Isla Shaftain speaks to Morningstar's Elizabeth Stuart

Holly Black 9 September, 2020 | 2:05PM
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Holly Black: It's back to school week at Morningstar and to help cover all the investment basics we have brought back our team of young experts. Luckily, they are as good at technology as they are at grilling our analysts.

Isla Shaftain: Hello. My name is Isla Shaftain. And today, I'm going to be talking with Elizabeth Stuart about whether investing can help stop climate change. Hello, Elizabeth.

Elizabeth Stuart: Hello.

Shaftain: Okay. To start off with, why is climate change becoming a more important issue for investors?

Stuart: So, climate change will actually alter the way our climate functions and that will impact things like weather or tide floods or fires and that may affect where we can operate our factories and where people can build their homes. So, something that may have been a great investment in the past now might be a lot riskier due to those factories. So, investors will need not only to take their normal consideration into account, but they also have to add an additional layer of risk analysis over the top of this to make sure that their investments are climate resilient as well.

Shaftain: Okay. Thank you. Is there a way to invest in companies that are helping slow or reverse the effects of climate change?

Stuart: Yeah, absolutely. Of course, there is. We can invest in companies that only use green energy. The green energy, that's energy made from renewable resources. As I'm sure you'll know, things like wind, waves or the sun. We can also invest in companies that make it easier for us to fly less, take less air travel. So, tech companies like those that are helping us connect this way rather than having to travel to speak to each other. There are also many companies that are being innovative and providing solutions to climate change and other environmental problems. So, we can invest in them rather than investing in old-fashioned oil and gas companies.

Shaftain: Okay. So, what are some of the most exciting companies in this space?

Stuart: Well, at Morningstar, we actually looked at what are the funds and also what are the companies within those funds that are providing the most innovative solutions, and we looked at how these companies are commonly coming up over and over again. They are very trusted companies in this space. So, we found Siemens Gamesa Renewable Energy coming up all the time. They have quite a low carbon risk and they provide obviously renewable energy. We see Vestas Wind Systems making wind turbines, generating energy from wind, again with a low carbon risk rating. And then, we also see TOMRA coming up quite a bit. They do a number of sort of innovative projects and one of them is actually plastic-based or plastic recycling which is sort of an underserved area. It's not seen as super investable, but it is a really crucial environmental issue we are facing at the moment.

Shaftain: So, can you tell me if focusing on ESG means lower returns for investors?

Stuart: Not necessarily. We actually had a look at this as well recently. As it turns out, even though there were sort of musings about this, there actually is no impact on returns when you choose a sustainable fund versus a traditional fund. And funds like these are also likely to survive a bit longer and they also did really well during the Covid pandemic when traditional products didn't fare that well.

Shaftain: Okay. Thank you so much for your time today, Elizabeth. For Morningstar, I'm Isla Shaftain.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk