When we think about the moral side of a business before deciding whether to invest in it or not we speak of ‘socially responsible’ investment. This refers to the subject of the business, and the way it is conducted. Appalling labour conditions for instance, like using child labour, underpaying workers, or forcing them to toil in unsafe or hazardous circumstances; companies who bribe government officials to solicit business, or those who trade in illicit goods, or circumvent tax regulations, cheat quality standards, or collude with others to avoid competition.
Many investors also wish to avoid specifically ‘amoral’ ventures, like the alcohol trade, the arms industry, gambling or tobacco. Dealing with unsavoury regimes might be frowned upon too. The Church or educational funds may wish to exclude such enterprises from their fund allocation at all costs. As long-term statistics have proven, alas, they often do so to the detriment of their wealth augmentation.
So called ‘vice investments’ tend to outperform other stocks in the long term. Big tobacco is a case in point. No matter how much we fight against these pedlars of addiction, their profits and dividend payments sadly out-perform the broader stock market with ease. Not investing in them means losing out financially.
The biggest dilemma in this respect presents big corporations with a clearly harmful impact on climate change: do we really want them to have our money despite the fact that they are detrimental to the future of our planet? Or would we rather dismiss the threat in the hope that problems will go away eventually and that we will make good money in the meantime?
John Kerry, US Secretary of State under the Obama administration, who was pivotal for the Paris Agreement where 197 nations pledged to reduce greenhouse gas emissions to less cataclysmic levels, had a message for both science deniers and environmental zealots: “Who can possibly object against our planet becoming a more liveable, cleaner place already now?” The political process started by the Paris Agreement became, with the support of India and China, irreversible, no matter how much the US is treading water now.
The political process started by the Paris Agreement became, with the support of India and China, irreversible, no matter how much the US is treading water now
This has implications for big corporations that have the habit of publishing glossy brochures brandishing their environmental responsibility while shying away from publishing hard facts. This makes moral and commercial judgments difficult. Yet a few weeks ago the majority of the shareholders of Exxon Mobil demanded more disclosure of the oil group’s climate risks. These investors had no problem with big oil. They wouldn’t be sitting there in the first place. They took issue with the financial risks involved with carbon, independent from any moral considerations.
Policy changes worldwide and a changing environment are forcing corporations to rethink their investment decisions and asset allocation irrespective of their views on climate, be they dismissive or evangelical. Unilever, which promised to become carbon neutral by 2020, or Volvo, which will only produce electrical cars from 2019, do not do so out of conviction alone, but out of commercial prudence.
We as retail investors should do the same. Droughts, floods, hurricanes, land erosion and rising world temperatures are wreaking havoc already now, even if we harbour doubts about the climate science. And politicians try to adapt their policies accordingly. What does it mean for our investment in oil or coal when public opinion and politics force miners and oil producers to leave a third of their reported reserves unrecovered?
How do we invest in agriculture, when vast operations become increasingly unpredictable, or in transport, which it becomes disrupted on an increasing scale? We want to know what a deteriorating climate means in respect of direct losses hitting the company we invest in, what it means in respect of their decreasing asset values, and how they prepare for future liability claims, as we have seen with asbestos and tobacco companies, or Volkswagen lately.
At the forefront of this stand are insurance companies who are faced with ever bigger catastrophe claims. They do their math swiftly and are better prepared to see a pattern where others might still argue about a freak incident. The 20 per cent rise in sea level at the tip of Manhattan meant an increase of insured losses of 30 per cent from super-storm Sandy alone. Flood insurance in many parts of England has to be provided by the taxpayer now, as newly calculated premiums would make insurance unaffordable for many house owners.
In the past, insurers could diversify geographically. Weather clusters are making this less viable now. Insurers have therefore sharpened their pencils and price climate change into their policies. This will make many businesses soon unviable. And it means also that clever insurers will have to think twice before they make their own investment decisions, which fund their payout capacity.
Bank of England Governor Mark Carney recently said that when the financial industry underestimates the impact of environmental risks on clients and its credit book this may pose a threat to financial stability. Carney, who campaigns for worldwide, environmental disclosure standards for publicly quoted corporations, was lambasted by climate sceptics as having “overstepped his remit” as banking regulator. While his comments might seem far-fetched, I think he has a point, even for little savers like us.
To invest in companies that have a clear business strategy when dealing with environmental risks and all its resulting opportunities and to shun those that are unprepared, is not the giddy impulse of sanctimonious do-gooders, but a prudent and economically sound decision.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
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