Should major investment decisions factor in climate change?

By Jonathan Jackson. Published at Jun 26, 2020, in Features

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Australia’s largest investment consulting firm JANA has called on investors to factor climate change into major investment decisions.

The firm has warned investors that the impact of climate change and unclear policy responses by governments, including Australia’s, pose a significant risk to returns.

JANA has urged investors to ensure that climate-related financial risk is adequately considered and monitored, as climate change is likely to influence all parts of the global economy.

The report, ‘Climate change - implications for investment strategy’, demonstrates that current policies on climate change, if continued, will have a detrimental impact on many investments. It incorporates the potential costs of physical changes resulting from climate change and the impact of policy changes.

The transition to a less carbon intensive global economy is inevitable, presenting medium and longer-term financial risks and opportunities for investors, according to JANA’s Head of Responsible Investment Research, Tim Conly.

“We expect climate change and climate-related transition and physical risks to impact on future investment returns. The financial risks associated with climate change have immediate implications for investment governance and process, and will become more influential on investment strategy over time,” Mr Conly said.

“Investors should integrate climate change considerations into their governance frameworks, investment decisions and monitoring activities. This includes looking to target investments that would benefit from the transition to a low carbon economy. However, for larger scale investment in particular, policy and regulatory uncertainty needs to be overcome,” he said.

JANA has approximately $600 billion in total assets under advice.

The report includes scenario modelling prepared by JANA in conjunction with specialist researcher Climate Insight. Dr Danyelle Guyatt from Climate Insight said the report’s modelling was based on two International Energy Agency scenarios assessing a range of potential impacts on risk asset returns over the medium and longer-term.

The first scenario, Stated Policy Scenario, anticipates limited global policy co-ordination and the continuation of currently announced policies, which would equate to 3 degree increase in global temperatures. The second, the Sustainable Development Scenario, models a more aggressive – and critically at this stage, hypothetical – policy response and emissions technology developments, which limits long-term temperature rise to 1.8 degrees.

According to Dr Guyatt, “the physical and transition risks of climate change are expected to have a significant negative influence on investment returns over time, but the Stated Policies Scenario is worse from an investment perspective. The cost of doing nothing is projected to be greater in the long term.

“This reinforces a need for portfolio diversification to build resilience across a range of climate-related scenarios,” she said.

Mr Conly said, “In both scenarios we anticipate policy and technology developments will gradually shift the relative risk/return prospects in favour of ‘’green’’ (lower emissions) versus ‘’brown’’ (emissions intensive) assets.

“The longer the delay in coordinated action to address climate change, the greater the likelihood of the impacts of climate change become more material.”

What to watch: International

Winnebago Industries (NYSE: WGO)

According to eToro’s Adam Vitesse, “One of the more intriguing companies to report its earnings this week was Winnebago. The company’s stock, having initially taken a huge hit in the broader market sell-off due to production line shutdowns, is up 33.8% year-to-date, after a huge 194% rally over the past three months. That surge has been driven by an expected increase in demand for domestic holiday options, which could lead to more sales of the firm’s camper vans. Currently six analysts rate the stock as a buy or overweight, three as a hold and one as a sell.”

Gold

Gold holders would be happy this week.

According to Vitesse, “Gold surged to levels not seen in eight years this week, surpassing the recent May peak, to trade above US$1,770 as people look to spread out their investments across multiple asset classes.

“The precious metal has risen by 25% in the last year, to hit levels not seen since 2012 and the height of the Eurozone crisis.

“Gold has climbed despite the rapid recovery in stock markets, which has seen them bounce back from March lows to leave them on track for their best quarter in a decade. The S&P 500 climbed back to 3,131 points overnight, leaving it less than 10% below its record high of 3,393 set in February.”

What’s happening in Crypto

The International Business Times has reported 18.4 million Bitcoins have already been mined out of a potential 21 million in existence, however the final Bitcoin will not be mined until 2140, 120 years from now, with rewards for mining Bitcoin recently cut in half.

“Following the most recent halving, miners now collectively receive 900 Bitcoin per day and earn 30-50 Bitcoin in transaction fees,” Vitesse said. “By 2140, there will be no more reward for mining Bitcoin because there’s no more Bitcoin to mine.

“The limited supply has helped to boost the price of Bitcoin in recent years, and it is currently close to the $10,000 mark, trading at $9,612 this morning.”

The best and worst performing sectors this week

Healthcare was the best performer up over 1 percent. Materials was just in the green however Utilities is down just under 2 percent. The worst performing sectors were Energy down over 6 percent; Industrials down 5 percent and Real Estate down over 3 percent at time of writing.

As for the ASX top 100 stocks, ResMed was up over 5 percent, Sonic Healthcare up over 4 percent and JB Hi-Fi up just under 4 percent. Challenger had a tough week down over 17 percent, Flight Centre wasn’t far behind down over 15 percent and Whitehaven Coal and Oil Search were both down over 11 percent.

So what's next for the Australian share market?

According to analyst and Wealth Within founder Dale Gillham, “Whilst many believe that the All Ordinaries Index is bullish, technically it has traded lower over the past two weeks and is currently trading lower than the recent high set back on 9 June. Right now, we are still seeing a tug of war between the bulls and bears as the market is struggling to decide on a clear direction. I mentioned last week, that it would be wise to assume that the market may fall over the coming week or two, and given how the market has traded this week it is likely there is more downside to come. Given this, we need to be prepared for the down move to continue.

“Right now, if the bulls are pulling back from buying, then the down move will be short in price and over in the next week or two. However, if the bears start to drive the market down, than we can expect a much bigger and longer move down in price. We also need to remember there is still a probability that the low in March may be tested, so once again, I recommend that investors exercise caution if buying and if the market does fall away be prepared to exit.”

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

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The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

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