Institutions seek to mitigate environmental risk

It’s not easy being green, especially when it comes to building an investment portfolio, but it is getting simpler. The timing couldn’t be better as environmental risks become less theoretical and more concrete — in our lives and in our investments.

Environmental risk isn’t something that makes it into the usual list of variables investors take into account when buying a stock or mutual fund. Still, in the past few years there has been a wholesale change with companies looking to adopt more environmentally friendly practices.

Socially responsible investments and advisors aren’t the only ones playing the green card. Wealth management firms, pension plans and companies are cashing in on the trend. Why? Because, they say, they can’t afford not to.

Earlier this month, the CPP Investment Board encouraged Canada’s 200 largest companies to disclose more information on the business risks and opportunities they face with climate change. The CPP hopes these companies will answer the Carbon Disclosure Project’s questionnaire, the world’s largest institutional investor collaboration on the business implications of climate change.

“Improved disclosure on climate-related risks and opportunities is critical for long-term investors like us to be able to incorporate the potential investment impact of environmental factors into our investment decisions,” Don Raymond, CPP’s senior vice-president for public market investments, said in a release. He adds this improved disclosure and responsible corporate behaviour with respect to issues like the environment have “a positive influence on long-term performance.”

UBS, one of the world’s leading wealth managers and financial firms, expands on this notion in a recent report by tying environmental risks to investments, but on a sector level. The report aims to guide investors “on how to handle the impact of unprecedented change, as the implications of climate change begin to make themselves felt.”

From an investment standpoint, the main risks come in the form of regulation as regulators look to crack down on heavy polluters. That’s not all. There is also the risk of damage or loss of physical property, lost revenue and possible damage to reputation if a company fails to clean up its act.

“It is the prospect of large-scale interest in addressing the root causes of global warming, combined with more stringent regulation of greenhouse gas emissions, which makes the opportunities related to climate change mitigation a compelling investment case,” the report notes.

The report warns that the winners and losers are not always obvious. Companies that operate within a sector known to belch out high emission levels can mitigate their risk by investing in low-carbon technology, trading emission credits, investing in offset projects and even lobbying to block or challenge regulations.

And aside from those industries whose fortunes depend on a stable environment, extreme weather events also impact such sectors as tourism, healthcare and insurance. (See below for a chart listing the risks related to climate change.)

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com