If you’re someone concerned about the climate crisis, then decarbonizing, or reducing reliance on carbon emitting fossil fuels, is something you may be considering.
When it comes to investing, however, there is a significant difference between decarbonizing your portfolio and decarbonizing the world. While decarbonizing your portfolio may be important for those who want to align their investments with their concerns about the impacts of climate change, it’s important to be clear about what a “low carbon” portfolio means and what it accomplishes.
Reducing fossil fuel exposure in your portfolio
Investors who have low carbon public equity and fixed income portfolios are not necessarily driving a low carbon world. Rather, they simply don’t have exposure to high carbon emitting public companies. Having low investment exposure to fossil fuels doesn’t exactly impact the world’s total fossil fuel emissions, and divesting really just means diverting your high carbon holdings to someone else.
This goes beyond secondary markets. For example, a high carbon emitting company might be pressured to divest their carbon intensive assets. Their divestment, however, may simply mean selling those assets to a private equity firm, resulting in no net change to the world’s carbon emissions.
Therefore, rather than reducing global emissions, decarbonizing your portfolio can instead reduce climate-related risks in your portfolio, typically evident in high emitting sectors. This would be a strategy to deploy for anyone concerned with environmental, social, and governance (ESG) related risks in their investments. Considering investment strategies that integrate ESG information into their approach, whether through integration, engagement, or both, could be a place to start.
Impacting fossil fuel usage in the real world
When it comes to your public equity and fixed income exposures, the most viable solution may be to take this low carbon, ESG-integrated approach. But, for those who are interested in decarbonizing the world, there are more niche and thematic investment options (thematic investing is an approach which focuses on predicted long-term trends rather than specific companies or sectors, enabling investors to access structural, one-off shifts that can change an entire industry) that are focused on environmental solutions, such as green bond funds or water infrastructure ETFs. These options give investors the chance to simultaneously reflect their concerns in their portfolio, while also capturing the opportunities created by innovative solutions as we transition to a low carbon economy. Private equity vehicles can also offer opportunities to invest directly in climate mitigation and adaptation technologies. It’s important that fund managers consistently report out to investors with tangible, clear metrics around the impact that these investment opportunities have on decarbonizing the world.
The point that’s often missed is that, while there are ways to manage climate risks in your portfolio, including “decarbonizing your portfolio,” and ways to capture opportunities in the transition to a decarbonized future, it’s important for the outcome a strategy is seeking to achieve to be clearly defined. It’s equally important to identify and whether those outcomes are in line with an investor’s overall goals.
To learn more about supporting your clients with sustainable investing solutions, reach out to our team at firstname.lastname@example.org or visit envestnet.com/sustainable/.
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Carlee Griffeth is an ESG Data and Research Analyst for Envestnet | PMC’s Sustainable Investing Team. Her work is focused on ESG and thematic impact due diligence. She is also responsible for sourcing and analyzing ESG data to support the development of sustainable products and reporting tools for advisors. Prior to Envestnet, Carlee served in the federal government for eight years, including the White House and both chambers of Congress. She earned her Master’s Degree in Urban Planning at Harvard University, where she focused her studies on sustainable development and decarbonized infrastructure.