How Climate Change Is Already Affecting Your Net Worth
Valuations on Companies Are Now Shifting Due to Climate Change
Climate Week in New York City started on Monday, September 19, which is running alongside the UN General Assembly meetings discussing important global issues, including health and the environment.
So why is this important to you as an investor?
It may not seem important at all, but much is happening behind the scenes, what some call a " Quiet Revolution" in global finance, and share prices are beginning to shift.
For example, the SEC is now investigating ExxonMobil on accounting practices related to stranded asset writedowns, and perhaps partly related to this news, Exxon was down 1.5% on September 20 and now trades in the low 80's, off its year to date high of $95 a share and basically flat over the last six months.
Concerns such as this may help put a cap on any possible rally.
The specific issue here has to do with oil reserves in the wake of both oil prices and potential restrictions on future carbon dioxide emissions. PwC is the auditor involved. Other oil companies in Europe, as well as Chevron, have written down assets. Chevron, in particular, wrote down roughly $2 Billion and this gave rise to increased profit concerns, and the company is also now off its year to date high over the summer partly as a result.
The concept of stranded assets is clear, there is only so much more greenhouse gas emissions we can put into the atmosphere and avoid global catastrophe. That might sound dire, but regardless of what you see and hear, this is completely scientifically accepted. Portfolio values are now being affected directly and that figures only to continue.
At the same time, portfolios looking at sustainability have skyrocketed in value when choosing carefully.
At Brown University, our student handcrafted portfolio, consisting of Hannon Armstrong, Xylem, 3M, Alphabet and Applied Materials was recently up over 25 percent while the S&P 500 was up 8 percent since mid-March, when these companies were first pitched as ideas by our students.
Looking back at ExxonMobil, by comparison, it is basically even since mid-March, performing worse than the S&P 500 and much worse than our student-run portfolio has done over these past six months.
Companies in the student portfolio needed to first pass financial criteria and then make a sustainability case. This demonstrates not only that there is no trade-off necessary on financial value, but that returns can be left on the table even if just missing a momentum move. This was arguably the case for Tesla over the past few years, but who wouldn't have wanted to own Tesla when it was $45 a share at the time our class added it to our portfolio?
Our fund manager partner for the new Brown University Sustainable Investment Fund, a new option for donors within the Brown Endowment, the Parnassus Endeavor Fund, has gone on to be the #1 Large Growth fund in the US in 2016, "sustainable" or otherwise. This is all now just good business practice.
Missing the trends and assuming we will exist in a business as usual state is now not only foolish, it may be against your fiduciary duty as an investor as well. Fiduciary duty involves loyalty and prudence.
Loyalty means not having conflicts of interest and prudence means acting with the best financial interest of your beneficiaries in mind. Neither of which is suited by business as usual in a rapidly changing world.
Take the Paris Agreement on climate, now very close to being ratified. This imposes restrictions on future energy mix possibilities, and here too the oil company projections don't match the country commitments. Something will give, especially as the transportation sector automates and goes electric, expected to happen in trucking first.
Service companies who support this transition also figure to succeed financially. Portfolios need to be mindful of the ongoing transition to a low carbon economy and not get left holding the proverbial bag based on older thinking.
Even if caused by the rise in shale gas, the complete financial bankruptcy in the US coal industry was aided by a lack of a viable market going forward in the US due to legislation and perceived future likely policy.
Companies like Volkswagen, in a pollution scandal of their own making, are also innovating and the race is on between the likes of BMW, Ford, Apple, Google, GM, Tesla and others for future market share among car sharing, mobility and other associated sub-industries related to the future of transportation.
Innovations also are on the rise and companies who are smartest are already taking advantage of efficiency strategies that help their bottom line as we wrote about at length in our Value Driver Model work for the UN Global Compact.