hand painting symbols of alternative energy sources in green

On a recent business trip, I explained to a young U.S. border guard that I work in the field of responsible investing (RI). The border guard, Scott, replied, “Oh, you mean like, companies that are focused on sustainability and stuff? That’s probably too low risk for me. I like volatility.”

“Wow,” I thought. Not only does this border guard know what I am talking about, he also knew intuitively that responsible investments are likely to be less volatile.

Although Scott does some swing trading in his spare time, most long-term investors are not looking for volatile price swings. That’s why a broad range of investors are seeking investments that manage exposure to environmental, social and governance (ESG) risks.

More than a quarter of the world’s assets under management (AUM) now incorporate ESG issues. However, in some markets, such as Australia and Canada, more than half of AUM incorporate one or more RI strategies. And RI continues to grow rapidly in the U.S., Europe and Asia.

Climate change is one of the more prominent ESG risk issues for investors. Increasingly, businesses are recognizing the need to assess and manage their exposure to climate-related financial risks. Since June 2017, more than 500 companies with market capitalizations totalling more than US$7.9 trillion have expressed support for implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), led by Michael Bloomberg and established by the Financial Stability Board (FSB).

The rapid rise of climate-related financial disclosure is not an altruistic or philanthropic endeavour. Rather, high-quality climate-related disclosure can help investors assess risk exposure and price assets more accurately, which leads to market efficiency and a more resilient financial system, overall.

“Climate-disclosure is becoming mainstream,” said Mark Carney, governor of the Bank of England and former chairman of the FSB on the release of the TCFD: 2018 Status Report, which was published in September. “As preparers, financial institutions and investors ‘learn by doing,’ a virtuous cycle will be created [in which] more and better information creates imperatives for others to adopt the TCFD and for everyone to up their game on the quality of information they provide.”

Some of Canada’s largest and most sophisticated institutional asset owners are taking significant steps on climate change. For example, la Caisse de dépôt et placement du Québec (CDPQ), which manages more than $300 billion in assets, plans to reduce the carbon intensity of its portfolio by 25% by 2025, becoming the first institutional investor in North America to set such a target.

The CDPQ’s portfolio managers must now work within carbon budgets, which are factored into employee performance evaluations. The organization also plans to increase investments in renewable energy by $8 billion in the next three years and increase its low carbon investments by 50%.

Other Canadian institutional investors — such as the B.C. Investment Management Corp., OPTrust, Alberta Investment Management Corpo. and Bâtirente — are making climate change a priority by adopting the TCFD’s recommendations, measuring their carbon footprint and conducting climate-scenario analysis, among other activities.

But institutions are not the only investors concerned about the climate. The Responsible Investment Association’s 2018 RIA Investor Opinion Survey, which is based on an Ipsos poll of 800 Canadian individual investors, found that 80% of Canadian retail investors are concerned about climate change and the environment.

Furthermore, about three-quarters of survey participants believe it’s likely that climate change will create risks for the global economy within five years and 70% believe climate change will have negative financial impacts on companies in some industries within the next five years.

The survey data also highlight a major opportunity for financial advisors to engage with their clients around RI, with 81% of survey participants reporting that they want their advisor to inform them about investments that are aligned with their values. And a whopping 86% of survey participants believe their advisor should be knowledgeable about how ESG risks could affect their investments.

Furthermore, survey participants reported a high level of interest in climate-themed investing, with a strong majority of 66% reporting that they would like to allocate a portion of their portfolio to companies providing solutions to climate change and environmental challenges. In addition, a majority of survey participants believe it’s important to align their investments with a low-carbon future. Evidently, there are not many Scotts in Canada’s retail market.

With retail investors joining the chorus of institutional investors, corporate leaders and governments in the quest for a low-carbon future, it’s increasingly difficult — and perhaps even reckless — for investment professionals to ignore climate-related risks and opportunities.

In today’s polarized dialogues around climate change and the energy sector,  hearing skeptics suggest climate change is “far away” and should be addressed “later” is common. But evidence shows investors are concerned about climate change now, and they want their advisors to inform them about RI now. So, what are you waiting for?