Advisors interested in developing climate-friendly portfolios need to accept that metrics are imperfect and get on with it, experts said Tuesday at the Responsible Investment Association’s annual conference.
Environmental, social and governance (ESG) funds are proliferating, and inconsistent data from competing providers may be intimidating for advisors. While there are methodological limitations to developing net-zero portfolios, the benefits include risk management, resilience and client engagement, the panellists said.
“We hear so many investors say, ‘The data is so bewildering. I look at the Trucost numbers and they’re different from the MSCI numbers,'” said Bertrand Millot, vice-president of risk management, fixed income and head of climate risk and issues at the Caisse de dépôt et placement du Québec, referring to providers of climate risk data.
“That shouldn’t stop you from getting off your belly and starting to crawl on your way to running. Use one. Choose one. And it doesn’t matter which one.”
While the methodologies differ, the data quality is more or less the same — and imperfect no matter which company you choose, he said. But that shouldn’t be an excuse not to use data.
“Don’t let your investment people start negotiating and arbitraging the data between the two, because that leads to futile discussions and goes nowhere,” he said. “The key is: just choose something and start reporting on that basis, and get on with it.”
As governments and companies make commitments to reach net-zero carbon emissions in the next two or three decades, more investors are demanding the same from their portfolios. But the process can appear overwhelming. In addition to the inconsistencies between data providers, there’s a lack of data from issuers and no rules in Canada for labelling funds as ESG, sustainable or responsible.
Despite these limitations, advisors need to ask clients about their interest in climate issues and be transparent about the methods for creating a portfolio that addresses climate change, said Marie-Justine Labelle, head of responsible investment with Desjardins Investments in Montreal. That means understanding what different products are able to achieve.
Desjardins surveys show that responsible investing — and climate in particular — is a “hidden need” for clients, Labelle said, and many are frustrated that advisors aren’t bringing it up.
“It does really seem to be a growing expectation and a way to connect with clients on their portfolios beyond just practical considerations,” she told the virtual audience on Tuesday afternoon. Discussing responsible investments can help a client “become an actor of change through their portfolios, which is something we’re hearing they want to do.”
While clients don’t expect advisors to have all the answers, they want to know the one giving advice is as interested in the topic as they are.
The panellists also talked about building net-zero portfolios as a way to manage risk. Issuers face significant transition risk to a low-carbon economy as governments implement policies to restrain global warming to 1.5 degrees. The International Energy Agency’s roadmap for net-zero emissions by 2050, released last month, said the industry would have to stop funding new fossil fuel projects. This transition could lead to “massive sectoral disruptions” and stranded assets on company balance sheets, Labelle said.
Plus, there are the physical risks from climate change including rising oceans and more severe weather.
“Climate change is such a pure-play risk management issue, and it’s coming fast,” Labelle said.
“Being aware of this gives you the foresight for portfolio resilience.”
While the panellists were willing to largely accept imperfect data and methods in favour of taking early action, they were highly skeptical about using carbon offsets — where companies buy another company’s emissions reduction credit to compensate for their own emissions — to reach net-zero emissions.
“Buying the right to emit from somebody else does not reduce anything at the planetary level,” Millot said. “It is the cheap way out.”
There are currently a wide variety of offsets of varying quality; buying certified offsets is better, he said, but he thinks carbon capture and storage will eventually be certified and offer a better solution.
Some new funds are looking to apply carbon offsets to broad indexes or even to cryptoassets in order to neutralize their holdings’ emissions.
Labelle said offsets might have a role in certain situations “but it’s a slippery slope,” and advisors should look for products that have a real impact. “Is [a product] actually trying to make a real-world outcome, because this is what we hear investors want,” she said.
Advisor’s Edge and Investment Executive are media sponsors of the RIA virtual conference.