The Independent Market Observer

What About Climate Change?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 14, 2021 1:23:12 PM

and tagged Commentary

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climate changeAs regular readers know, I largely steer clear of politics. Political beliefs are largely beyond argument (on both sides), so it’s not a good use of time to put out arguments that go against someone’s convictions. Yet, in economics and markets, we do have to deal with the facts, as we saw recently with the pandemic. Regardless of where you stand on the vaccine, for example, the facts are what they are. And that is where we now find ourselves with climate change.

Change Is in the Air

You may or may not believe climate change is a real thing. But the facts on the ground are now at a level that affects economics and the markets. The heat waves in the western U.S., the wildfires in the same region, the rising sea levels that are generating floods in large areas of Florida: all have been widely reported as facts. These events bring home the reality that things are changing, that the climate and the facts on the ground are now different than they have been in previous decades. As citizens, we can disagree about the causes of and remedies for these events. As investors? We have to respond to them regardless of our political beliefs.

I am certainly not the first to say this. Larry Fink, chairman and CEO of BlackRock, has issued letters to shareholders that make the same point. Insurance companies are changing their underwriting policies to reflect climate risks. Municipal securities investors and underwriters are increasingly taking these risks into account. And perhaps most notably, an activist hedge fund won election to Exxon’s board for its candidates on the platform of moving beyond oil. The investment world is changing even faster than the real world.

What Does This Mean for Investors?

As investors, we need to pay attention. As people, we need to be aware. I read an article recently about Marathon, Florida, which is seeing increasing flooding. We vacationed there this spring, so I know the area a bit. One homeowner was quoted as saying he should have done more due diligence before buying his home, which is now threatened. I think this poor person’s situation may become all of ours. We need to be aware and to do our due diligence.

One way to do so is to look more at targeted investing styles, such as SRI (socially responsible investing) and ESG (environmental, social, and governance investing). These are becoming increasingly popular. Even as they become more popular, they are also becoming more mainstream, as more and more investors focus on these issues. Once again, you may not agree with the ideas, but you have to deal with the consequences.

Respond to the Facts

At Commonwealth, we have been on this train for some time, offering multiple options for SRI and ESG investors. Here, too, we have been more focused on these areas as mainstream investment managers increasingly incorporate these metrics in their analyses. This is a growing issue and a growing trend in the investing world. We don’t take a stand on the politics—but we do respond to the facts. And, as good investors, that is exactly what we should be doing.

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