Ireland is the second-worst country in the EU for tackling climate change, according to a report published earlier this summer by Climate Action Network Europe. The report, which examines how countries perform in reaching their climate and energy targets, ranked Ireland 28th of 29 EU countries. Only Poland had a worse record. Ireland‘s own climate change watchdog, the Climate Change Advisory Council, has also warned that Ireland is projected to be nowhere near meeting its 2020 and 2030 climate change targets.
This lack of action is likely to lead to Ireland being fined by the EU. Irish investors could also suffer lower returns on their assets if they fail to consider sustainable investing – where environmental, social and corporate governance (ESG) factors are included as part of the investment approach. Sustainable investing has traditionally been seen as taking an ‘ethical‘ stance, one reserved mainly for charities and university endowments. However, this is an archaic view. Sustainable investing actually involves a consideration of real risks likely to drive future returns, with environmental factors becoming more important as the world transitions to a lower-carbon, more sustainable economy.
Whether you share this view or not, there‘s no doubt times are changing for investors. EU regulations coming into force in early 2019 will compel all pension schemes to have a formal ESG policy and disclose it in their annual reports to members. Europe‘s ambition is to expand these requirements across the investment landscape and increase pressure on all investors, asset managers and companies to ensure that sustainability is high on their agenda.
So, how will this affect investors? In the transition to a low-carbon economy, it is possible that trillions of dollars of fossil fuel investments, from oil-reliant energy companies to conventional cars, will lose significant value. This may lead to fossil fuel-intensive assets, as well as some reserves, becoming ‘stranded assets‘ – with company valuations being hit as the value of these assets are written down.
Doom and gloom aside, the push for climate action and long-term sustainability also brings opportunities. While some investors may be daunted by what may be a new area and struggle with how to make decisions that are both sustainable and profitable, they must at the very least understand how the funds they invest in take ESG factors into account. Another important step could be to consider a low-carbon index designed to track a specific index (eg global equities), but with lower carbon footprints.
Huge spending on sustainable infrastructure will also be required to assist in the transition to a lower-carbon economy. While some financing will come from governments, a huge gap will need to be filled by private investors. Investing in funds that directly hold assets and projects linked to renewable energy infrastructure, such as wind turbines and solar panels, and sustainable natural resources, such as forestry and agriculture, could also provide strong returns.
While it‘s fair to say that sustainable investing is a long-term proposition in a rapidly-evolving sector, and not necessarily at the forefront of investors‘ minds, it might also be a more prudent one, as areas that have performed well in the past may not necessarily perform as well in the future. One thing is certain – all investors need to refresh their long-term investment views to adapt to this changing world.
Rob Meaney is the head of responsible investing at Mercer in Ireland (mercer.ie)
Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent
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