How environmental concerns impact your savings24 February 2022 Back to results
Artemis’ Impact Equities team
Successful investment means identifying drivers of expected risk – and sources of potential return. And while they might seem ‘softer’ (or perhaps just more difficult to measure in monetary terms), environmental issues are increasingly relevant to many companies and the investment returns they produce. This is the ‘E’ in ESG (environmental, social & governance).
So what environmental issues do investors need to consider?
There is, sadly, no single exhaustive list. Intuitively, environmental impacts vary significantly by company and by sector. For example, the direct environmental impacts of the oil or mining sectors are significant and obvious; for the software sector they are less so. Investors therefore (need to) give careful consideration to what they believe are the material environmental issues they consider for a given company or sector (if indeed any). They also need to be aware that what is considered ‘material’ can change very quickly - think of the sudden awareness of plastic waste in our oceans (thank you Sir David Attenborough). Doing this well requires experience.
In general terms, however, material environmental issues can be considered either a risk or an opportunity. Environmental risks associated with a company’s products or its operational activities might include: fines associated with regulatory non-compliance; reputational risk (including their ability to attract staff); and declining consumer demand for un-sustainable goods. All of these may impact a company’s sales, revenue growth, margins or profits and so its desirability as an investment. Remember that the Deepwater Horizon oil spill in the Gulf of Mexico cost BP $65billion.
The ‘energy transition’
The ultimate environmental risk that many companies face is the climate crisis. The necessity of slowing climate change means that, at best, carbon-intensive products will face more regulation and higher taxation. At worst there may simply no longer be any (or much reduced) demand for fossil-fuel based products as lower-carbon alternatives become more desirable. This is what is referred to as the ‘energy transition’.
And even for those companies outside of the most energy-intensive industries, future regulations to slow climate change will likely touch their operations or their regulatory disclosures, which means there is an important role for all investors to engage with the companies that they invest in to promote best-practice on climate change (and other issues) and to ensure that they are working to ‘future-proof’ their operations.
Innovation is creating products that are greener – and cheaper
But as is often the case in the world of investing, what is a risk for some can be an opportunity for others. Innovation and the convergence of technologies are creating products and services that are cleaner and greener – and often cheaper – than the traditional alternatives. The enormity of the energy transition the world needs is providing huge opportunities for companies to create products and services that are both promoting and benefitting from the shift to a more sustainable world. With a mission to ‘accelerate the world’s transition to sustainable energy’, Tesla is the obvious example here.
Companies are part of the society and the environment in which they operate. As expectations about the role of companies in society change, environmental concerns are presenting investors with risks – but also with opportunities. And although the consideration of environmental issues in investing isn’t a new phenomenon, its impact has increased as the scale of the climate crisis has become clear. There is no longer any option: investors need to avoid the destruction of value the energy transition will bring and focus on finding the value it will create.
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