By Stephen Metcalf, Head of Sustainable Investing, RBC Wealth Management
Climate change is the issue of our times, and will have wide-reaching effects on societies and economies worldwide, without exception. Wealth managers and investors must treat climate change as a core investment risk as well as an opportunity and get ahead of it now where possible.
Given clients have different preferences in this space, and the multi-dimensional nature of the problem, wealth managers must deploy a wide range of investment solutions that focus on areas such as: exclusions, growth potential, and what the low carbon economy will look like.
The main opportunity going forward will be the so called ‘ESG Momentum’, where investors look for companies with improving ESG credentials. This contrasts with the established ‘Best in Class’ approach which dominates the industry currently, whereby companies with good existing credentials are preferred. When this new approach is layered with investor activism and engagement, the outcome has the potential to deliver more investment outperformance as well as ultimately be more impactful for wider society and the environment.
If the industry can predict how widely-utilised ESG metrics will evolve over time for specific companies, and hence find the next much-loved ESG stock before everyone else does, managers have the potential to outperform. And, arguably, providing capital to companies who need it to change for the better has more additionality than only investing in companies that the market is already queuing up to invest in.
Wealth managers will be expected to measure the environmental footprint of their portfolios as a starting point, feed this back into their investment processes and provide tangible impact metrics to clients. Advisers should be able to say “these are the carbon emissions in your portfolio”, or “this is how much waste is generated by the companies”. We expect regulators will begin mandating this kind of reporting and portfolios will no longer be measured just on risk and return, but also on impact.