C is for Carbon
Dr Bob Explains Series on Financial Topics
October 8 this year was different from other workdays. A friend and his family were visiting from Zurich, and my wife and I took them for dim sum and shopping. Partly as a result, I missed two inconspicuous but important news items. The first announced an ominous report from the world’s most prominent group of climate scientists. The second announced the winners of the Nobel prize for economics.
While my wife and I played host, the Intergovernmental Panel on Climate Change[i] released the results of its latest study. It concluded that a 1.5°C increase in average world temperatures would more closely resemble a perilous 2.0°C increase than previously recognized. The potentially disastrous consequences of global warming, if still unchecked, would come sooner than previously thought.
Within hours of the IPCC’s announcement, the Royal Swedish Academy of Sciences announced the recipients of the 2018 Nobel prize for economics. One, William Nordhaus, was cited for research that lay the groundwork for assigning a price to carbon. With such a carbon price, mechanisms such as taxes and trading could curb overall carbon emissions and global warming.
That these two press announcements were released on the same day was a coincidence. Together they add to the pressure on corporations to loosen dependence on fossil fuels and take active steps toward a lower-carbon future. The concept of “carbon risk” seeks to capture how well a company is positioned to transition to that future.
Investment research firm Morningstar, building on the work of Sustainalytics with individual companies, has developed carbon risk ratings for funds. Those with the most promising outlook and lowest carbon risk can receive Morningstar’s Low Carbon Designation.
These ratings are handy tools for investors to:
- Zero in on environmental concerns (the “E” in “ESG”[ii]), global warming in particular,
- Identify companies that are likely to fare better in a lowcarbon future, and
- Combine with other considerations to build portfolios for doing good and well.
Had I scanned the Wall Street Journal on October 8, I might’ve noticed in the left-hand “What’s News” summaries on the front page that “a UN scientific panel warned that rapid and far reaching changes are needed to avert catastrophic climate change.” I hadn’t and didn’t.[iii]
[i] The IPCC was itself awarded a Nobel prize in 2007, for peace.
[i] “ESG” is environmental, social, and governance investing
[iii]Disclosure: This commentary is furnished for the use of Glen Eagle Advisors and its clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle Advisors representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary. The Chartered Financial Analyst (CFA) designation is conferred by the CFA Institute.