While SCERS may be a relatively small player, big dogs like the California Public Employees’ Retirement System have adopted climate change as a “priority theme,” and may soon consider 350.org’s argument.
Just to add an additional wrinkle, all of this comes right as The World Future Council releases a report (link opens a PDF) finding that the opportunity cost of using non-renewable fossil fuels for energy, instead of other applications like plastics production, is between $3.2 trillion and $3.4 trillion per year.
Five key investor takeaways
Here are five ways that long-term investors can account for these forces in their portfolio management.
- Be wary of high-cost, carbon-intensive, and controversial projects. You’ve got the risk numbers above for some of the European players. Arctic drilling and tar sands exploitation come at a high cost as well. TransCanada Corporation (NYSE:TRP)‘s Keystone pipeline is a perfect example of such a controversial project. Greenpeace has identified it as among the world’s 14 most carbon-intensive projects (link opens PDF). On the flip side, the HSBC study found that only 1% of BG Group‘s market cap was at risk.
- Look for investment in carbon capture and storage and renewable energy. You can look for this among pure players and as part of the oil majors’ portfolios. Make sure you assess such hard indicators as serious research and development investment, and don’t be fooled by clever PR campaigns.
- Invest in transport fuel efficiency. The HSBC analysts found that improvements in transport fuel efficiency are an easy way to reduce fossil-fuel demand.
- Reassess passive and benchmarked investments. Carbon Tracker makes the excellent point that “asset owners typically invest large amounts in passive funds which track the market, or active funds which are benchmarked against market indices. This means many investors are backing huge fossil fuel reserves purely as a result of the structure of the financial products they invest in. The continued focus on short term returns perpetuates the status quo.”
- Divest? You could follow 350.org’s urgings and divest from the oil majors. While this may sound drastic, consider yet another report that came out last week from The Aperio Group, an investment management firm. “Do the Investment Math: Building a Carbon-Free Portfolio” (link opens PDF) reveals that while divesting from fossil-fuel companies doesn’t necessarily add value to a portfolio, nor it does subtract value, and it increases the risk to investors at such a modest level as to be negligible.
The article 5 Investor Strategies for the Carbon Bubble originally appeared on Fool.com and is written by Sara Murphy.
Sara E. Murphy has no position in any stocks mentioned. The Motley Fool recommends Chevron, Statoil (ADR), and Total SA (ADR).
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