Numerous academic studies suggest that Environmental, Social and Governance considerations are material to both risk and return for investors1. But good ESG ratings are complex to build; important issues for one industry may be irrelevant for another industry2. So, out of all the ESG issues you could consider, why do we believe climate change is so important? Because there is no other ESG issue that matches climate for the size of the required global response and the clear linkage to financial outcomes via carbon pricing.
1 “Corporate Sustainability: First Evidence on Materiality”, Khan, Serafeim, Yoon (2016)From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, March 2015, University of Oxford and Arabesque Partners.
2 The Sustainability Accounting Standards Board (SASB) lists 26 broad sustainability-related business issues ranging from Customer Privacy to Air Quality to Business Ethics. Obvious climate related issues only account for 2 of these 26 issues; Green House Gas (GHG) Emissions and preparation for the physical impacts of Climate Change.
The views expressed are the views of Jonathan Shead, Head of Investments - Australia through the period ended 17 May 2021, and are subject to change based on market and other conditions.
Investing involves risk including the risk of loss of principal. The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
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