Investment planning in Perth and beyond has been introduced to a relatively new factor in potential investment performance: climate change. More specifically, greenhouse gas emissions are an important factor in evaluating Australian and global equity portfolios.*
Ian Woods is the Head of Environmental, Social and Governance Investment Research for our parent company, AMP Capital. Recently, Mr Woods published an insight paper on the AMP Capital blog called “Greenhouse gas emissions: risks and challenges for portfolios.” We would like to share some of his thoughts on the subject with you.*
Mr Woods used the Paris Climate Change Agreement as an example of a global commitment to acknowledge climate change. He feels that both companies and investors need to assess, communicate and manage risks posed to them by climate change.*
Assessing Greenhouse Gas Emissions
Greenhouse gas emissions are split into three categories. Scope 1 is from company operations, such as the burning of fossil fuel. Scope 2 is the emissions from the process of supplying electricity for operations generated by the combustion of fossil fuels. Scope 3 may include transportation of raw materials and provision of services.*
Entire funds are measured, company by company, for greenhouse gas exposure to assess the risk. Mr Woods thinks that either governments will enact a “carbon tax” or the market will exact a “carbon price” regarding greenhouse gas emissions. This and other factors will be used to assess the effects of greenhouse gas exposure on a fund’s performance.*
Assessing Climate Change Risk in Portfolios
Mr Woods describes the process used by AMP Capital to assess risk in various portfolios. It involves a lot of mathematics and metrics that we don’t have the time to describe for you here. Suffice to say that AMP Capital has been assessing the climate change exposure of the AMP Capital Sustainable Australian Equity Fund and the ASX 200 for more than six years.*
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*AMP Capital, 23 February 2016. Ian Woods: “Greenhouse gas emissions: risks and challenges for portfolios.”