Hedging Portfolio Climate Risk with GEOS


Hedging Portfolio Climate Risk with GEOS

Global investors have broadly gravitated towards climate change as the most material ESG factor given the potential for climate change to reshape the economy and impact their portfolios and future returns. To manage portfolio climate risks, many investors have started using “net-zero aligned” or low carbon strategies that seek to reduce the portfolio’s carbon footprint, a proxy for climate risk. The belief is limiting exposure to emissions intensive companies will minimize climate risk and benefit long term portfolio risk and return.

The Essex Global Environmental Opportunities Strategy (GEOS) team believes these strategies do not fully account for climate risks since they ignore climate-related opportunities, overstate the utility of carbon footprint metrics, and overlook physical climate risks. A better approach for investors is to incorporate GEOS into their portfolio as a hedge against portfolio climate risk since we view investing in climate-related opportunities as the best way to protect against climate risks. Our climate-related investment approach is far more rigorous than simply looking at a company’s carbon intensity or static emissions footprint, which are inherently backward-looking metrics. GEOS provides concentrated exposure to climate-related opportunities, a significant long-term growth opportunity, that should benefit as the low carbon transition accelerates and physical climate impacts intensify due to delayed climate action. In contrast, many companies in investors’ portfolios, as part of index funds, actively managed strategies, or single stock holdings, are exposed to high transition or physical risk that may result in asset impairments, declining demand for products and services, or higher operating costs, negatively impacting their stock prices.

By incorporating GEOS into their portfolios, investors can ensure their portfolios are climate resilient and positioned to benefit from the low-carbon transition and physical impacts of climate change. For more information on managing portfolio climate risk through GEOS, please visit the link to our full white paper below.

Click to Read Our White Paper


This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.

This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.