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.
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.
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