Investors intensify probes into impact of low carbon on returns

Global investors are using increasingly sophisticated techniques to test the impact of a low-carbon economy on their investments as their access to financing grows more dependent on decarbonising their portfolios, according to credit rating agency, Fitch Ratings.

Portfolio managers have, Fitch reported, been moving away from simple screening, exclusion and engagement techniques, because they limit their ability to invest in new securities of issuers generating a significant share of revenues from carbon-intensive operations.

Fitch said the more sophisticated techniques in play include factoring in the impacts of sector and business model disruptions caused by climate-related drivers. It reported investor forecasts of “sudden shifts and changes in sector compositions and business models and their timing due to unanticipated climate policies and regulations, higher-than-expected carbon prices, and changes in investor sentiment and consumer preferences.”

The agency said investor analyses have revealed how such changes may affect the profitability, liquidity, solvency and refinancing risks of issuers. And portfolio-level approaches help the investment industry mitigate long-term, transitional, and physical climate risks.

Climate risk is increasingly integrated into credit analysis Fitch said. “The in-depth understanding of an issuer’s business strategy, its relative positioning amongst its peers and its industry’s current and future regulatory and technology environment shows how climate-related issues might materialise,” it reported, adding: “Investors will recognise and reward issuers with strong Environmental Social and Governance management and reporting, especially those within sectors with high climate-risk exposure.” Fitch said the banking sector was increasingly the source of pressure on corporates to decarbonise as stakeholders and regulators force banks’ senior management to look more carefully at bank customers’ carbon footprints and assess how they fit in with their public carbon-reduction targets. And insurers globally are implementing decarbonisation plans for their investment and underwriting portfolios reported Fitch.