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How environmental issues could impact your portfolio, and what you can do about it

In the first article of our three-part series on Environmental, Social and Governance (ESG) investing, we look at the key environmental issues facing investors and explore two funds that could help.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In the last ten years, we’ve seen eight of the warmest years on record.

That’s no coincidence. Thermometer readings around the world have been rising since the industrial revolution, and the evidence suggests humans are mostly to blame.

Heat-trapping greenhouse gas emissions make it more difficult for the earth to radiate the sun’s heat back into space. It increases the likelihood of serious and irreversible environmental consequences – from catastrophic wildfires and droughts to more severe storms and rising sea levels.

How could this impact my investments?

Climate change poses significant risks for carbon intensive sectors like oil, gas, coal, heavy industry and transport. For example, it increases the risk of so-called ‘stranded assets’. That’s where a company’s assets lose value or become obsolete. Stranded assets caused by environmental issues, like climate policy changes to reduce emissions, are becoming more apparent.

Some could also fall victim to the physical impacts of climate change, like coastal oil refineries or nuclear plants, which are vulnerable to rising sea levels.

The risks to your investments are potentially more far reaching than just those with direct exposure to fossil fuels. In the future all companies, regardless of their sector, could face restrictions and fines linked to their carbon footprint.

The European Union Emissions Trading System is currently the world’s most established carbon pricing regime, covering the main energy and carbon-intensive companies in Europe. But several other countries, including the US, are examining whether to introduce carbon pricing systems to help curb emissions. An expansion of carbon pricing could further impact the cash flows, profits and share prices of high emitting companies.

The road to net zero

In 2015, world leaders signed the Paris Accord, an international agreement aiming to limit the global temperature rise to ‘well below’ 2°C above pre-industrial times. In November, global leaders will convene in Glasgow for the UN Climate Change Conference 2021 (also known as COP 26). It’s expected to be used as an opportunity to review what’s been done since the Paris Accord was signed and lay out more plans to help reach the target.

In 2019, the UK became the first major economy to pass a net zero commitment into law. That means emissions will have to be avoided completely or – if that's impossible – offset by planting trees or sucking CO2 out of the atmosphere. Since then, several other countries have taken similar steps, and many more are planning to do so.

Countries aren’t the only ones making net zero commitments though. Lots of businesses, both in the UK and overseas, have also adopted net zero targets. Businesses not seen to be doing enough to reduce their carbon emissions could risk losing customers and therefore revenues.

Climate change isn’t the only environmental risk

Climate change is arguably the most significant and pressing environmental risk investors face, but it’s far from the only one.

Biodiversity loss is also a major challenge, for example. Biodiversity underpins a variety of ecosystem services, from food and clean water to flood protection and climate regulation. But exploitation of the environment by large-scale infrastructure and agriculture is throwing things off balance.

The effects are already being felt in industries like fishing. But other areas like agriculture, forestry and tourism are also facing these risks. Companies that rely on deforestation in their supply chains could also suffer supply disruption, increased costs and reputational damage.

Waste management is another environmental consideration. Increasing consumption is causing more pressure on landfills, which in turn is causing landfill taxes to rise. This combined with tougher regulations on how waste is handled and managed, will severely impact companies with less sustainable business models.

What can investors do?

This week is Good Money Week. It’s a national campaign that aims to raise awareness of responsible investing. We think it could be a great time to check if your portfolio is ready to weather the environmental challenges facing us in the decades ahead.

If you want to invest with an environmental focus, but don’t have the time or knowledge, a fund could be a good alternative. We take a closer look at two below.

Both funds have the flexibility to invest in emerging markets and derivatives, which add risk. Remember, all investments can fall as well as rise in value, so you could get back less than you invest.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice.

Legal & General Future World Climate Change Equity Factors Index

The Legal & General Future World Climate Change Equity Factors Index fund aims to invest in upsides that climate change could bring to some companies. It does this while also reducing how much is invested in those involved with the fossil fuel industry or who emit higher than usual levels of CO2.

It invests in more than 2,200  companies across the globe and aims to track the FTSE All-World ex CW Climate Balanced Factor Index.

The index is weighted more to companies that help address the impacts of climate change, resource depletion and environmental erosion. Less is invested in companies that produce fossil fuels or emit high levels of CO2. The index also gives greater weight to companies that score well on four factors: value, quality, low volatility and small size.

Legal & General are experienced tracker fund managers. However the index tracked by the fund looks very different to the broader global stock market, so we'd expect it to perform differently too.

More on Legal & General Future World Climate Change Equity Factors Index, including charges

Legal & General Future World Climate Change Equity Factors Index Key Investor Information

Pictet Global Environmental Opportunities

The team behind the Pictet Global Environmental Opportunities fund believe that growing populations and rising living standards will put increasing pressure on the world’s finite resources. They think this could lead to scarcity and quality challenges.

Companies looking to solve environmental challenges through innovative technology and intelligent use of natural resources could therefore deliver above-average growth over the long term.

The fund invests in companies across the globe that make a positive contribution to the environment, operating in areas like pollution control, water supply, renewable energy, waste management and sustainable agriculture.

The managers also like financially robust companies with a unique advantage over the competition, and a business model that doesn’t rely on government subsidies. Here’s how the fund currently invests across major sustainability themes.

Current fund investments

Source: Pictet Asset Management. Correct as at 30/07/2021.

Current investments include Danish energy firm Ørsted. Ten years ago, it was one of the most coal-intensive energy companies in Europe. Now it’s ranked among the most sustainable companies on the planet. It has a 30% share of the offshore wind market and 90% of the energy it generates comes from renewable sources.

Please note the fund can invest in smaller companies, which adds risk. It’s also an offshore fund, so investors are not normally protected by the Financial Services Compensation Scheme.

More on Pictet Global Environmental Opportunities, including charges

Pictet Global Environmental Opportunities Key Investor Information

Want to learn more?

If you want to learn more about investing responsibly, have a look at the new Responsible Investment section of our website. 

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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