Hurricanes, wildfires, droughts and floods not only pose risks for humanity but also for investors, and how companies work to prevent the potential damage is becoming an important consideration for advisors and asset managers.
The way they calculate that risk for their clients is evolving, according to a group of advisors and asset managers.
“There is a huge amount of information an advisor needs to look at to judge how companies are addressing the risks of climate change. The challenge is they do not have the resources to make that judgment,” Adam Johnson, senior client portfolio manager for Pictet Asset Management, said in an interview.
“The process for advisors will get easier as investors demand, and get, more information,” he added. Pictet is a global asset manager with offices around the world, and chooses investments based on their environmental and social impact.
“The change we are seeing now is that investors are accepting the fact that you do not have to give up returns to do the right thing,” Johnson said. “They are realizing there will be penalties for those companies that do not meet improved standards.
Working climate change activity risks into a company assessment “takes a lot of work, but the momentum is going in the right direction,” he added.
Modeling Risks
FIS, a global fintech firm for the financial industry, has developed the Climate Risk Financial Modeler to help companies assess, reduce and report on the physical risks they face due to climate change. The modeler is designed to help companies plan for that potential damage and forecast the financial risk.
FIS data shows that 59% of U.S. CEOs said incorporating climate risk into financial planning is either planned, in progress or completed. The modeler helps companies assign specific dollar values to assets in different scenarios to create a specific risk profile.
“People are asking questions about whether these risks are priced into a company’s operations,” said Harry Stahl, senior director of enterprise strategy at FIS, in an interview. In his role, Stahl focuses on regulation technology and ESG factors.
“Investors are getting much more sophisticated and are looking at what the perils of climate change are,” he said. “For advisors, assessing these risks is becoming a basic fiduciary responsibility.’’
Investors should demand that this type of information be included in annual company reports, which should explain what companies are doing to address climate risks, Stahl added.
“Some companies are more exposed to climate change risks than others. For instance, if a person is investing in real estate, he or she has to be hyperaware of the risks posed,” he said. “For other companies, investors should be looking at the risks or opportunities created by the transition to a more energy-friendly environment.”
Having this knowledge “is becoming more of an expectation of financial advisors,” he added.
“Insurers are on the front lines for both needing information on climate change risks and assessing the potential vulnerabilities,” said Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, in an interview. Impax is a global asset manager that puts the transition to a more sustainable global economy at the core of its mission.
“Investors are hurt when companies are not pricing in the potential costs of climate change disturbances,” she said. “We are talking to companies about what they are doing to address these risks.”
For some companies, this means being ready to absorb the cost of damage. For others, it means being self-insured or moving to a less vulnerable physical location, she added. Companies that take action to lower risks may get lower insurance premiums, and also become more attractive to investors.
“The process of reducing risks becomes less daunting if the company tackles one issue at a time,” Gorte said. To help with addressing these risks, and insuring for them, insurers and reinsurers have begun investing heavily in climate models to more accurately predict potential losses.
When bringing on new clients, advisors should take into account the effect climate change will have on their investments, said Bud Sturmak, head of impact investing and a partner at Perigon Wealth Management, a San Francisco-based independent RIA with more than $7.7 billion in client assets.
“The financial industry is moving toward personalizing portfolios and building a portfolio around what the client truly cares about,” he said. “This includes taking the risks of climate change into consideration for many clients. Survey data shows that 70% to 80% of investors are looking at climate risks, [which means] advisors should be looking for asset managers who take an active approach to managing climate risks.
“There is push and pull between short-term returns and long-term risks,” Sturmak said, “but active asset managers should have impact reports that show if companies are committing to needed changes and if they are really doing what they say to reduce risks. Active asset managers are pushing companies to make changes to reduce risks.”
Pictet’s Johnson added, “Companies and investors will benefit as the market begins to recognize the companies that are transitioning to a more sustainable economy.”