Innovating Investments for Climate Resilience
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Kevin Eckerle, Director of Corporate Research and Engagement, NYU Stern Center for Sustainable Business
The end of September brings the conclusion of the 10th annual Climate Week in NYC. This year’s jam-packed calendar of events included a panel discussion co-hosted by the Stern Center for Sustainable Business (Stern CSB) and SustainAbility, and moderated by Professor Tensie Whelan, Director of the Stern CSB. In a wide-ranging conversation, the distinguished panel including Rob Engle (Nobel Laureate and Director of the Stern Volatility Institute), Anne Van Riel (Head of Sustainable Investing for ING in North America), and Courtney Thompson (from Morgan Stanley’s Sustainable Finance team) touched on ways in which their organizations are developing and delivering new products for investing in climate resilience, the ways in which investors can hedge climate risks in their portfolios, and the gaps that remain in the finance sector’s approach to climate-related investments.
Rob Engle discussed his modelling of climate risks and the returns achieved through his climate hedging strategy. Through his strategy, publicly traded environmental portfolios (those that meet one or more of Morningstar’s sustainability criteria), which Prof. Engle posits serve as an indicator of new environmental risks, are underperforming the broader market by about 5%. But, in a story akin to ‘The Big Short’ which highlighted the investment opportunities presented by the 2008 housing crisis, Prof. Engle noted that the outcomes so far are consistent with his overall thesis that over the longer-term, as environmental conditions decline with accelerating climate change, these environmental portfolios will outperform.
In contrast to Prof. Engle’s approach to constructing an investment portfolio, Anne Van Riel discussed how ING delivers products to assist companies investing in climate action. She described ING’s Sustainability Improvement Loans, in which the loan’s interest rate can be increased or decreased, in response to the client company’s sustainability performance. Recent examples from across ING’s portfolio include loans to Renewi, a recycling company; Royal DSM, that specializes in nutrition, health, and sustainable living; and Gecina, a leading European real-estate investment trust.
Courtney Thompson highlighted Morgan Stanley’s approach to embedding the research of the Institute for Sustainable Investing on the impacts of climate change in particular asset classes in the equity analysis being done for each of the sectors that Morgan Stanley covers. A recent example of which is the report from September 2018 on the risks and opportunities that climate change presents for investors in real assets (i.e, buildings, airports, pipelines, cell towers, etc.). The report outlines a lifecycle approach for asset management that includes due diligence on climate-related risks at the level of an individual asset, incorporating resilient design into the asset’s construction and renovations through time, anticipating and preparing for extreme events, and creating a plan for divestment should the risks become too great.
Though a smaller topic of conversation, a gap identified by all panel participants was the lack of political leadership on climate change, especially within the United States. All participants agreed that, in the absence of such political leadership, business needs to fill the void. Another critical gap that was raised by Prof. Engle was the coalescing of citizen opinion on the urgency of addressing climate change. A conclusion supported by a recent Gallup poll which found that only 64% of Americans say that climate change is caused by human activities and only 45% believe that climate change will pose a serious threat in their lifetimes. This lack of urgency among the majority of Americans underscores the critical need for events like Climate Week. For in these events, that continue to grow in scale, attendance, and impact, spotlights shine on the new and innovative approaches, like those described by our panelists, for solving the climate challenge. As events like Climate Week also continue to attract more participation from the global business community, they show how business is stepping forward to grow opportunity from addressing global challenges.
Additional resources:
Climate Week
The Stern Volatility Institute’s V-Lab
Morgan Stanley’s Institute for Sustainable Investing
ING’s approach to climate action
Megan Brenan and Lydia Saad, Global Warming Concern Steady Despite Some Partisan Shifts, Gallup. March 28, 2018.
Rob Engle discussed his modelling of climate risks and the returns achieved through his climate hedging strategy. Through his strategy, publicly traded environmental portfolios (those that meet one or more of Morningstar’s sustainability criteria), which Prof. Engle posits serve as an indicator of new environmental risks, are underperforming the broader market by about 5%. But, in a story akin to ‘The Big Short’ which highlighted the investment opportunities presented by the 2008 housing crisis, Prof. Engle noted that the outcomes so far are consistent with his overall thesis that over the longer-term, as environmental conditions decline with accelerating climate change, these environmental portfolios will outperform.In contrast to Prof. Engle’s approach to constructing an investment portfolio, Anne Van Riel discussed how ING delivers products to assist companies investing in climate action. She described ING’s Sustainability Improvement Loans, in which the loan’s interest rate can be increased or decreased, in response to the client company’s sustainability performance. Recent examples from across ING’s portfolio include loans to Renewi, a recycling company; Royal DSM, that specializes in nutrition, health, and sustainable living; and Gecina, a leading European real-estate investment trust.Courtney Thompson highlighted Morgan Stanley’s approach to embedding the research of the Institute for Sustainable Investing on the impacts of climate change in particular asset classes in the equity analysis being done for each of the sectors that Morgan Stanley covers. A recent example of which is the report from September 2018 on the risks and opportunities that climate change presents for investors in real assets (i.e, buildings, airports, pipelines, cell towers, etc.). The report outlines a lifecycle approach for asset management that includes due diligence on climate-related risks at the level of an individual asset, incorporating resilient design into the asset’s construction and renovations through time, anticipating and preparing for extreme events, and creating a plan for divestment should the risks become too great.Though a smaller topic of conversation, a gap identified by all panel participants was the lack of political leadership on climate change, especially within the United States. All participants agreed that, in the absence of such political leadership, business needs to fill the void. Another critical gap that was raised by Prof. Engle was the coalescing of citizen opinion on the urgency of addressing climate change. A conclusion supported by a recent Gallup poll which found that only 64% of Americans say that climate change is caused by human activities and only 45% believe that climate change will pose a serious threat in their lifetimes. This lack of urgency among the majority of Americans underscores the critical need for events like Climate Week. For in these events, that continue to grow in scale, attendance, and impact, spotlights shine on the new and innovative approaches, like those described by our panelists, for solving the climate challenge. As events like Climate Week also continue to attract more participation from the global business community, they show how business is stepping forward to grow opportunity from addressing global challenges.
Additional resources:
Climate Week
The Stern Volatility Institute’s V-Lab
Morgan Stanley’s Institute for Sustainable Investing
ING’s approach to climate action
Megan Brenan and Lydia Saad, Global Warming Concern Steady Despite Some Partisan Shifts, Gallup. March 28, 2018.