Low-carbon investing approaches are gaining interest as investors focus on sustainability. Investors of all types can make an impact by investing in climate solutions at an early stage and using their power as a shareholder to push for change
Moving from risk mitigation to actively fighting climate change
Many investors are interested in low-carbon investing approaches that can help them invest more sustainably. However, there is a difference between reducing carbon exposure risk and actively fighting climate change. Investors can use a variety of methods to identify where they can make more impact on climate challenge through their portfolio choices.
Understanding low-carbon investing concepts
Several low-carbon investing methods can help investors assess their portfolio. These can include measuring the portfolio’s overall carbon footprint, or using climate transition scores to explore how the portfolio is likely to be affected as the world shifts away from high carbon use.
However, low-carbon investing is not just about managing risk exposure. Investors can also consider to what extent their portfolio aligns with making the Paris climate targets a reality by driving absolute emission reductions.
By using different low-carbon investing concepts, investors can gain a true picture of their portfolio’s active contribution to solving the climate challenge. Then, they can identify the laggard companies using some of these methodologies and find opportunities to switch their stock picks to more climate-friendly alternatives.
This can mean looking for lower-emitting or more climate-aligned securities. Climate-aware investors may even look for opportunities to get rid of heavy emitters from their portfolio altogether, by excluding sectors that will likely have a limited future under any low-carbon scenario.
Shifting into companies providing climate solutions
To really make an impact on climate change, investors can direct some portion of their capital towards companies that are providing climate solutions through new technology and innovations. Or, they can look for companies in traditional industries that are leading the field in adapting to the climate transition.
One important consideration in low-carbon investing strategies is which types of investments can make the most impact. Illiquid investments in climate solutions tend to be the most impactful, as investors directly finance the growth of companies rather than simply purchasing securities in secondary markets. By identifying promising early-stage companies, investors can help accelerate technologies that will allow economies around the world to decarbonize.
This is especially important with climate change, as significant innovation will be required to develop climate technologies that are affordable and can be adopted globally – even in countries where there is little policy support for action on climate change.
Fighting against climate change through active ownership
Beyond the choice of stocks in a portfolio, all investors have the opportunity to fight climate change through further enhancing the positive impact of companies. Investors can embrace active ownership to add value to companies by using their power as a shareholder. In practice this can mean influencing companies through shareholder engagement, joining boards, or by exercising shareholder voting rights, resulting in a greater climate alignment by the company.
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