Climate risk – A warming topic

July 14, 2021 1:52 pm Published by Leave your thoughts

Two steps to understand climate risk in client portfolios


Written by Gavin Francis

One of the most influential people in the world in recent years has been, Sir David Attenborough. He has been warning us about the significant risk and potential impact of climate change. We have watched intently as he enlightens us, translating the science into tangible meaning. The future financial, environmental, and social consequences of climate change are becoming increasingly apparent not only to professional investors, but also the general public; some of whom are your clients.
 
Therefore, it’s no surprise that, at our Impact Investment Academy last November when we asked: “What should investors’ top priority engagement topic be in the coming decade?69% of financial advisers answered, ‘climate change’.
 
So, if this is the hot topic you probably need to be ready to have a view on how this might impact a clients investment portfolio.

But where do you start when it comes to measuring the risk to your clients’ portfolios of the impact of climate change and can you help clients to mitigate those risks?

That’s where Worthstone’s Impact Portal and Portfolio Impact Reporting (PIR) analysis comes in.

We believe that advisers building their own portfolios need to have access to carbon risk analysis to help clients mitigate and plan effectively. As part of the methodology launched in January 2021 Worthstone has developed the Carbon Risk score which codifies the carbon and climate risk associated with a fund.
 
The risks associated with climate change can be categorised into: 

  • Transitional risks which denote the risks related to environmental regulation/ policy, market forces and technology, i.e., the climate transition.
  • Physical risks which represent the risks associated with the acute (extreme weather events) and the chronic (sea-level rise, rising temperatures) impact of climate change.

The score provides insights into the risks associated with the material financial threat of pricing-in carbon and the transitional and physical risks of climate change.
 
The score enhances an adviser’s ability to identify and quantify the funds with low value chain carbon involvement, good risk management strategies and low levels of fossil fuel inclusion. Helping you build portfolios for your clients that have lower risk to the impact of climate change.
 
Each fund’s Carbon Risk score is benchmarked against a traditional market proxy and the Worthstone fund universe which helps you make direct comparisons in your analysis and also contextualise the risk for your clients.
 
If your firm build their own portfolios and would like to know more about this score and the others that might help, please get in touch or book a demo, we’d be delighted to hear from you.

Gavin Francis
Founder and Director

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