Credit Suisse Says Quick Climate Wins May Reduce Investor Impact

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For climate-focused investors, Credit Suisse Group AG has pointed out an awkward irony in a new report: Reducing a portfolio’s carbon footprint doesn’t necessarily lead to lower greenhouse-gas emissions.

“Decarbonizing your portfolio isn’t the same as building a portfolio that helps to decarbonize the world,” James Gifford, the bank’s head of impact advisory, wrote in the report published Thursday.

To illustrate his point, Gifford gave the example of a wind-turbine producer: Such a company may have a high-carbon footprint resulting from its manufacturing process, yet its product is a key component of efforts to wean the world of fossil fuels. Meanwhile, buying shares of a low-carbon company in a sector with a comparatively small footprint, such as media, will have a very limited impact on climate change, according to the report.

Once a distant threat, climate change has become a pressing reality for money managers as they face growing demands from investors, regulators and activists to direct capital toward businesses that contribute to a greener future. A quick way to assuage critics and show evidence of climate action is to offload carbon-intensive holdings, but, in doing so, fund managers risk giving up their ability to influence corporate polluters.

Investors should “not only consider how to reduce exposure to carbon in their portfolios and ensure their portfolios are aligned with a low-carbon future, but also explore whether their portfolios are actually contributing to solving the climate challenge,” Gifford wrote in the report.

Pushing companies to reduce emissions and retool their businesses for a low-carbon future can be an arduous and convoluted process, so investors that want to encourage change should choose their approach wisely, Zurich-based Gifford said in an interview. Investors can have the biggest impact on companies either when they help fund their early stage growth in private markets or when they proactively engage with publicly traded companies.

While most large-cap companies have in-house teams looking at sustainability and environmental issues, there is plenty of “low-hanging fruit” where investors can have a significant impact, especially with small- and mid-cap companies and in the emerging markets, Gifford said.

“If you sell out of companies that face climate risks, it is no longer possible to engage with them,” Gifford said. “Many investors want to stay diversified and so they will remain invested in some sectors that face climate risks and help drive the transition through engagement.”

©2021 Bloomberg L.P.

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