Investors are now more interested in climate change than mortgage rates, according to a new Salt Funds Management paper, as clients increasingly push for action on sustainability.
“It wasn’t that long ago that the first question after nearly every client presentation was on the outlook for mortgage interest rates; now it’s almost universally questioning what action we are taking in portfolios to mitigate climate change,” the Salt think-piece says.
But client pressure (along with a “fiduciary obligation” to act in their best interests) is just one of five main reasons fund managers must now incorporate climate change into investment strategies, according to the paper authored by Salt economist, Bevan Graham, and ESG adviser, Sonya Fynmore.
Firstly, Salt says the global response to climate change will alter the “fundamental structure of the economy” with new winners and losers emerging as businesses adapt.
However, while the transition might spark the rise of innovative players, the shift to a greener economy won’t happen overnight allowing incumbents time to evolve.
“Some currently high emitters that are investing in transformational technology to reduce their resource intensity may prove to be long-term success stories,” Salt says.
And the paper says fund managers will need to take an active approach to identify the emergent opportunities and risk of the climate change era.
Furthermore, professional investors have to come to grips with a growing list of new climate-related risks including real physical impacts, regulations, and reputational dangers “for companies not meeting the new standards of stakeholders and suffering customer or investor revolt”.
“Climate change is real and the world in which fund managers operate is changing rapidly,” the paper says. “This includes the regulatory environment in which we operate, businesses are changing and adapting their processes to comply with those regulations, and consumer preferences and expectations are changing.”
Salt follows an ESG integration process for its in-house managed portfolios while aligning with like-minded firms for its new global funds. The Auckland-headquartered boutique recently appointed Morgan Stanley and Cohen & Steers to manage global equities and real assets, respectively, for its new range of sustainability funds.
The manager has also seen a surge of interest in its NZX-listed Carbon Fund this year. Since January the fund, which gives investors exposure to the NZ carbon credit market, reported units on issue rising from 6.9 million to 16.2 million as at last week: by value the listed fund has jumped from about $9 million at the start of the year to almost $26 million now as the share price rose from $1.31 to the current $1.55.