For the first time the Global Risks Report is dominated by the environment.
From World Economic Forum (weforum.org): Following a year of floods and droughts, when fires ravaged Australia and the Amazon, and teenage climate activist Greta Thunberg was chosen as Time’s Person of the Year, it is perhaps little wonder that environmental issues dominate leaders’ concerns for the future.
But the latest edition of the World Economic Forum’s Global Risks Report shows how loudly they are sounding the alarm. Established leaders and up-and-comers agree: climate change is the stand-out long-term risk the world faces.
The report, which identifies the top threats facing our world by likelihood and extent of impact, names failure to mitigate and adapt to climate change as the key concern for the Forum’s network of business leaders, NGOs, academics and others. The group places it as the number one risk by impact and number two by likelihood over the next 10 years.
Image: World Economic Forum Global Risks Report 2020.
In fact, respondents to the Global Risks Perception Survey, which underpins the report, rank issues related to global warming – such as extreme weather and biodiversity loss – as the top five risks in terms of likelihood over the coming decade. This is the first time one category has occupied all of the top slots since the report was launched in 2006.
Image: World Economic Forum Global Risks Perception Survey
Climate change is hitting harder and accelerating faster than many people predicted. And efforts to meet commitments to limit global warming are slipping, with countries veering off course. For the Global Shapers Community – the Forum’s younger constituents – environmental issues are even more pressing and top their list of concerns both in the short and long term.
Image: World Economic Forum Global Risks Perception Survey
Doing Well by Doing Good
As citizens, individuals can initiate positive change by expressing their political preferences around sustainability through the ballot box. As investors, they can express their preferences through participation in global capital markets. Indeed, a strong case can be made that the latter can have a larger and more immediate impact. And it certainly doesn’t mean having to compromise returns.
Investors can evaluate those companies being considered for investment using a focused set of environmental issues that reflect their primary concerns. For example, if one is trying to reduce a portfolio’s greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may first be deemphasized or excluded from the portfolio altogether. An across-industry comparison of this nature provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by companies within a portfolio with a minimal reduction in diversification.
Then, companies may also be rated on sustainability considerations. For example, this could include retail companies that improve the energy efficiency of their facilities, utilities that produce electricity using solar or wind power, trucking companies that improve the fuel efficiency of their fleets or use alternative-fuel vehicles, or energy companies that increase efficiency, reduce waste, and improve their overall environmental footprint. On the other hand, companies with poor environmental sustainability ratings relative to industry peers may receive a lesser weight or may be excluded.
Investing well and incorporating values around sustainability need not be mutually exclusive. Starting with a robust investment framework, then overlaying the considerations that represent the views of sustainability-minded investors allows for a cost-effective approach that provides investors the ability to pursue their sustainability goals without compromising on sound investment principles or accepting lower expected returns. By aligning our values with investment goals, each of us can make a positive and an immediate difference.
You can read more about our sustainability portfolios here.