FCLTGlobal’s “Decarbonizing Long-Term Portfolios” generally advises long-term institutional investors to stay invested in and engaged with carbon-intensive assets or industries as such companies journey toward decarbonization over time in lieu of divesting or excluding such assets or industries from their portfolios.
Among the potential drawbacks of a divestment or exclusion approach are:
- Excludes opportunities for investment returns in the portfolio from transitioning assets
- Eliminates the investor’s voice and associated ability to facilitate change
- Results in portfolio under-allocation to meaningful portions of the global economy, such as energy, industrials, and materials, thus increasing portfolio risk
- Transfers, but does nothing to reduce, carbon-intensive assets in the economy overall
- Commonly removes carbon-intensive assets from the public markets with associated reduced transparency and monitoring
- Prevents companies from accessing capital to transform their businesses and reduce their emissions
- Increases companies’ cost of capital, resulting in a higher return to investors who retain the carbon-intensive assets or industries
The report suggests a top-down approach to portfolio decarbonization that is much more holistic and nuanced than the divest/exclude approach, and includes a decarbonization “toolkit” for investors to help facilitate the guidance.
Access additional resources on our Institutional Investors, Sustainability, and Climate Risk & Disclosure pages.
This post first appeared in the weekly Society Alert!