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Preparing your portfolio for a changing climate as risks and opportunities grow

TORONTO — A growing number of investors concerned about the economic costs of climate change are shifting to greener portfolios in an effort to do their part for the environment and avoid potential losses down the road.

“People are really looking for ways to be able to have an impact, and are asking the question, ‘what can I do about climate change?’,” said Tim Nash, an investment coach at Good Investing.

There’s a increasing perception that holding stocks in carbon-intensive industries contributes to harmful emissions, or at least benefits from them, so investors are looking to exclude them from their portfolios, Nash said.

“More and more people are realizing that actually their investment portfolio is a huge contributor to their carbon footprint.”

Then there’s the growing financial threat of disasters associated with climate change, such as the recent bankruptcy filing by California utility PG&E Corp. due to overwhelming liabilities after its equipment started some of the destructive wildfires in the state in recent years.

Investors need to be wary of direct climate risks, as well as potential policy changes that could come if governments take the threat more seriously, Nash said.

“Investors need to get ahead of this curve, because if they wait until the political pendulum swings back and stricter regulations come into place, then at that point they may be too late.”

Investors large and small are starting to make the shift. Heavyweights like pension funds are rethinking their portfolios, including Caisse de depot et placement du Quebec, which committed in late 2017 to consider climate change in every investment decision.

The move is part of a wider shift to investments that consider environmental, social and governance (ESG) issues. Together known as responsible investments, the total amount under management in Canada ballooned to $2.1 trillion by the end of 2017, up from about $500 billion in 2010, according to the Responsible Investment Association.

The increased interest has helped create a much wider suite of options for average investors. Last September, Vanguard launched two ESG-focused exchange-traded funds, including one focused on U.S. stocks and the other internationally.

“For a long time there weren’t many options, and the fees were higher than traditional ETFs, but now, especially with Vanguard, they are just dirt cheap, which is great,” said Nash, who also blogs about sustainable finance.

BlackRock Inc., another major player in the ETF space, launched a series of investment funds last October together known as the iShares Sustainable Core range, as well as new analytical tools including carbon intensity measurements for a wide variety of its funds.

Investors can also find more about the individual companies that make up funds, including through ratings produced by Sustainalytics Inc. on Yahoo Finance, or overall mutual fund sustainability rankings at Fossil Free Funds.

Major banks also offer sustainable mutual funds, though investors need to keep a close eye on management fees, Nash said.

“They know that our customers are willing to pay a higher price for organic food, for fair trade coffee or chocolate, in the same way they will often assume investors are willing to pay a higher fee for socially responsible mutual funds.”

The growth of various responsible options means investors can tailor their portfolios, said Patti Dolan, a portfolio manager with Mission Wealth Advisors of Raymond James Ltd.

“There is more is ability to align values and investments, which in the past really wasn’t the case.”

Dolan, who is also on the board of directors of the Responsible Investment Association, said investors should make sure to keep their investments diversified as they take more control of where they direct their funds.

Aside from allowing investors to align their portfolios with their values, responsible investment vehicles such as the long-running iShares Jantzi Social Index Fund can also provide superior returns, said Dolan.   

“It’s outperformed the TSX and TSX 60 every year for the last 18 years and overall it’s by a quarter to a half a per cent, so that’s pretty reasonable. It’s a misnomer that you’re going to lose money by investing this way, you can actually find companies that are not as volatile.”

To balance the stock side of the portfolio there is the option of green bonds, which fund sustainability projects. CoPower Inc., one of the leaders in impact investing in Canada, funds projects like geothermal energy, LED retrofits, and community solar power.

As a private bond, it does carry some risks on default, liquidity, and duration, but offers an attractive five per cent interest on a six-year bond, Nash said.

“Bonds really haven’t been performing very well. So this is a way to diversify, take a little bit more risk, get a higher return, and then most importantly for my clients, have a really positive impact by directly investing in green projects across Canada.”


Ian Bickis, The Canadian Press

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