Stormy weather lies ahead.
That’s not a forecast for a blizzard or deluge, but a prediction for your investments.
The bankruptcy filing last month by a U.S. utility company — Pacific Gas and Electric Corp. (PG&E) — points to trouble ahead as the effects of climate change start to pile up.
The California power company faces tens of billions of dollars in liability claims for its alleged role in sparking massive wildfires, including one in November that burned down Paradise — a once-scenic woodland city of about 25,000 residents.
Although massive blazes incinerating large swaths of land and communities are now commonplace — because of a hotter planet — what’s different is this wildfire drove a major publicly traded company to insolvency.
And it’s a utility company of all things — a class of investments often considered to be well-positioned as climate change deepens, because these firms are at the forefront of energy efficiency and renewables. What’s more, PG&E, like so many utility companies, was considered a steady investment. It paid a good dividend, which made it ideal for income-needy boomers.
Yet those familiar with the risks climate change poses to financial markets say we should expect more of the same or worse over the coming years.
Mike Thiessen, vice-president of sustainable research at Genus Capital in Vancouver, says what happened to PG&E further illustrates how markets have been slow to put a price on climate-change risks.
Even though most investors may not have seen it coming, PG&E “had a very high risk because it was operating in California, where there has been a drought for about a decade,” he says.
What’s more, the company was not as diligent as others in mitigating risks. And its perceived mismanagement has now opened it up to lawsuits, Thiessen says.
California law has also played a role in the company’s troubles.
We should expect the rules to become more stringent elsewhere, including Canada, as the effects of a warming planet become more burdensome.
More than ever, investors need to pay attention to what was once considered a niche segment of investing. If you’re not viewing your investments through an environmental, social and governance (ESG) lens, your money is more at risk than you probably realize, he adds.
While environmental risk is top of mind for many investors, all three considerations are deeply connected, because what’s good for society and corporate governance is now often equally so for the planet. And it’s often average people driving the movement, asking advisers about these investment options, says Fred Pinto, head of asset management with NEI Investments, one of Canada’s leading investment firms specializing in ESG.
“I would say many investors are further along in their appreciation of the issues than the advisory industry.”
Yet more advisers are now going green, too, including certified financial planner MaryAnn Kokan-Nyhof with Desjardins Financial Security Investments. The Winnipeg financial adviser increasingly found herself fielding questions from clients about the effects of climate change on their investments. So, she started offering ESG-focused strategies a few years ago.
And she urges other advisers to consider doing the same. Or they should at least start up discussions with clients on the subject because “sadly, many investors are not yet aware of the options.”
What shouldn’t be part of the discussion is that investing with the environment in mind will cost you returns in your portfolio, Pinto says.
“Are we seeing better returns now with ESG than without it?” he says.
“To be honest, that is hard to prove. But there is lots of research out there that shows the returns are just as good.”
More and more, however, an argument can be made that investing in a company which isn’t incorporating ESG considerations into its operations is more risky than investing in one that is, he says. Taking this notion a bit further, what happened to PG&E could happen to companies in our portfolios.
Certainly, Thiessen believes this is a risk in the future, especially for Canadians, with our bias toward oil and gas companies in our portfolios.
“Because communities and governments see increasingly what climate change is doing, they’re going to want to regulate carbon even more,” Thiessen says.
Struggling oil and gas companies could be even more challenged to turn a profit. They even face the prospect of holding stranded assets, a situation in which developing and bringing these resources to market becomes too costly to be competitive.
“The oilsands and arctic drilling are at the very top of this list when it comes to this risk,” Thiessen says.
This is unlikely to happen soon, he adds. Our reliance on hydrocarbon energy is not going away just yet. But we have already seen how technology can quickly disrupt the industry. Most recently, advances in hydraulic fracturing have opened up access to sources of oil and gas previously thought unviable. And that has created more competition for Canadian oilsands, pushing down prices and helping send the industry into a slump. Additionally, advances regarding renewables will only further change the paradigm for energy.
Then again, as PG&E’s recent history demonstrates, it’s not just oil and gas companies people should worry about, but any firm not taking climate change seriously.
“ESG considerations just aren’t the nice thing to do anymore,” Thiessen says.
“They’re something that you have to do.”