The outperformance over the past 18 months of some “green” equities, or those with direct or obvious climate solutions (such as renewable energy), has left investors wondering whether climate transition risks are already priced in. A new study by MSCI finds that transition-risk pricing differs by region and by a company’s greenness, as measured by its greenhouse gas (GHG) emissions and proportion of “green” revenues.¹ Even after normalizing for industry effects, equities with low GHG emissions and a higher share of revenues from “green,” low-carbon activities commanded higher valuations than equities with more “brown,” high-carbon-intensity revenues.

While we recognize the strong performance of certain green equities, we believe the lack of reliable emissions data makes it…

Wellington’s Climate Research Team works with Woodwell Climate Research Center to integrate climate science into the investment process for our impact strategies. We increasingly leverage reports, quantitative models, and investor tools to identify impact assets with exposure to these risks and companies whose products we believe minimize the human and environmental toll of climate-related events.

Water scarcity

One key climate-related trend that overlaps with impact investing — particularly our clean water and sanitation theme — is water scarcity. We believe chronic water shortages in many regions are a critical issue. Solutions to prevent or alleviate water scarcity will likely attract more investor attention and trigger significant capital spending as governments and public/private partnerships invest in water infrastructure and technology. And because water scarcity is still underappreciated by the market, impact investors have opportunities to…

The “plum rains” of Taiwan’s monsoon season, or Meiyu, have started to fall, bringing a modicum of relief to the island’s worst drought conditions in over 50 years and enabling manufacturers and technology investors to exhale — at least temporarily. While the weather forecast in Taiwan would not normally make financial headlines, the island’s exposure to climate risk, current severe water shortage, and reliance of its large semiconductor industry on water have the global business and investment community on alert.

Global semiconductor hub

Taiwan produces 50% of the world’s semiconductors and 92% of the high-end transistors used in advanced technology applications like autonomous driving and high-performance computing. Any disruption in local manufacturing could short circuit the global technology supply chain. The overarching risk to semiconductor fabrication in Taiwan is lack of water. Semi fabrication requires enormous amounts of water: the typical chip factory consumes between two and four million gallons of water per day; larger companies use even more. Without sufficient water to power and cool chip fabrication, production…

A climate-driven capital cycle is underway, and we believe companies must invest in low-carbon solutions to protect and grow the value of their assets and strengthen competitive positions. In our view, companies that prioritize environmental stewardship and establish clear climate strategies can be first movers and market leaders that profit from the low-carbon transition and deliver value for investors.

Identifying — and encouraging — climate leadership

We want all portfolio companies to achieve net-zero greenhouse gas (GHG) emissions by 2050 and set science-based targets to accomplish this. We look for companies that view climate planning as a strategic priority. We seek businesses adapting to changing regulations and positioning themselves to capitalize on evolving governmental incentives and consumer preferences. During our engagements, we ask boards and management teams to embrace low-carbon practices and align business plans with the Paris Agreement to cap global temperature rise to 1.5°C. We seek leadership on supplier practices and sustainable product innovation as a way to reduce indirect emissions. Our proxy voting policies are aimed at…

With so much money flowing into new markets like renewables and cleantech, we will see some companies succeed and perhaps become the next Tesla. We will also see some companies fail spectacularly. In other words, there will be a great deal of dispersion. We have seen hundreds of special purpose acquisition companies (SPACs) raised in the last few years, with many focusing on cleantech and other forms of energy and transportation disruption. Most of them assume a J curve in their revenues and profits, and I think it’s reasonable to expect that they won’t all achieve their projections. However, given limited sell-side coverage, identifying those that will make it and those that will not could prove to be lucrative.

The importance of time horizon for traditional and renewable energy sectors

In thinking about energy investment opportunities, I believe having a differentiated time horizon is essential — that is, focusing on the long term when others are focused on the short term, and vice versa. When things go bad in the energy sector, it’s difficult for investors to imagine how things can go back to normal. During the COVID crisis, for example, many were ready to write off the oil market, believing that prices were permanently impaired and treating the equities and debt of the companies accordingly. But as we saw…

The challenges of the past year have highlighted the potential for environmental, social, and governance (ESG) factors to become even more relevant to the investments we make on our clients’ behalf and have underscored the increasing importance of stewardship by fiduciaries and active investors. In 2020, an unprecedented number of our corporate engagements included ESG topics, a trend we think will continue in 2021 and beyond. In particular, we expect many conversations to address executive compensation and climate change, along with diversity, equity, and inclusion (DEI).

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Recently, a few people have asked me a version of: “So, when will we start to see some climate events?” I can interpret this question in one of two ways. They either believe worsening hurricanes, wildfires, floods, and other climate events are simply bad weather, or they are displaying a cognitive bias, where bad memories associated with disturbing events fade quickly.

Investors risk becoming desensitized to the increasing frequency and severity of climate-related events and discounting the long-term consequences for capital markets of a changing climate. It would be difficult to dismiss the many record-breaking (and near-record-breaking) climate events that occurred in 2020 (and recent years) as a spate of “bad weather.” Devastating hurricanes, floods, and wildfires are occurring more frequently, and climate models project similar increases in the probability of…

The Biden presidency, bolstered by Democratic majorities in the US Senate and House of Representatives, indicates a paradigm shift in climate policy at the highest levels of government. Along with immediately rejoining the Paris Agreement, President Biden has announced ambitious plans to position the US as a global leader in several climate-related areas, including clean energy, clean technology, and sustainable infrastructure.

Biden’s plan views climate change as an “existential threat — not just to our environment, but to our health, our communities, our national security, and our economic well-being.”¹ The initiative also includes language linking clean energy with job growth, a connection I’ve been…